<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
         JANUARY 31, 1997.
         -----------------
                                       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 offices)                 (Zip Code)

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 January 31, 1997: 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 -
               January 31, 1997 and
               April 30, 1996                        3

               Condensed Statements
               Of Consolidated
               Operations - Three
               Months Ended January 31,
               1997 and January 31, 1996 and 
               Nine Months Ended January 31,
               1997 and January 31, 1996             4

               Condensed Statements
               Of Consolidated Cash
               Flows - Nine Months
               Ended January 31, 1997
               and January 31, 1996                  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>
                                                           January 31, 1997    April 30, 1996
                                                           ----------------    --------------                          
<S>                                                         <C>             <C>                
                                                                    
                                                               (Unaudited)
Current assets
   Cash and cash equivalents .............................   $    24,063    $    67,886
   Accounts receivable ...................................         7,822         20,652
   Due from Kidsview, Inc. ...............................       298,090        194,117
   Notes receivable-officers .............................       131,729        111,355
   Investments ...........................................        54,171         54,171
   Prepaid financing costs and other expenses ............         1,507         69,075
                                                             -----------    -----------
                          Total current assets ...........       517,382        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 ........................       254,463        234,813
                                                             -----------    -----------
                                                                  56,947         75,228
                                                             -----------    -----------

Investment in Glasgal ....................................     1,863,036      2,111,151
Investment in Evolutions Inc. ............................     1,875,000         75,000
Deferred Income taxes ....................................       809,287        809,287
Security deposits ........................................           700            700
                                                             -----------    -----------
                                                               4,548,023      2,996,138
                                                             -----------    -----------

                     Total assets ........................   $ 5,122,352    $ 3,588,622
                                                             ===========    ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities
   Accounts payable ......................................   $   337,308    $   947,512
   Accrued expenses and taxes payable ....................       292,606         49,825
   Notes payable-officers and stockholders ...............       464,520        461,716
   Notes payable-other,  current portion .................     1,721,168      1,411,424
   Investment, warrants to sell Glasgal ..................       300,000        300,000
                                                             -----------    -----------
                       Total current liabilities .........     3,115,602      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 ...................................    (3,057,590)    (4,646,195)
   Unrealized loss on investments ........................       (54,171)       (54,171)
                                                             -----------    -----------
              Total stockholders' equity .................     2,006,750        418,145
                                                             -----------    -----------
               Total liabilities and stockholders'
                     equity ..............................   $ 5,122,352    $ 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            Nine Months Ended
                                               -----------------------   ----------------------------                
                                              January 31   January  31    January 31      January 31
                                                 1997          1996           1997            1996
                                              ----------   -----------    ----------      ----------    
<S>                                       <C>            <C>             <C>           <C>    

                                                      (Unaudited)                 (Unaudited)


Revenues:
     Sales .............................   $    60,733    $   202,814    $   492,320    $ 1,101,953

Costs and expenses
     Cost of goods sold ................        45,600        100,823        333,790        906,958
     Royalties/licensing fees ..........         4,968         50,062         27,658        170,978
     Product development cost ..........         6,000         10,826         18,000         12,000
     Advertising and  promotion ........             0          5,376          4,539         86,261
     Depreciation ......................         6,549          6,550         19,649         37,670
     General and administrative expenses       230,442        413,075        781,476      1,831,487
     Less: management fees .............      (185,500)      (245,054)      (605,158)      (245,054)
                                              --------       --------       ---------     ---------
                                               108,059        341,658        579,954      2,800,300
                                              --------       --------       ---------     ---------

Operating income (loss) ................       (47,326)      (138,844)       (87,634)    (1,698,347)

Gain on sale of assets and product lines             0              0              0      1,034,494
Gain on sale of securitites ............       144,038         30,667      1,757,858      1,456,802
Interest income ........................         1,406          7,731          2,178         21,930
Other income ...........................             0              0          3,372              0
Interest expense .......................       (35,906)       (41,242)       (87,169)      (234,519)
                                             ---------      ---------      ---------      ---------
Income (loss) before income taxes ......        62,212       (141,688)     1,588,605        580,360


Income tax credit ......................             0              0              0        644,436
                                           -----------    -----------    -----------    -----------
Net income (loss) ......................   $    62,212    ($  141,688)   $ 1,588,605    $ 1,224,796
                                           ===========    ===========    ===========    ===========

Income (loss) per share ................   $      0.00    ($     0.01)   $      0.11    $      0.08
                                           ===========    ===========    ===========    ===========

</TABLE>
                                       

                                                                      4

<PAGE>

<TABLE>

                                          Direct Connect International Inc. and Subsidiary
                                               Consolidated Statements of Cash Flows

<CAPTION>

                                                                         For The Nine Months Ended

                                                                    January 31, 1997  January 31, 1996
                                                                    ----------------  ----------------  

                                                                              (Unaudited)
<S>                                                                 <C>           <C>                                

Cash flows from operating activities
     Net income .................................................   $ 1,588,605    $ 1,224,796
     Adjustments to reconcile net income
       to net cash provided by operating activities:
          Depreciation and amortization .........................        19,650         37,670
          Gain on sale of Glasgal stock .........................    (1,757,858)    (1,456,802)
          Financing fees-general and administrative expense .....             0        398,720

        Decrease (increase) in assets
          Accounts receivable-trade .............................        12,830        (55,159)
          Prepaid royalties .....................................             0         57,500
          Prepaid financing costs and expenses ..................        67,568        269,442
          Inventories ...........................................             0         52,626
          Deferred income taxes .................................             0       (644,436)
        Increase (decrease) in liabilities
          Accounts payable ......................................      (610,204)       431,240
          Accrued expenses and taxes payable ....................       242,781         80,067
                                                                      ---------        -------
Net cash provided by (used in)
     operating activities .......................................      (436,628)       395,664
                                                                      ---------        -------
Cash flow from investing activities
        Notes receivable-officers, increase .....................       (20,374)       247,004
        Proceeds from sale of Glasgal Communications, Inc. shares     2,005,973      1,871,066
        Increase in Due from Kidsview, Inc. .....................      (103,973)      (522,031)
        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 molds, tools, and dies ...................             0       (104,113)
        Aquisition of property and equipment ....................        (1,369)             0
        Investment in security ..................................             0       (500,000)
                                                                         ------      ---------
Net cash provided by  investing activities ......................        80,257      1,306,240
                                                                         ------      ---------
                               
Cash flows from financing activities
        Increase in notes payable-officers and stockholders .....         2,804         14,609
        Increase in notes payable-other .........................     1,743,636        550,000
        Decrease in notes payable-other .........................    (1,433,892)    (2,252,622)
                                                                      ---------      ---------
Net cash provided by (used in) financing
    activities ..................................................       312,548     (1,688,013)
                                                                      ---------      ---------
Net increase (decrease) in cash and cash
    equivalents .................................................       (43,823)        13,891
Cash and cash equivalents at beginning
    of period ...................................................        67,886        171,677
                                                                         ------        -------  
Cash and cash equivalents at end of period ......................   $    24,063    $   185,568
                                                                     ===========   ===========


Supplemental disclosures of cash flow information
          Cash paid during the nine months for interest .........   $    87,169    $   234,519
                                                                    ===========    ===========

                                                                                5
</TABLE>



<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 January 31, 1997,  (b) the results of  operations  for the three and
         nine months ended January 31, 1997 and January 31, 1996 and (c) changes
         in cash flows for the nine months ended January 31, 1997.

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 January 31, 1997 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
         $3,400,000 at December 31, 1996 and which expire  during  various years
         through 2010.

5.       The  Company has made an  investment  in  Evolutions,  Inc.  (EVO),  an
         apparel and toy products company,  aggregating approximately $1,875,000
         at January 31, 1997 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 nine month  periods  ended January 31, 1997 amounted
to $60,733 and $492,320,  respectively,  as compared to $202,814 and $1,101,953,
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 January 31, 1997, the Company did not have a backlog of confirmed orders from
its customers.

Gross Profit

Gross Profit  percentage  for the three months ended January 31, 1997 was 25% as
compared to 50% for the three  months  ended  January  31,  1996.  Gross  Profit
percentage for the nine months ended January 31, 1997 was 32% as compared to 18%
for the nine months ended  January 31, 1996.  Such decrease for the three months
ended January 31, 1997 resulted from the closing out of inventories at subnormal
prices.  The increase for the nine months ended  January 31, 1997  resulted from
customer chargebacks during fiscal year 1996.

Royalties/Licensing Fees

Royalties/Licensing fees are variable expenses which increase as sales increase.
For the three and nine month periods  ended  January 31, 1997,  the Company paid
approximately   $4,968  (or  8%  of  sales)  and   $27,658  (or  6%  of  sales),
respectively,  as compared to $50,062 (or 25% of sales) and  $170,978 (or 16% of
sales)  for  the  three  and  nine  month   periods   ended  January  31,  1996,
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 1997, the Company is not obligated to make
minimum royalty payments pursuant to any license agreements.

Other Income

Other income amounted to  approximately  $145,444 and  $1,763,408, for the three

                                        7
 <PAGE>

and nine months ended January 31, 1997 as compared to approximately  $38,398 and
$2,513,226  for the three and nine months ended  January 31, 1996.  The increase
for the three month period ended  January 31, 1997 was due to the sale of shares
of Glasgal stock by the Company.  The decrease for the nine months ended January
31,  1997 was due to the gain on sale of assets  and  product  line in the prior
year.

General and Administrative Expenses

Advertising and promotion  expenses amounted to $0, and $4,539 for the three and
nine month  periods  ended  January 31, 1997 as compared to $5,376 and  $86,261,
respectively,  for the three and nine month periods ended January 31, 1996. This
decrease was due to the sale of product lines in 1996.

For the three and nine months  ended  January  31,  1997,  the Company  earned a
management fee of $185,500 and $605,158,  respectively,  as compared to $245,054
and $245,054,  respectively,  for the three and nine month periods ended January
31, 1996,  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
January  31,  1997 were  $230,442  and  $781,476,  respectively,  as compared to
$413,075  and  $1,831,487,  respectively,  for the three  month  and nine  month
periods ended January 31, 1996.  Included in such amount for the three month and
nine month  periods ended  January 31, 1997 were  commissions  of $0 and $7,808,
respectively,  as compared to $11,612 and $57,062,  respectively,  for the three
month and nine month  periods ended  January 31, 1996.  This  decrease  resulted
primarily  from the  decline in the amount of sales upon which  commissions  are
based. Professional fees were $24,500 and $95,649,  respectively,  for the three
and nine month  periods  ended  January  31,  1997 as  compared  to $68,467  and
$163,319,  respectively,  for the three and nine month periods ended January 31,
1996. This decrease for the three and nine months ended January 31, 1997 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 $9,598 and
$32,941,  respectively, for the three month and nine month periods ended January
31, 1997 as compared to $14,415 and $41,179,  respectively,  for the three month
and nine month periods  ended January 31, 1996.  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 nine month  periods  ended  January 31,  1997,  salaries  were
$102,848  and  $350,411,  respectively,  as compared  to $98,857  and  $607,147,
respectively,  for the three and nine month periods ended January 31, 1996. Such
decrease  for the nine months  ended  January 31, 1997 was due to a reduction in
the number of  employees  in that  period and lower  salary  levels for  certain
employees in such period.

                                        8


<PAGE>


Travel and  entertainment  expenses  increased  to $35,800 and  $102,430 for the
three and nine month  periods  ended January 31, 1997 as compared to $23,676 and
$61,813  for the three and nine month  periods  ended  January  31,  1996.  This
increase  resulted from the Company's efforts to expand sales under its Kidsview
management  agreement. 

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 $2,186,000 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 EVO as decribed herein.  Second, the Company owns approximately
1,143,333 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 January 31, 1997,  the Company had a
cash and cash  equivalent  balance of $24,063 as compared to $185,568 at January
31, 1996.

For the nine months ended January 31, 1997 the Company used cash from operations
in the amount of $436,628 as compared to providing  $385,000 from operations for
the nine months ended January 31, 1996. The Company obtained $312,548,  from its
financing  activities  for the nine months ended January 31, 1997 as compared to
using  approximately  $1,686,000 for the nine months ended January 31, 1996. The
amount for 1997 resulted  primarily from borrowings using the Company's  Glasgal
shares as collateral. The amount for 1996 resulted primarily from the payment of
notes payable  amounting to $2,253,000 and the issuance of new notes aggregating
$550,000.

For the nine months ended January 31, 1997,  the Company  provided  $80,257 from
its investing activities as compared to providing $1,306,240 for the nine months
ended  January 31,  1996.  Included in the nine  months  ended  January 31, 1997
amount  were  proceeds  received  in the amount of  $2,005,973  from the sale of
256,667  shares of Glasgal  stock;  cash flows for the nine months ended January
31, 1996 included  $1,871,066  from the sale of 680,000 shares of Glasgal stock.
Also  included  in 1997 cash flows from  investing  activities  was cash used to
increase  the  Company's  investment  in EVO by  $1,805,000  and to increase the
Company's advances from Kidsview,  Inc. by $103,973.

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

                                        9

<PAGE>



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 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 and expects to deliver an additional  5,833
shares of Glasgal  common stock to such  noteholders as  consideration  for such
extension.

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
nine months  ended  January 31,  1997,  the  Company  received  fees from EVO in
connection with this management arrangement amounting to $605,158.

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.

                                       10


<PAGE>


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
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.

In January 1997,  the Company sold 25,000 shares of Glasgal common stock held by
the Company in its margin  account  and 10,000  shares of Glasgal  common  stock
pursuant to Rule 144 under the Securities  Act of 1933, as amended.  The Company
received  net  proceeds  from such  sales  aggregating  $144,038.  Approximately
$59,655 of such  proceeds were used to pay down the margin loan which at January
31, 1997 amounted to approximately $445,145.

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



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<PAGE>



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  $396,000  at
January  31,  1997.  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.

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.

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<PAGE>



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
be between $2.1 million  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 January 31,
1997, such notes amounted to approximately  $774,800  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 to 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


                                       13


<PAGE>



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
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


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<PAGE>



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
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

                                       15


<PAGE>



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.


DEFERRED INCOME TAX ASSETS

Deferred  income tax assets as of January  31, 1997 and April 30, 1996 have been
reduced to $809,287 by a valuation  allowance  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:

                           None.





















                                       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: March 12, 1997                               By /s/Peter L. Schneider
      --------------                                  ---------------------
                                                         Peter L. Schneider
                                                         President and Chief
                                                         Operating Officer

Date: March 12, 1997                               By /s/Barry A. Rosner
      --------------                                  ------------------
                                                         Barry A. Rosner
                                                         Treasurer and Chief
                                                         Financial Officer



















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