<PAGE>


                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(X )     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
         OCTOBER 31, 1996.
         -----------------

                                       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

                                     0-18288
                                     -------

                        DIRECT CONNECT INTERNATIONAL INC.
                        ---------------------------------
             (Exact name of registrant as specified in its charter)


         Delaware                                        22-2705223
         --------                                        ----------
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                      Identification No.)

266 Harristown Road
Glen Rock, New Jersey                                       07452
---------------------                                       -----
(Address of principal executive                          (Zip Code)
offices)

Registrant's telephone number, including area code - (201) 445-2101

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

                                  YES   X       NO
                                      -----         -----

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of October 31, 1996: 9,062,066
                                      ---------





<PAGE>



                DIRECT CONNECT INTERNATIONAL INC. AND SUBSIDIARY

                                      INDEX

PART I.      FINANCIAL INFORMATION                                   PAGE NO

             Item 1.           Financial Statements

                               Condensed Consolidated
                               Balance Sheets -
                               October 31, 1996 and
                               April 30, 1996                            3

                               Condensed Statements
                               Of Consolidated
                               Operations - Three
                               Months Ended October 31,
                               1996 and October 31, 1995 and             4
                               Six Months Ended October 31,
                               1996 and October 31, 1995

                               Condensed Statements
                               Of Consolidated Cash
                               Flows - Six Months
                               Ended October 31, 1996
                               and October 31, 1995                      5

                               Notes to Financial Statements             6

             Item 2.           Management's Discussion
                               and Analysis of Results
                               of Operations and
                               Financial Condition                     7 - 15

PART II.     OTHER INFORMATION

             Item 6.           Exhibits and Reports
                               on Form 8-K                               16

             Signatures                                                  17




                                        2


<PAGE>


PART 1.     FINANCIAL INFORMATION

         ITEM 1. FINANCIAL STATEMENTS
<TABLE>

                  Direct Connect International Inc. and Subsidiary
                           Consolidated Balance Sheets


                                            ASSETS
<CAPTION>

                                                October 31, 1996  April 30, 1996
                                                ----------------  --------------
<S>                                               <C>              <C>   
                                                   (Unaudited)
Current assets
    Cash and cash equivalents                        $52,865          $67,886
    Accounts receivable                               12,361           20,652
    Due from Kidsview, Inc.                          302,765          194,117
    Notes receivable-officers                        124,631          111,355
    Investments                                       54,171           54,171
    Prepaid financing costs and other expenses        35,356           69,075
                                                     -------          -------
                         Total current assets        582,149          517,256
                                                     -------          -------

Property and equipment, at cost
    Furniture and fixtures                            43,912          42,543
    Molds, tools and dies                            267,498         267,498
                                                     -------         -------
                                                     311,410         310,041
    Less: accumulated depreciation                   247,913         234,813
                                                     -------         -------
                                                      63,497          75,228
                                                      ------          ------

Investment in Glasgal                              1,896,871        2,111,151
Investment in Evolutions Inc.                      1,875,000           75,000
Deferred Income taxes                                809,287          809,287
Security deposits                                        700              700
                                                   ---------        ---------
                                                   4,581,858        2,996,138
                                                   ---------        ---------

                         Total assets             $5,227,504       $3,588,622
                                                  ==========       ==========
                                              

                  LIABILITIES and STOCKHOLDERS' EQUITY

Current liabilities

    Accounts payable                                $326,870         $947,512
    Accrued expenses and taxes payable               315,587           49,825
    Notes payable-officers and stockholders          463,813          461,716
    Notes payable-other, current portion           1,876,696        1,411,424
    Investment, warrants to sell Glasgal             300,000          300,000
                                                     -------          -------
                                             
              Total current liabilities            3,282,966        3,170,477
                                                   ---------        ---------
Stockholders' equity 
     Convertible preferred stock:
          Authorized 5,000,000 shares, $.001
          par value; issued and outstanding-
          5,000,000 shares                             5,000            5,000
     Common stock:
          Authorized 15,000,000 shares, $.001
          par value; issued and outstanding-
          9,062,066 shares                             9,062            9,062
     Capital in excess of par value                5,104,449        5,104,449
     Accumulated deficit                          (3,119,802)      (4,646,195)
     Unrealized loss on investments                  (54,171)         (54,171)
                                                     -------          ------- 
          Total stockholders' equity               1,944,538          418,145
                                                   ---------          -------
          Total liabilities and stockholders'
               equity                             $5,227,504       $3,588,622
                                                  ==========       ==========
</TABLE>
                                    3
<PAGE>
<TABLE>

                Direct Connect International Inc. and Subsidiary
                      Consolidated Statements of Operations

<CAPTION>
                                         For The                        For The                                               
                                     Three Months Ended               Six Months Ended
                                     ------------------               ----------------
                                 October 31      October 31     October 31       October 31
                                     1996           1995          1996              1995
                                     ----           ----          ----              ----
                                         (Unaudited)                    (Unaudited)
<S>                                <C>           <C>           <C>             <C>    


Revenues:
    Sales                          $259,838        $778,664       $431,587       $899,139

Costs and expenses
    Cost of goods sold              124,713         742,186       288,190         806,135
    Royalties/licensing fees          6,881         110,691        22,690         120,916
    Product development cost          6,000           1,174        12,000           1,174
    Advertising and promotion         4,539          15,004         4,539          80,885
    Depreciation                      6,549          12,916        13,100          31,120
    General and administrative     
        expenses                    316,370       1,093,219       551,034       1,418,412
    Less:  management fees         (164,658)              0      (419,658)              0
                                   --------       ---------      ---------      ---------
                                    300,394       1,975,190       471,895       2,458,642
                                   --------       ---------      ---------      ---------

Operating income (loss)             (40,556)     (1,196,526)      (40,308)     (1,559,503)

Gain on sale of assets and            
     product lines                        0       1,034,494             0       1,034,494
Gain on sale of securities          696,885       1,426,135     1,613,820       1,426,135
Interest income                         707           7,033           772          14,199
Other income                          1,094               0         3,372               0
Interest expense                    (25,510)        (44,557)      (51,263)       (193,277)
                                    -------         -------       -------        -------- 
Income before income taxes          632,620       1,226,579     1,526,393         722,048
Deferred income taxes                     0         644,436             0         644,436
                                    -------       ---------     ---------       ---------
Net income                         $632,620      $1,871,015    $1,526,393      $1,366,484
                                   ========      ==========    ==========      ==========
Income per share                      $0.04           $0.12         $0.10           $0.09
                                      =====           =====         =====           =====
                                                                                         
</TABLE>




                                       4






<PAGE>
<TABLE>

                Direct Connect International Inc. and Subsidiary

                      Consolidated Statements of Cash Flows
<CAPTION>

                                                                    For The Six Months Ended
                                                                    ------------------------

                                                           October 31, 1996      October 31, 1995
                                                           ----------------      ----------------
                                                                         (Unaudited)
                                                                         -----------
<S>                                                            <C>              <C>   

Cash flows from operating activities
   Net income                                                  $ 1,526,393      $ 1,366,484
   Adjustments to reconcile net income
          to net cash provided by operating activities:
          Depreciation and amortization                             13,100           31,120
          Gain on sale of Glasgal stock                         (1,613,820)      (1,426,135)
          Financing fees-general and administrative expense              0          348,720
Decrease (increase) in assets
   Accounts receivable-trade                                         8,291         (122,818)
   Prepaid royalties                                                     0           57,500
   Prepaid financing costs and expenses                             33,719          237,410
   Inventories                                                           0           32,297
   Deferred income taxes                                                 0         (644,436)
Increase (decrease) in liabilities
   Accounts payable                                               (620,642)         271,671
   Accrued expenses and taxes payable                              265,762           (3,160)
                                                                   -------           ------ 
         Total adjustments                                      (1,913,590)      (1,217,831)
                                                                ----------       ---------- 
Net cash provided by (used in)
  operating activities                                            (387,197)         148,653
                                                                  --------          -------

Cash flow from investing activities
   Notes receivable-officers, increase                             (13,276)         258,790
   Investment in Glasgal Communications, Inc.                    1,828,100        1,871,066
   Increase in Due from Kidsview, Inc.                            (108,648)               0
   Decrease in Due from Kidsview, Inc.                                   0          244,337
   Increase in Investment in Evolutions, Inc.                   (1,800,000)               0
   Sale of molds, tools, and dies                                        0           69,977
   Acquisition of property and equipment                            (1,369)        (104,113)
   Investment in security                                                0         (500,000)
                                                                 ----------       ---------- 
Net cash provided by (used in) investing activities                (95,193)       1,840,057
                                                                 ----------       ----------

Cash flows from financing activities
   Increase in notes payable-officers and stockholders               2,097              348
   Increase in notes payable-other                               1,624,129       (2,191,677)
   Decrease in notes payable-other                              (1,158,857)         350,000
                                                                ----------          -------
Net cash provided by (used in) financing activities                467,369       (1,841,329)
                                                                   -------       ---------- 
Net decrease in cash and cash equivalents                          (15,021)         147,381
Cash and cash equivalents at beginning of period                    67,886          171,677
                                                                    ------          -------
Cash and cash equivalents at end of period                     $    52,865      $   319,058
                                                               ===========      ===========

Supplemental disclosures of cash flow information
  Cash paid during the six months for interest                 $    51,263      $   160,277
                                                               -----------      -----------
</TABLE>

                                       5
<PAGE>




                        DIRECT CONNECT INTERNATIONAL INC.
                                 AND SUBSIDIARY

                          Notes to Financial Statements

1.       In the opinion of  management,  the  accompanying  unaudited  financial
         statements contain all adjustments, consisting only of normal recurring
         adjustments,  necessary to present fairly (a) the financial position as
         of October 31, 1996,  (b) the results of  operations  for the three and
         six months ended  October 31, 1996 and October 31, 1995 and (c) changes
         in cash flows for the three and six months  ended  October 31, 1996 and
         October 31, 1995.

2.       Refer to the  audited  financial  statements  for the fiscal year ended
         April 30, 1996 for details of accounting policies and accounts, none of
         which have changed significantly in composition since that date.

3.       Financial results for the interim period ended October 31, 1996 may not
         be indicative of the financial results for the fiscal year ending April
         30, 1997.

4.       The  Company has  available  carry  forward  losses  applicable  to the
         reduction  of future  Federal  income taxes  aggregating  approximately
         $4,869,000  at December 31, 1995 and which expire during the years 2003
         to 2010.

5.       The  Company has made an  investment  in  Evolutions,  Inc.  (EVO),  an
         apparel and toy products company,  aggregating approximately $1,800,000
         at October 31, 1996 for which the  Company has  received  shares of EVO
         common stock representing approximately 11% of EVO's outstanding common
         stock.

















                                        6


<PAGE>



Item 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Net Sales

Net sales for the three and six month periods ended October 31, 1996 amounted to
$259,838  and  $431,587,  respectively,  as compared to $899,139  and  $778,664,
respectively, for the same periods in the prior fiscal year.

The Company intends to develop additional product lines;  however,  there can be
no assurance  that it will be able to do so on a commercially  viable basis.  If
such  product  lines are so  developed,  the  Company may be required to sell or
license such product  lines,  depending on, among other  factors,  its financial
resources.

At October 31, 1996, the Company did not have a backlog of confirmed orders from
its customers.

Gross Profit

Gross Profit  percentage  for the three months ended October 31, 1996 was 52% as
compared  to 5% for the three  months  ended  October  31,  1995.  Gross  Profit
percentage  for the six months ended October 31, 1996 was 33% as compared to 10%
for the six months ended  October 31, 1995.  Such increase for the three and six
months ended October 31, 1996 did not require any  adjustments,  such as credits
and other charges,  which were included in the three months and six months ended
October 31, 1995.

Royalties/Licensing Fees

Royalties/Licensing fees are variable expenses which increase as sales increase.
For the three and six month  periods  ended  October 31, 1996,  the Company paid
approximately   $6,881  (or  3%  of  sales)  and   $22,690  (or  5%  of  sales),
respectively,  as compared to $110,691 (or 14% of sales) and $120,916 (or 13% of
sales) for the three and six month periods ended October 31, 1995, respectively.
The decrease in royalties was primarily  attributable  to the decrease in sales.
In order to match revenues with expenses, minimum royalty guarantees are treated
as prepaid  expenses and are charged against income as the related  products are
sold.  For fiscal 1996,  the Company is not  obligated  to make minimum  royalty
payments pursuant to any license agreements.

Other Income

Other income amounted to approximately $698,686 and $1,617,964 for the three and

                                        7


<PAGE>



six months ended October 31, 1996 as compared to  approximately  $2,467,000  and
$2,474,000  for the three and six months ended  October 31, 1995.  This decrease
for the three and six months ended October 31, 1996 is due to the sale of shares
of Glasgal stock by the Company in the prior periods and the gain in the sale of
assets and product line in the 1995 period.

General and Administrative Expenses

Advertising and promotion  expenses  amounted to $4,539 and $4,539 for the three
and six month periods ended October 31, 1996 as compared to $15,004 and $80,885,
respectively,  for the three and six month periods ended October 31, 1995.  This
decrease was due to the sale of product lines in 1995.

For the three and six months  ended  October  31,  1996,  the  Company  earned a
management fee of $164,658 and $419,658,  respectively, which covers the monthly
reimbursement  of the costs  incurred  by the  Company  in  connection  with its
operations  as it relates to supporting  the product lines which were sold.  Set
forth below are the principal components.

General and  administrative  expenses for the three and six month  periods ended
October  31,  1996 were  $316,370  and  $551,034,  respectively,  as compared to
$1,093,219  and  $1,418,412,  respectively,  for the  three  month and six month
periods ended October 31, 1995.  Included in such amount for the three month and
six month  periods ended  October 31, 1996 were  commissions  of $ 0 and $8,469,
respectively,  as compared to $38,688 and $45,451,  respectively,  for the three
month and six month  periods  ended  October 31, 1995.  This  decrease  resulted
primarily  from the  decline in the amount of sales upon which  commissions  are
based. Professional fees were $59,100 and $71,149,  respectively,  for the three
and six month periods ended October 31, 1996 as compared to $56,473 and $94,852,
respectively,  for the three and six month periods ended October 31, 1995.  This
decrease for the six months ended  October 31, 1996 was due  primarily to having
incurred no professional  fees in connection with the sale of certain assets and
product lines and  investment  securities  and financing  activities.  Letter of
credit  and  foreign   office   expenses   amounted  to  $10,344  and   $23,343,
respectively,  for the three month and six month  periods ended October 31, 1996
as compared to $24,720 and  $26,764,  respectively,  for the three month and six
month  periods  ended  October 31, 1995.  This decrease was due primarily to the
decline in purchases resulting from the decrease in sales and the decline in the
cost of goods purchased.

For the three and six month  periods  ended  October  31,  1996,  salaries  were
$138,288  and  $247,563,  respectively,  as compared to $414,857  and  $508,290,
respectively,  for the three and six month periods ended October 31, 1995.  Such
decrease  was due to a reduction in the number of employees in the three and six
months ended October 31, 1996 and lower salary  levels for certain  employees in
such periods.

Travel and entertainment expenses increased to $37,506 and $66,630 for the three
and six month  periods ended October 31, 1996 as compared to $19,662 and $38,137


                                        8


<PAGE>



for the three  and six month periods  ended  October  31,  1995.  This  increase
resulted from the Company's efforts to expand sales.

LIQUIDITY AND CAPITAL RESOURCES

During the next twelve months,  the Company in addition to meeting its operating
needs  will  have  notes  payable,   as  discussed   below,  in  the  amount  of
approximately $2,340,000 becoming due. The Company does not believe that it will
be able to pay these obligations out of operating revenues, and, accordingly, it
will have to seek  additional  financing  or sell  assets to do so. The  Company
anticipates  funding its  obligations  from two principal  sources.  First,  the
Company intends to develop  additional product lines which would be promoted and
marketed in a manner similar to the manner in which the Company has utilized for
its Zoo Borns and Tea Bunnies  product lines which involved the transfer of such
product lines to Evolutions,  Inc. (EVO) as decribed herein. Second, the Company
owns approximately  1,178,333 shares of common stock of Glasgal  Communications,
Inc.  (Glasgal) and may, from time to time,  sell a portion of such shares.  For
additional  information  regarding prior dispositions of Glasgal shares, see the
description of such  transactions  contained  herein.  There can be no assurance
that the Company will be able to develop additional  product lines,  obtain such
financing or sell assets,  in which event such  obligations will have a material
adverse effect upon the Company's operations. The Company expects to support its
operations over the next five months through funds generated from its management
contract with EVO as described  herein.  At October 31, 1996,  the Company had a
cash and cash  equivalent  balance of $52,865 as  compared to $67,886 at October
31, 1995.

For the six months ended October 31, 1996 the Company used cash from  operations
in the amount of $387,197 as compared to providing  $148,653 from operations for
the six months ended October 31, 1995.  The Company  obtained  $467,369 from its
financing  activities  for the six months ended  October 31, 1996 as compared to
using  approximately  $1,841,000  for the six months ended October 31, 1995. The
amount for 1996 resulted  primarily from borrowings using the Company's  Glasgal
shares as collateral. The amount for 1995 resulted primarily from the payment of
notes payable  amounting to $2,192,000 and the issuance of new notes aggregating
$350,000.

For the six months  ended  October 31,  1996,  the Company used $95,193 from its
investing  activities.  Included in that amount  were  proceeds  received in the
amount of  $1,828,100  from the sale of 221,667  shares of Glasgal  stock.  Also
included in that amount was cash used to increase the  Company's  investment  in
Evolutions  Inc. by  $1,800,000  and to increase  the  Company's  advances  from
Kidsview, Inc. by $108,648.

In October 1995 the Company issued to two individual lenders promissory notes in
the aggregate principal amount of $350,000. Such notes are secured by a total of
200,000  shares of Glasgal common stock held by the Company and bear interest at
the rate of 10% per annum and became due on October 15, 1996.  As an  inducement
for the noteholders to make the $350,000 loan to the Company, the Company agreed
to deliver to such holders an aggregate of 19,440 shares of Glasgal common stock
                                        
                                       9

<PAGE>



held by the Company and to deliver to such  holders (a) warrants to purchase for
a period of  twenty-four  months an aggregate of 19,440 shares of Glasgal common
stock  held by the  Company  at an  exercise  price of $3.00  per  share and (b)
warrants to purchase for a period of  twenty-four  months an aggregate of 38,880
shares of the  Company's  common stock at an exercise  price of $ .20 per share.
The Company is  negotiating  with such  noteholders  regarding an extension  for
repayment of the notes.

The Company in September  1995  entered  into an agreement  with EVO whereby the
Company  transferred all rights and interests to its Zoo Borns product line, Tea
Bunnies  product line and Kidsview  name to a subsidiary of EVO for $750,000 and
shares  of  common  stock  of  EVO  equal  to  approximately  7% of  EVO's  then
outstanding  common  stock  (valued  at  $75,000)  with  the  right  to  receive
additional  shares of common stock equal to approximately 15% of the outstanding
common stock of EVO based on certain performance levels of the Zoo Borns and Tea
Bunnies product lines over the next three years.

As an inducement for EVO to enter into this agreement, the Company issued to EVO
warrants to purchase  350,000  shares of common stock of the Company at exercise
prices of $ .10 per share with  respect  to  100,000  shares and $ .20 per share
with respect to 250,000 shares.  In anticipation of consummating  the agreement,
EVO and the Company entered into a lending  arrangement  under which the Company
signed a promissory  note in March 1995 for $750,000 with interest at the annual
rate of 12%.  Such note was secured by 133,973  shares of Glasgal  stock held by
the Company and by an interest  in certain  accounts  receivable  and was due on
September 1, 1996.  In July and August 1995,  the Company also borrowed from EVO
an  aggregate  of  $350,000  with  interest  at the  annual  rate of  12%.  Such
obligations were secured by certain accounts  receivable and were due on October
31,  1995.  Upon  consummation  of the  agreement,  all these  obligations  were
cancelled.

The Company  recognized a gain of  approximately  $1,034,000 as a result of this
transaction.

As part of the  agreement,  the Company is managing  these  product lines and is
receiving an amount equal to its monthly  operating  costs, up to $100,000,  for
such period of time as the Company is managing such product  lines.  The Company
is providing the services of Peter Schneider, President of the Company, for such
management. This management arrangement may be extended for up to two additional
years depending on certain performance levels of such product lines. For the six
months ended October 31, 1996, the Company  received fees from EVO in connection
with this management arrangement amounting to $419,658.

On May 28, 1996,  the Company  established  a margin  account with the brokerage
firm of Cowen & Company  (Cowen).  In that  connection,  the  Company  delivered
300,000  shares of common  stock of  Glasgal  held by the  Company  to Cowen and
borrowed $500,000 against such account.

On June 10, 1996, the Company sold (at $9.00 per share) 115,000 shares of common
stock of Glasgal held by the Company in its margin account. The Company received
net proceeds from such sale aggregating  approximately  $1,000,000.  The Company

                                       10


<PAGE>


used  approximately  one-half  of the  proceeds  to pay off its  margin  loan of
approximately  $500,000.  In  October  1996,  the  Company  placed in its margin
account an  additional  20,000  shares of common  stock of  Glasgal  held by the
Company.

The  net  proceeds  from  the  transactions  referred  to  above  (approximately
$1,000,000) was invested in common stock of EVO at $2.50 per share, and warrants
exercisable  at $3.50 per share to purchase  common stock of EVO. The Company in
August 1996 also made an additional  equity  investment in EVO of  approximately
$800,000  on the same  terms,  which  included  the  transfer  by the Company of
106,667 shares of Glasgal common stock held by the Company,  in EVO common stock
and warrants to purchase  common stock.  As an inducement for such  investments,
the Company received  additional  warrants to purchase 400,000 additional shares
of EVO common stock exercisable at $2.50 per share.

To expand its business,  the Company will have to seek additional  financing and
there can be no  assurance  that it will be able to obtain  such  financing.  No
assurance can be given as to the number of outstanding warrants, which represent
a potential  source of funds,  that will be exercised.  The Company is exploring
alternatives  to utilizing its equity  investments in connection  with financing
its operations and developing new products.

In order to  arrive at the  completed  stage,  the  Company's  products  must go
through the following processes: product concept and design, product development
and   engineering,   pre-production   approval  and  product   manufacture   and
distribution.

In order to supplement  its cash flow,  the Company,  on March 6, 1991,  entered
into loan  agreements  with several  investors  whereby the Company  borrowed an
aggregate of $282,000  for six months with  interest at the  semiannual  rate of
14.5%. As part of such transaction,  the Company issued to such investors,  in a
private  placement,  an aggregate  of 17,000  shares of its common  stock,  on a
restricted basis, for an aggregate  consideration of approximately  $22,000.  In
October 1991, the Company paid off $32,000 (plus accrued  interest) with respect
to such loans. At such time the Company  renegotiated  the balance of such loans
(plus accrued interest) and issued new notes, maturing in one year, amounting to
approximately  $290,000 including interest thereon at the annual rate of 10%. In
September  1992 the Company  delivered  200,000 shares of common stock to one of
such investors in exchange for the  contemplated  cancellation of  substantially
all the balance of such loans.  The Company under the terms of this  arrangement
remains  contingently  liable for the prior  obligation  depending on the future
stock price and  salability of the shares.  The investor has been unable to sell
the shares for a price of at least  $1.625 and,  accordingly,  the shares can be
returned to the Company. The Company is obligated to pay such investor the value
of the note,  plus  accrued  interest,  aggregating  approximately  $395,100  at
October  31,  1996.  If the  Company  is  unable to pay this  obligation  out of
operating revenues,  it will have to seek additional financing or sell a portion
of its equity  holdings in Glasgal to do so. There can be no assurance  that the
Company  will be able to obtain such  financing  or sell such  equity,  in which
event this  obligation  would have a material  adverse effect upon the Company's
operations.

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<PAGE>



Given the nature of the Company's  business,  the length of the typical  product
cycle in the toy business,  the need to respond  rapidly to  developments in the
marketplace  and to, if  necessary,  make rapid  changes  in  product  lines and
strategic  plans to meet the rapid  changes in the  marketplace,  the  Company's
planning   historically  has  been  limited  to  approximately  a  twelve  month
time-frame at any given time. It is  anticipated  that the Company will continue
to operate in a similar  fashion in the  future.  Accordingly,  analyses of long
term liquidity and capital requirements are not meaningful.

In 1992, the Company, in order to regain listing on the NASDAQ Small Cap System,
to provide for operating  requirements and in contemplation of a possible change
in the  nature of the  Company's  business,  completed  a private  placement  of
securities in October 1992, in which  investors  subscribed for 100 Units,  each
Unit consisting of 50,000 shares of Convertible  Preferred Stock and 25,000 1992
Warrants to purchase  shares of Common Stock,  for a total of  $3,000,000.  Such
private  placement  was closed in two stages,  the first of which  involved  the
purchase of 52-1/2 Units and closed in July 1992,  with the balance of the Units
offered  (47-1/2  Units)  being  purchased in October  1992.  As a result of the
consummation  of such  private  placement,  (a) the  Redeemable  Class A Warrant
exercise price has been adjusted from $1.00 per share to $ .53 per share and the
number of shares of Common Stock  issuable upon  exercise of Redeemable  Class A
Warrants has been increased from 3,438, 900 shares to 6,488,517 shares of Common
Stock so that  each  holder  of a  Redeemable  Class A  Warrant  will be able to
purchase  1.8868  shares of Common Stock for $1.00 upon exercise of each Warrant
and (b) the  Redeemable  Class B Warrant  exercise  price has been adjusted from
$1.50  per share to $ .75 per  share  and the  number of shares of Common  Stock
issuable upon exercise of Redeemable  Class B Warrants has been  increased  from
1,719,450  shares to  3,438,900  shares of Common Stock so that each holder of a
Redeemable  Class B Warrant  will be able to purchase  one share of Common Stock
per warrant upon exercise of such Warrant.

In  November  1992,  the  Company  signed a merger  agreement  with  Glasgal,  a
privately held company which  provides  network  design,  hardware and software,
carrier  facilities and support services for organizations in a diverse range of
industries.  The Company and Glasgal terminated the proposed merger agreement in
December 1993 and entered into a stock purchase agreement described below.

In November 1992, the Company,  in contemplation of the Glasgal merger,  entered
into  a  loan  agreement  with  Glasgal   whereby  the  Company  loaned  Glasgal
$1,000,000,  due on December 31, 1993, as extended,  at an annual  interest rate
equal to two percent above the prime rate. An aggregate of $400,000 (also due on
December 31, 1993 as extended) was loaned to Glasgal in March,  June, August and
September 1993. All the loans were secured by 50.1% of the stock of Glasgal held
by  Ralph  Glasgal,  Glasgal's  principal  stockholder,  and a  second  priority
security  interest  in,  among  other  things,  Glasgal's  accounts  receivable,
inventory  and  equipment.  The  purpose of this loan was to  satisfy  partially
Glasgal's  short-term  cash needs  pending the proposed  merger with the Company
(which was not consummated - see below),  which cash needs Glasgal  estimated to
 

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<PAGE>


be between  $2.1million  and 2.6 million.  These  short-term  cash needs related
specifically to (i) Glasgal's  financing of the  implementation  of its business
plan, (ii) its financing of an increased  level of inventory,  (iii) a reduction
in the average age of its trade  payables,  (iv) its  financing of the shortfall
between a prior mortgage and a new bridge loan, and (v) to meet certain  balance
sheet requirements of prospective new lenders.

In order to provide for additional working capital,  to meet expenses related to
the  Glasgal  merger,  and to be in  position  to assist  Glasgal in solving its
immediate cash flow problems in contemplation of the merger, the Company entered
into  lending  arrangements  with  several  individuals  under which the Company
issued notes aggregating $780,000 plus interest thereon at the annual rate of 8%
in private  placements  pursuant to an exemption from registration under Section
4(2) of the  Securities  Act of 1933,  as amended (the Act).  Such notes matured
between  December 31, 1993,  as extended,  and December 31, 1995. At October 31,
1996, such notes amounted to approximately  $812,000  including accrued interest
thereon.  As an  inducement  for making such  loans,  it was  intended  that the
holders would have an opportunity  to convert such notes into equity  securities
when the Company next undertook a private placement,  the terms of which had not
been determined, provided that the holders met suitability requirements thereof.
The  Company  believes  that all of such  holders  either  were  officers of the
Company or  relatives of officers of the Company who in all cases were deemed to
be  suitable  investors  or  other  individuals  who  had  preexisting  personal
relationships with officers or directors of the Company and, in addition,  would
have been deemed  "accredited  investors" as such term is defined in Rule 501 of
Regulation D under the Act if an exemption  had been sought under  Regulation D.
In view of the Company's  default in payment of its obligations  under the notes
and its inability of afford the noteholders an opportunity to convert such notes
into equity  securities,  several of the noteholders have recently contacted the
Company  and have  threatened  to  commence  litigation  against  the Company to
enforce the Company's obligations under the notes. The Company intends either to
pay off the  obligations  or to convert the notes  (including  accrued  interest
thereon)  into Common  Stock at a rate of five shares of Common Stock per dollar
subject to  stockholder  approval of an increase in authorized  shares of Common
Stock in connection  with a proposed  meeting of  stockholders.  There can be no
assurance  that  the  Company  will  be  able  to  effectuate  such  payment  or
conversion.  Litigation  by  noteholders  to enforce the notes would  materially
adversely affect the Company's operations.

In  addition,  the  Company in February  1993  accepted a  subscription  from an
unaffiliated non-U.S.  investor to purchase 1,500,000 shares of Common Stock, in
a private  placement,  for an aggregate  consideration of $300,000.  The Company
believes that such private  placement did not result in any further  adjustments
of any outstanding warrants, options or convertible stock.

The Company,  after  termination  of the Glasgal  merger,  entered into a common
stock purchase agreement (the "Agreement") with Glasgal governing certain equity
investments  which the Company has made,  and in the future  intends to make, in
Glasgal  common stock.  Pursuant to the  Agreement,  in January 1994 the Company
converted outstanding indebtedness of Glasgal owed to the Company into equity of
Glasgal  which,   upon   consummation  of  the  Glasgal  merger  with  Sellectek
 

                                       13


<PAGE>


Incorporated,   resulted  in  the  Company  owning   approximately  28%  of  the
outstanding  shares of Glasgal or 18.5% on a fully diluted  basis.  In addition,
the  Agreement  gives  Glasgal  the right to require  the Company to purchase an
additional  number of shares of common  stock of  Glasgal  equal to 13.5% of the
then  outstanding  shares (the "Additional  Shares"),  or 10% on a fully diluted
basis,  for an aggregate of  approximately  $8.4 million  after giving effect to
certain warrant solicitation fees (the "Additional DCI Investment"). Glasgal may
require this purchase if, and then only to the extent that, the Company receives
proceeds  from the  exercise  of  existing  Company  warrants.  There  can be no
assurance  that any or all of such warrants  will be exercised.  The Company has
issued warrants to the public to purchase  6,448,517 shares of Common Stock at $
 .53 per share,  warrants to purchase  3,438,900  shares of Common Stock at $ .75
per share,  and warrants to purchase  2,500,000  shares of Common Stock at $1.00
per share.  Such warrants will expire in 1997, as extended.  The Company has the
right to retain the first $500,000 of warrant exercise proceeds;  however,  such
amount must be used by the Company to purchase shares of Common Stock of Glasgal
if the aggregate amount of warrant exercise  proceeds applied to the purchase of
Glasgal  common  stock,  after the earlier of the  expiration of exercise of all
warrants or 24 months  after the  effectiveness  of the  registration  statement
covering the Common Stock underlying the warrants, is less than $8.4 million. In
view of the fact that, at the present time and throughout 1996, the price of the
Common Stock has been substantially below the exercise price of the warrants, it
is  impossible  to predict  the  timing of  exercise  of any of the  outstanding
warrants,  or if such warrants will ever be exercised.  The Company  anticipates
such an event  will not arise for at least  two  years  and  that,  should  such
eventuality  arise,  the Company  will  attempt to meet such  obligation  either
through loans (which may be secured by all or a portion of its Glasgal  equity),
equity financings or some combination  thereof.  If Glasgal does not require the
Additional DCI Investment, the Company may still purchase, on the same terms, up
to one-half of the Additional Shares.

In November  1993, the Company issued to several  investors  secured  promissory
notes aggregating  $500,000 with interest thereon at the annual rate of 8%. Such
notes were secured by all the assets of the Company and matured on September 30,
1994, as extended,  and were paid off on October 6, 1994.  As an inducement  for
such investors to make such loan, the Company issued to such investors warrants,
which expire on November 23, 1998, to purchase an aggregate of 750,000 shares of
Common Stock at an exercise price of $ .05 per share, as adjusted.  The proceeds
from such transaction  were loaned to Glasgal to fulfill certain  commitments to
Glasgal.  Such loan to Glasgal was made on the same terms as the previous  loans
to Glasgal referred to hereinabove. As an inducement to extend the maturity date
of such notes to September 30, 1994,  the Company issued an aggregate of 500,000
additional  warrants ("1994  Warrants") to the holders of such notes on the same
terms and conditions as the 1993 Warrants  except that the exercise price of the
1994 Warrants is $ .20 per share.

On  October 6, 1994,  the  Company  consummated  a lending  arrangement  with BW
Capital  Corporation  ("BW"),  an  independent  lender  organized  to  invest in
unregistered securities and small capitalization companies which was the largest
shareholder of Sellectek  prior to its merger with Glasgal.  The Company,  which
was introduced to BW in connection  with the  Glasgal/Sellectek  merger,  has no

                                       14


<PAGE>


relationship  with BW other than in  connection  with such lending  arrangement.
Under  the  terms  of such  arrangement,  the  Company  issued  to BW a  secured
promissory note in the principal  amount of $1,600,000  bearing  interest at the
rate of 11%  per  annum  (the  "Note").  The  Note  was  secured  by  collateral
consisting of 2,000,000  shares of Glasgal common stock owned by the Company and
all dividends and other distributions of any kind in respect of such shares. The
Note matured on October 6, 1995 and was subsequently  paid. As an inducement for
BW to make such loan to the  Company,  the  Company  transferred  to BW  270,000
shares of Glasgal  common stock owned by the  Company.  The Company also paid an
investment  banker,  Brookehill  Equities,  $100,000  as  compensation  for  its
services in connection  with arranging the loan.  Under the terms of the lending
arrangement, because the Note was not prepaid in full on or before July 6, 1995,
the Company  transferred  to BW an additional  270,000  shares of Glasgal common
stock owned by the Company.  The Company used the proceeds from such loan to pay
off existing secured indebtedness aggregating $750,000 including $30,000 paid to
Joseph Salvani, the Company's Chairman, and for general corporate purposes.

Prior to entering  into the  lending  arrangement  with BW, the  Company  sought
alternative  financing  for  several  months  and  had  discussions  with  other
potential  sources of financing.  In the opinion of management,  the BW proposal
offered the Company the best financing  terms of the limited  alternatives  then
available to the Company.  In establishing  the collateral for the loan, BW took
into  account  the fact  that,  notwithstanding  a market  price at that date of
approximately  $4 per share for Glasgal  common stock,  in view of the fact that
the shares to be delivered as collateral were restricted and that the market for
Glasgal common stock generally was then illiquid, if it were forced to liquidate
the  collateral  it was  unlikely  that BW would  realize an amount close to the
reported per share market value for such stock.  From the Company's  standpoint,
the BW Loan, while not on favorable terms,  represented the best terms available
to the Company and  management  believed that it was in the best interest of the
Company  to  proceed  with such  borrowing  in order to be able to  develop  its
product lines and to reduce outstanding debt that was then due.

Among the alternatives  considered by the Company at the time of the BW loan was
the sale of a portion of its Glasgal stock.  In view of the  restrictions on the
transfer of such stock as well as the  illiquidity of the market for the shares,
the Company's  options with respect to any such sale were  limited.  The Company
did receive a verbal offer to purchase  approximately  two million shares of the
Glasgal common stock, to be accomplished through a private placement exempt from
registration  under  Regulation S under the Federal  securities laws, at a price
per share of  approximately  $ .80. The Company  rejected  such an offer as less
favorable than the BW  alternative.  Similarly,  the inducement fees incurred in
connection with the BW transaction,  while onerous, viewed in the context of the
overall BW  transaction,  were  deemed  the best  alternative  available  to the
Company in order for it to continue to fund the  development of its toy business
and preserve as much of its Glasgal equity as possible.




                                       15


<PAGE>



DEFERRED INCOME TAX ASSETS

Deferred  income tax assets as of October  31, 1996 and April 30, 1996 have been
reduced to $809,287 by a valuation  allowance of $983,802  due to  uncertainties
concerning their realization.

PART II.          OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K

                  Exhibits:

                           Financial Data Schedule

                  Reports on Form 8-K:

                           Form 8-K/A, dated August 19, 1996, regarding changes
                           in registrant's certifying accountant


























                                       16



<PAGE>






                                   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.

                                     DIRECT CONNECT INTERNATIONAL INC.
                                               (Registrant)



Date:    December 12, 1996            By /s/Peter L. Schneider
         -----------------               ---------------------
                                         Peter L. Schneider
                                         President and Chief
                                         Operating Officer

Date:    December 12, 1996            By /s/Barry A. Rosner
         -----------------               ------------------
                                         Barry A. Rosner
                                         Treasurer and Chief
                                         Financial Officer


















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