DIGITAL PRODUCTS CORP, 10-Q, 1995-11-20

DIGITAL PRODUCTS CORP
10-Q, 1995-11-20
MISCELLANEOUS BUSINESS SERVICES

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FORM 10-Q

Securities and Exchange Commission
Washington D.C. 20549

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended: September 30, 1995
Commission file number: 0-9503

DIGITAL PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)

FLORIDA 59-1141879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

800 N.W. 33rd Street
Pompano Beach, Florida
33064
(Address of principal executive offices)

(305) 783-9600
(Registrant's telephone number, including area code)

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 Registrant's classes of
common stock, as of November 10, 1995: 11,589,267 shares of common stock, par
value $.025 per share.

<PAGE>
PART I - FINANCIAL INFORMATION

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION

PERIOD ENDED SEPTEMBER 30, 1995

Item Page
- - ----

Introductory Comment . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Item 1. Financial Statements:

Consolidated Balance Sheets -
September 30, 1995 and March 31, 1995 . . . . . . . . . . . . . . . . 4

Consolidated Statements of Operations and Deficit -
For the Three Months Ended September 30, 1995 and 1994 . . . . . . . . 6

Consolidated Statements of Operations and Deficit -
For the Six Months Ended September 30, 1995 and 1994 . . . . . . . . . 7

Consolidated Statements of Changes in Shareholders' Equity -
For the Six Months Ended September 30, 1995 . . . . . . . . . . . . . 8

Consolidated Statements of Cash Flows -
For the Six Months Ended September 30, 1995 and 1994 . . . . . . . . . 9

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 16

<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED FINANCIAL STATEMENTS

INTRODUCTORY COMMENT

The condensed financial statements included herein have been prepared
by Digital Products Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although management
of the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest Annual Report on Form 10-K,
filed July 14, 1995 (File No. 0-9503). In the opinion of the management of the
Company, the financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary to fairly present the results for the
interim periods to which these financial statement relate.

The results of operations of the Company for the three and six months
ended September 30, 1995 are not necessarily indicative of the results to be
expected for the full fiscal year.

<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1995 AND MARCH 31, 1995

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)
ASSETS
------

CURRENT ASSETS:
Cash $ 320,042 $1,087,707
Marketable securities -0- 8,911
Accounts receivable - net 2,004,482 1,928,925
Inventory (Note 2) 334,015 442,840
Sales contracts receivable (Note 3) 14,091 50,161
Sales type lease receivable (Note 4) 194,946 434,685
Other current assets (Note 5) 403,954 201,997
------- -------
Total Current Assets 3,271,530 4,155,226
RENTAL EQUIPMENT - Net (Note 6) 1,264,723 1,252,977

PROPERTY, PLANT AND EQUIPMENT - Net 576,664 741,080
(Note 7)

SOFTWARE DEVELOPMENT COSTS - Net 733,594 911,732

SALES CONTRACTS RECEIVABLE - LONG TERM
(Note 3) 7,918 26,222

SALES TYPE LEASES - LONG TERM (Note 4) 285,961 257,780

OTHER ASSETS (Note 8) 107,287 90,358
------- ------

TOTAL ASSETS $6,247,677 $7,435,375
========= =========

See Notes to Financial Statements

<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1995 AND MARCH 31, 1995

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Capitalized lease obligations - current $ 133,366 $ 132,037
Accounts payable (Note 9) 1,205,487 1,947,623
Accrued expenses (Note 9) 1,573,691 1,838,939
Deferred revenue (Note 11) 615,248 288,775
------------ ----------
Total Current Liabilities 3,527,792 4,207,374
CAPITALIZED LEASE OBLIGATIONS 104,528 164,466

SUBORDINATED CONVERTIBLE NOTE 470,003 457,145

OTHER LONG TERM LIABILITIES (Note 10) 590,808 833,864
------- -------

TOTAL LIABILITIES 4,693,131 5,662,849
========= =========
SHAREHOLDERS' EQUITY:

Common Stock, par value $.025
50,000,000 authorized, 11,029,328 issued 275,733 275,733
Additional paid-in capital 31,454,854 31,454,854
Accumulated deficit (30,076,925) (29,858,945)
------------ ------------
1,653,662 1,871,642

Less: Treasury stock (at cost) (99,116) (99,116)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 1,554,546 1,772,526
--------- ---------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,247,677 $ 7,435,375
========= =========

See Notes to Financial Statements

5
<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

FOR THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994

(UNAUDITED)

September 30, 1995 September 30, 1994
------------------ ------------------
REVENUES:
Sales of products and software $ 893,237 $ 1,427,380
Rental and monitoring revenues 857,770 1,156,727
Service and other revenue 266,470 482,714
----------- -----------
Total Revenues 2,017,477 3,066,821
--------- ---------

COST AND EXPENSES:
Cost of revenues -
Sales of products and software 334,021 454,278
Rental and monitoring revenues 390,071 483,043
Service and other revenue 104,363 601,884
Operating expenses 1,459,478 1,416,155
Research and development 33,032 68,004
------ ------
Total Costs and Expenses 2,320,965 3,023,364
--------- ---------

INCOME (LOSS) FROM OPERATIONS (303,488) 43,457
-------- ------

OTHER INCOME (EXPENSE):
Interest income (788) 10,103
Interest (expense) (66,804) (49,932)
Total Other Income (Expense) (67,592) (39,829)
------- --------

NET INCOME (LOSS) $ (371,080) $ 3,628

DEFICIT - BEGINNING $(29,705,843) $(30,076,725)
------------ ------------

DEFICIT - ENDING $(30,230,025) $(28,110,813)
============= =============
NET INCOME (LOSS) PER SHARE $ (0.03) $ (0.00)
==== ======

WEIGHTED AVERAGE NUMBER OF SHARES 10,989,267 10,989,441
OUTSTANDING

See Notes to Financial Statements

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

FOR SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994

(UNAUDITED)

September 30, 1995 September 30, 1995
------------------ ------------------

REVENUES:
Sales of Products and Software Revenues $ 2,043,871 $ 2,305,980
Rental and monitoring revenues 1,802,822 2,351,591
Service and other revenue 662,488 824,631
----------- -----------
Total Revenues 4,509,181 5,482,202
--------- ---------

COST AND EXPENSES:
Cost of revenues -
Sales of products and software 651,621 797,555
Rental and monitoring revenues 879,309 1,128,825
Service and other revenue 271,982 1,080,868
Operating expenses 2,879,847 2,744,684
Research and development 88,505 203,545
------ ------
Total Costs and Expenses 4,771,264 5,955,477
--------- ---------

LOSS FROM OPERATIONS (262,083) (473,275)
-------- ---------

OTHER INCOME (EXPENSE):
Interest income 13,902 25,832
Interest (expense) (123,421) (101,238)
Other - net 153,622 (250,000)
------- -------
Total Other Income (Expense) 44,103 (325,406)
------ ---------

NET LOSS $ (217,980) $ (798,681)

DEFICIT - BEGINNING $(29,858,945) $(27,312,132)
------------ ------------

DEFICIT - ENDING $(30,076,925) $(28,110,813)
============= =============
NET LOSS PER SHARE $ (0.02) $ (0.07)
==== ======

WEIGHTED AVERAGE NUMBER OF SHARES 10,989,267 11,004,633
OUTSTANDING

See Notes to Financial Statements

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995

(UNAUDITED)

<TABLE><CAPTION>
Common Stock Treasury Shares
------------ ---------------
Additional Total
Paid In Accumulated Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - 11,029,328 $275,733 $31,454,854 $(29,858,945) 40,061 $(99,116) $1,772,526
July 1, 1995

NET LOSS $(217,980) $(217,980)
--------------------------------------------------------------------------------------------
BALANCE -
September 30, 1995 11,029,328 $275,733 $31,454,854 $(30,076,925) 40,061 $(99,116) $1,554,546
========== ======= ========== ========== ====== ======== =========
</TABLE>

See Notes to Financial Statements

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994

(UNAUDITED)

<TABLE><CAPTION>
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH (USED IN) OPERATING ACTIVITIES:
Net Income (Loss) $ (217,980) $ (798,681)
--------- ---------
Operating activities:
Depreciation and amortization 502,010 759,096
(Increase) Decrease in sale contracts
and sales type leases 265,932 170,806
(Increase) decrease in accounts receivable (75,557) (830,337)
(Increase) decrease in inventory 108,825 41,281
(Increase) decrease in rental inventory (270,757) (39,811)
(Increase) decrease in software development costs 109,203 (33,492)
(Increase) decrease in other assets (218,886) (103,939)
Increase (decrease) in accounts payable
and accrued liabilities (1,237,582) (709,043)
Increase in deferred revenue 326,473 133,321
Loss on investment - 0 - 250,000
-------- --------
Total Adjustments (490,312) (362,118)
--------- ---------
Net Cash (Used In) Operating Activities $ (708,292) $ (1,160,799)
--------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,675) (10,017)
Sale of marketable securities - 0 - 2,250,000
----- ---------
Net Cash Provided By (Used In) Investing (9,675) 2,239,983
------- ---------
Activities

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capitalized lease obligation (58,609) (56,110)
-------- --------

NET INCREASE (DECREASE) IN CASH (776,576) 1,023,074
Cash at beginning of period 1,096,618 866,927
--------- -------

CASH AT END OF PERIOD $320,042 $1,890,001
======= =========
</TABLE>

See Notes to Financial Statements

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1995

Note 1. Business Activity.
- - -------------------------

Digital Products Corporation and its subsidiaries (the "Company") are
engaged in the design, fabrication and marketing of electronic devices for the
criminal justice industry. The Company derives these revenues principally from
sales and rentals to governmental agencies and entities which provide services
to government agencies. The Company is also engaged in the development and
marketing of computer applications programs for various industries.

Note 2. Inventory.
- - ------------------

Inventory is stated at the lower of cost or market using the first in,
first out method in determining cost, and replacement cost or net realizable
value in determining market. Inventory consists of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Supplies $ 43,100 $ 65,436
Finished goods 290,915 377,404
------- -------
Total Inventory $ 334,015 $ 442,840
======= =======

Note 3. Sales Contracts Receivable.
-----------------------------------

Sales contracts receivable consists of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Gross sales contracts receivables $ 132,102 $ 242,383
Less: Unearned revenue (110,093) (166,000)
--------- ---------
Net sales contract receivables 22,009 76,383

Current portion of sales contract
receivables 14,091 50,161
------ ------

Long term portion of sales
contract receivables $ 7,918 $ 26,222
===== ======

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1995

Note 4. Net Investments in Sales Type Leases.
- - ---------------------------------------------

Net investments in sales type leases consist of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Total minimum lease payments to be received $ 647,237 $ 833,465
Less: unearned income (166,330) (141,000)
-------- ---------
Net investment in sales type leases 480,907 692,465
Amounts due within one year 194,946 434,685
------- -------
Net long term portion $ 285,961 $ 257,780
======= =======

Note 5. Other Current Assets.
- - -----------------------------

Other current assets consist of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Prepaid royalties $ 164,830 $ 76,949
Deposits on bids 25,400 26,100
Prepaid expenses 167,633 66,621
Note receivable 20,000 20,000
Other 26,091 12,327
------ ------
$ 403,954 $ 201,997
======= =======

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1995

Note 6. Rental Equipment Inventory.
- - -----------------------------------

Rental equipment is stated at cost and is depreciated on a straight
line basis over estimated useful lives of up to five years. Depreciation
commences as the units are placed into rental inventory. The equipment,
manufactured by the Company, is recorded at cost as follows:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Rental equipment at cost $ 4,003,491 $ 3,732,734
Less: Accumulated depreciation (2,738,768) (2,479,757)
---------- -----------

$ 1,264,723 $ 1,252,977
========= =========

Note 7. Property, Plant and Equipment.
- - --------------------------------------

Property, plant and equipment consists of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Office and computer equipment $ 1,638,514 $ 1,634,459
Production equipment 46,428 46,428
Leasehold Improvements 8,514 2,894
--------- ------------
1,693,456 1,683,781

Less: Accumulated depreciation (1,116,792) (942,701)
--------- ---------

Net property, plant and
equipment $ 576,664 $ 741,080
======= =======

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1995

Note 8. Other Assets.
---------------------

Other assets consist of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Pre-paid royalties $ 18,450 $ 21,600
Fixed asset purchases in progress 23,677 4,100
Security deposits 46,401 45,902
Other 18,759 18,756
------ ------
$ 107,287 $ 90,358
======= ======

Note 9. Accounts Payable and Accrued Expenses.
----------------------------------------------

Included in accounts payable at September 30, 1995 and March
31, 1995 is a liability of $197,042 and $521,389 respectively, to unaffiliated
third party lenders who purchased certain receivables from the Company on a full
recourse basis. The liability is being reduced as the receivables are
collected. The Company's accounts receivable are collateral under one of the
financing agreements. Accrued expenses are comprised of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Payroll, payroll taxes and benefits $ 259,236 $ 235,276
Commissions 132,519 105,696
Sales tax payable 66,368 184,392
Warranty and repairs 221,966 223,737
Accrued rent settlement - current portion 27,182 27,182
Current portion of litigation settlement 75,000 318,000
Other 791,420 744,656
--------- ---------
$ 1,573,691 $ 1,838,939
========== ==========

<PAGE>

DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1995

Note 10. Other Liabilities - Long-Term
---------------------------------------

Other long-term liabilities at September 30, 1995 and March 31, 1995 are
comprised of the following:

September 30, 1995 March 31, 1995
------------------ --------------
(Unaudited)

Long-term portion of rent settlement $ 215,565 $ 383,622
Long-term portion of litigation 75,000 150,000
settlement 148,800 148,800
Long-term portion of warranty reserve 151,443 151,442
------- -------
Other $ 590,808 $ 833,864
======= =======

Note 11. Revenue Recognition
-----------------------------

The Company recognizes revenues on correctional services
systems sales and sales-type leases upon delivery. Revenue for
warranties sold with these products are recognized immediately and a
reserve for future costs is recorded simultaneously. Warranties on
electronic devices sold separately are deferred and recorded as
income over the term of the warranty. Related costs are expensed as
incurred.

The Company recognizes rental revenues as earned over the
terms of the applicable operating leases which generally do not
exceed one year.

Revenue from the sale or licensing of software systems is
recognized upon delivery to the customer when the Company has no
further obligations or has insignificant obligations remaining under
the sale of licensing agreement and collectibility is probable.

Service revenue on support contracts for software systems
is recognized over the life of the contract, usually one year.

Other revenue includes license fees received for the
granting of exclusive territorial rights for the leasing of the
Company's electronic products which are recognized in full upon
contract signing, provided the Company has no significant remaining
economic obligations.

Note 12 Contingencies
---------------------

The Company is the subject of product liability claims.
One of such claims alleges that the Company's monitoring equipment
was defectively designed and manufactured and negligently installed.
This action is in the preliminary stage. The other claims alleged
certain deficiencies with respect to the Company's monitoring
equipment. All of such lawsuits have been forwarded to the Company's
insurance carrier. The Company is involved in other litigation
incidental to the conduct of its business. The ultimate outcome of
these

<PAGE>
matters cannot presently be determined. No provision for any liability that may
result from such litigation has been made in the financial statements as such
amount, if any, cannot be determined.

On or about November 3, 1995, defendants AFTEC, Inc. and Gustavo Valez
served a counterclaim against IBS and a third party complaint against the
Company, David J. Dell and Richard A. Angulo. The counterclaim and third party
complaint purports to seek damages for breach of contract and breach of oral
contract and for the issuance of an injunction against IBS. In addition, the
counterclaim and third party complaint seeks damages for breach of contract
against the Company, David Dell and Richard Angulo. Liability against the
Company is alleged in the complaint to exist by virtue of the fact that the
Company allegedly dominated and controlled the assets, accounts and operations
of IBS to such an extent that IBS had no independence or existence of its own
and therefore was the Company's alter ego. The counterclaim and third party
complaint states that damages sought against the Company, IBS, Angulo and Dell
are in excess of $15,000.00.

Note 13. Manufacturing Agreement
- - ---------------------------------

The Company has entered into a manufacturing and engineering services
agreement with KBS, Inc. for the manufacturing of the Company's home monitoring
equipment. There are no minimum production quantities under the agreement.

Note 14. Subsequent Event
- - --------------------------

On October 23, 1995, the Company and Strategic Technologies Inc.
("Strategic"), announced the execution of a definitive Agreement and Plan of
Merger dated as of October 13, 1995 (the "Merger Agreement") providing for the
merger (the "Merger") of a wholly owned subsidiary of Strategic with and into
the Company pursuant to which the Company will become a wholly-owned subsidiary
of Strategic. Pursuant to the transaction, each outstanding share of Digital
common stock will be converted into .379291 of a share of Strategic common
stock. Upon completion of the merger and a proposed private placement of
500,000 shares of Strategic common stock, Strategic will have approximately 10.9
million shares outstanding (11.9 million fully diluted), of which 4.4 million
shares and 600,000 options will be held by former Digital shareholders.

It is anticipated that the merger will be consummated in or about March of
1996. The transaction is conditioned on obtaining the approval of the
shareholders of both Strategic and the Company, the approval of the United
States and Canadian securities regulators and the listing of the Strategic
common shares on the Toronto Stock Exchange, as well as other conditions.

The Company expects to incur significant professional and administrative
costs in connection with the Merger, and there can be no assurance that the
Merger will be consummated. Strategic has agreed to fund the Company's
transaction costs relative to the Mergers, up to $275,000. Strategic has been
issued a one year warrant to acquire 500,000 shares of Digital at $0.25 per
share plus a conditional warrant to acquire an additional 1,500,000 Digital
shares in consideration of agreeing to bear certain transaction costs which
warrants are exercisable in the event the transaction is not consummated under
certain circumstances.

<PAGE>

In conjunction with the execution of the Merger Agreement certain principal
shareholders of both companies, including members of the Boards of the
companies, have executed a related Shareholders' Agreement whereby the
signatories have confirmed their intention to vote for and support the Merger
and to provide for certain post-closing governance matters relating to
Strategic. Strategic and Digital have also agreed to immediately begin joint
marketing of their respective product lines and integration of certain other
business operations.

Note 15. Segment Information
- - -----------------------------

The following table sets forth selected items from the Company's Statements of
Operation for the three months ended September 30, 1995 and 1994.

(Unaudited)

September 30, 1995 September 30, 1994

Amount % of Segment Amount % of Segment
------ ------------ ------ ------------
Revenues:
Criminal Justice Segment 1,667,609 82.7 2,157,905 70.4
Computer Software Segment 349,868 17.3 908,916 29.6
------- -------

Total Revenue 2,017,477 3,066,821

Cost of Sales:
Criminal Justice Segment 769,818 92.9 867,236 56.3
Computer Software Segment 58,637 7.1 671,969 43.7
------ -------

Total Costs of Sales 828,455 1,539,205

Gross Margin:
Criminal Justice Segment 897,791 75.5 1,290,669 84.5
Computer Software Segment 291,231 24.5 236,947 15.5
------- -------

Total Gross Margin 1,189,022 1,527,616

Operating Expenses:
Criminal Justice Segment 1,037,187 69.5 1,003,617 67.6
Computer Software Segment 455,323 30.5 480,542 32.4
------- -------

Total Operating Expenses 1,492,510 1,484,159
Other Income (Expense):
Criminal Justice Segment (64,602) (95.6) (37,760) (94.8)
Computer Software Segment (2,990) (4.4) (2,069) (5.2)
----- -----

Total Other Income (expense) (67,592) (39,829)

Net Income:
Criminal Justice Segment (203,998) (55.0) 249,292
Computer Software Segment (167,082) (45.0) (245,664)
------- -------

Total Net Income (371,080) 3,628

<PAGE>

The following table sets forth selected items from the Company's Unaudited
Consolidated Statements of Operation for the six months ended September 30, 1995
and 1994.

September 30, 1995 September 30, 1994

Amount % of Segment Amount % of Segment
------ ------------ ------ ------------
Revenues:
Criminal Justice Segment 3,605,319 80.0 3,725,395 68,.0
Computer Software Segment 903,862 20.0 1,756,807 32.0
------- ---------

Total Revenue 4,509,181 5,482,202
Cost of Sales:
Criminal Justice Segment 1,612,908 89.5 1,695,323 56.4
Computer Software Segment 190,004 10.5 1,311,925 43.6
------- ---------

Total Costs of Sales 1,802,912 3,007,248

Gross Margin:
Criminal Justice Segment 1,992,411 73.6 2,030,072 82.0
Computer Software Segment 713,858 26.4 444,882 18.0
------- -------

Total Gross Margin 2,706,269 2,474,954

Operating Expenses:
Criminal Justice Segment 2,014,170 67.9 1,928,773 65.4
Computer Software Segment 954,182 32.1 1,019,456 34.6
------- ---------

Total Operating Expenses 2,968,352 2,948,229

Other Income (Expense):
Criminal Justice Segment 51,164 (116.0) (321,849) (98.9)
Computer Software Segment (7,061) 16.0 (3,557) (1.1)
----- -----

Total Other Income (expense) 44,103 (325,406)
Net Income:
Criminal Justice Segment 29,405 13.5 (220,550) (27.6)
Computer Software Segment (247,385) (113.5) (578,131) (72.4)
------- -------

Total Net Income (217,980) (798,681)

<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- - ---------------------

Digital Products Corporation and its subsidiaries (the "Company")
provide information management solutions to specific aspects of the criminal
justice and corrections industry and the construction trade. For the criminal
justice and corrections industry, the Company, through its DPC Monitoring
Services, Inc. ("DPCMSI") subsidiary, provides such solutions through the
development and distribution of equipment, technology and computer software
programs marketed to the public and private agencies conducting community
corrections, supervision and offender monitoring and check-in programs for
individuals subject to probation, parole and pre-trial diversion (the "Criminal
Justice Segment"). Within the construction industry, the Company's BLR, Inc.
subsidiary (which conducts its business under the trade name "BGIS Systems,
Co.") ("BGIS"), develops, distributes and supports computer software application
programs for the highway and utility segment of the industry. The Company also
provides post-sale support services for all such products, technology and
software programs, and, in connection with the sale of its products, technology,
software licenses and services, it may act as a dealer of computer hardware and
other software products. During the fiscal quarter ended September 30, 1995,
the Company substantially discontinued the operations of its DPC/International
Business Solutions, Inc. ("IBS") subsidiary, which developed, distributed and
supported financial accounting computer software programs for multi-national
corporations requiring concurrent, multi-national, multi-currency, and multi-
lingual capabilities.

<PAGE>
RESULTS OF OPERATIONS

The following table sets forth selected items from the Company's
unaudited Consolidated Statements of Operations for the quarter ended September
30, 1995 and 1994, as percentages of corresponding revenues and percentage of
increase (decrease) in each such item from the prior periods.

Percentage of Revenues
Three Months Ending
-------------------

% of Increase
September 30, 1995 September 30, 1994 (Decrease)
------------------- --------------------- ----------
<S> <C> <C> <C>
Revenues:
Product 44.3% 46.6% (37.4)%
Rental & Monitoring 42.5 37.7 (25.8)
Service 13.2 15.7 (44.8)
---- ----
Total 100.0 100.0 (34.2)
Cost of Revenues*
Product 37.4 31.8 (26.5)
Rental & Monitoring 45.5 41.8 (19.2)
Service 39.2 124.7 (82.7)
---- ----- ------
Total 41.1 50.2 (46.2)

Gross Margin*
Product 62.6 68.2 (42.5)
Rental & Monitoring 54.5 58.2 (30.6)
Service 60.8 (24.7) (236.0)
Total 58.9 49.8 (22.2)

Operating Expenses 72.3 46.2 3.1

Research and
Development 1.6 2.2 (51.4)
Operating Income (Loss) (15.0) 1.4 (798.4)

Total Other Income
(Expense) (3.4) (1.3) (69.7)

Net Income (Loss) (18.4) 0.1 (10,328.2)

</TABLE>

* Percentage of revenues for Cost of Revenues and Gross Margin are expressed as
a percentage of corresponding revenues.

<PAGE>

The following table sets forth selected items from the Company's
unaudited Consolidated Statements of Operations for the quarters ended September
30, 1995 and 1994, as percentages of corresponding revenues and percentage of
increase (decrease) in each such item from the prior periods.

<TABLE><CAPTION>
Percentage of Revenues
Six Months Ending
-----------------

% of Increase
September 30, 1995 September 30, 1994 (Decrease)
------------------- --------------------- ----------
<S> <C> <C> <C>
Revenues:
Product 45.3% 42.1% (11.4)%
Rental & Monitoring 40.0 42.9 (23.3)
Service 14.7 15.0 (19.7)
---- ----
Total 100.0 100.0 (17.7)
Cost of Revenues*
Product 31.9 34.6 (18.3)
Rental & Monitoring 48.8 48.0 (22.1)
Service 41.1 131.1 (74.8)
---- ----- ------
Total 40.0 54.9 (40.0)

Gross Margin*
Product 68.1 65.4 (7.7)
Rental & Monitoring 51.2 52.0 (24.5)
Service 58.9 (31.1) 252.4
Total 60.0 45.1 9.3

Operating Expenses 63.9 50.1 4.9

Research and
Development 2.0 3.7 (56.5)
Operating Income (Loss) (5.8) (8.6) 44.6

Total Other Income
(Expense) 1.0 (6.0) (86.4)

Net Income (Loss) (4.8) (14.6) (72.7)

</TABLE>

* Percentage of revenues for Cost of Revenues and Gross Margin are expressed as
a percentage of corresponding revenues.

<PAGE>

QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1994
- - -----------------------------------------------------------------------------

The Company incurred a loss from operations of approximately $303,400
during the second quarter of the Company's fiscal year ending March 31, 1996
(the "1996 Fiscal Year"), compared to an operating profit of approximately
$43,400 for the second quarter of the fiscal year ended March 31, 1995 (the
"1995 Fiscal Year"). The Company's net loss for the second quarter of the 1996
Fiscal Year totaled approximately $371,000 compared to an income of
approximately $3,000 for the second quarter of the 1995 Fiscal Year. The
unfavorable results incurred in the second quarter of the 1996 Fiscal Year are
primarily due to the lower than anticipated revenues in all categories with
higher than normal corporate expenses.

Revenues

The Company's total revenue for the second quarter of the 1996 Fiscal Year
totaled approximately $2,017,400, a decrease of $1,049,300 or 34.2% compared to
the second quarter of the 1995 Fiscal Year. On a year to date basis the total
revenues for the 1996 Fiscal Year totaled approximately $4,509,181, a decrease
of $973,000 or 17.7% compared to the year to date revenues for the 1995 Fiscal
Year.

Revenues generated by the Criminal Justice Segment totaled approximately
$1,667,600 and 82.7% for the second quarter of the 1996 Fiscal Year, while the
Computer Software Segment totaled approximately $349,800 and 17.3%. Revenues
generated by the Criminal Justice Segment for the second quarter of the 1996
Fiscal Year decreased by approximately $490,296 or 22.7% compared to the second
quarter of the 1995 Fiscal Year. The decline in revenues in the
Criminal Justice Segment is attributable to continued intense price competition
in the industry and budgetary constraints of government agencies adversely
affecting the availability of funds for electronic monitoring equipment and
services during the current quarter. The Company is focusing its efforts on the
Criminal Justice Segment in anticipation of continued growth in this segment and
plans to further reduce the expenses related to these operations. The Software
Segment's revenues declined during the second quarter of the 1996 Fiscal Year
by approximately $559,000 or 61.5%. During the fiscal quarter ended
September 30, 1995, the Company discontinued a substantial portion of the
operations of its IBS subsidiary as a result of the departure of a number of
the original employees who formed a new company to compete with
IBS. See Note 12. Contingencies. IBS does not anticipate any future
significant revenue to be derived from the licensing of its software but does
anticipate some revenues generated from on-going support to the program's
established customer base.

On a year to date basis the Criminal Justice Segment totaled approximately
$3,605,300. Compared to the same period for the 1995 Fiscal Year, revenues
decreased approximately $120,000 or 3.2%. Year to date revenues for the
Software Segment of approximately $903,800 decreased by approximately $852,900
and 48.6% compared to the same period for the 1995 Fiscal Year.

Product Sales. Product sales for the second quarter of the 1996 Fiscal Year
- - -------------
totaled approximately $893,200 compared to approximately $1,427,300, a decrease
of $534,100 or 37.4%. The Criminal Justice Segment totaled approximately
$683,000 a decrease of $161,700 and 19.1%. The Software
Segment's product sales totaled approximately $210,200, a decrease of $372,400
and 63.9%. For the second quarter of the 1996 Fiscal Year, the Criminal Justice
Segment contributed 76.5% of the category, while the Software Segment accounted
for 23.5%.

Total year to date product sales for the 1996 Fiscal Year totaled
approximately $2,043,800 a decrease of $262,100 and 11.4%, compared to the year
to date revenue for the 1995 Fiscal Year. The Criminal Justice Segment product
sales totaled approximately $1,520,600 with an increase over the same period for
the 1995 Fiscal Year of $398,200 or 35.5%.

<PAGE>

However, the Company can give no assurance that its product sales will
increase. The Software Segment's year to date product sales were approximately
$523,200 a decrease of $660,300 or 55.8%. On a year to date basis, the Criminal
Justice Segment contributed 74.4% of the product sales, while the Software
Segment totaled 25.6%.

Rental & Monitoring Revenue. Revenue in this category is comprised of recurring
- - ---------------------------
revenues from the rental of the Company's monitoring equipment and recurring
services revenues from the Company's Monitoring Center, both of which are
included in the Criminal Justice Segment. The combined categories of rental and
monitoring revenue totaled approximately $857,700 for the second quarter of the
1996 Fiscal Year compared to revenues of approximately $1,156,700 for the 1995
Fiscal Year or a decrease of $299,000 and 25.8%. Total monitoring revenue for
the first half of the 1996 Fiscal Year totaled approximately $1,802,800 compared
to $2,351,500 for the first half of the 1995 Fiscal year or a decrease of
$548,700 and 23.3%. Due to the increased price competition in the pay per day
type contracts, and the Company's position towards pricing such contracts based
upon true cost and other risk factors, the Company has accepted a smaller market
share in exchange for a higher price per day. In addition, budgetary
constraints of government have adversely affected the availability of funds for
electronic monitoring equipment and services. In the first half of the 1996
Fiscal Year, the Monitoring Center had approximately 1,800 clients as compared
to 2,240 clients during the first half of the 1995 Fiscal Year.

Service and Other Revenue. Service and other revenues include revenues
- - -------------------------
generated from post sale support service, product warranty and non-warranty
support activity associated with the support and maintenance of the Company's
Criminal Justice Segment and service revenues generated from post sale support
services provided by the Software Companies. Service Revenues for the second
quarter of the 1996 Fiscal Year totaled approximately $266,400, a decrease of
$216,300 and 44.8% from the same period in the 1995 Fiscal Year. The Criminal
Justice Segment accounted for approximately $126,800 of the total for the
quarter, compared to approximately $156,500 for the second quarter of 1995
Fiscal Year or a decrease of $29,700 and 19.0%. The Software Segment
contributed approximately $139,600 for the second quarter of the current fiscal
year compared to approximately $362,200, a decrease of $222,600 and 61.5% from
the second quarter of the 1995 Fiscal Year. Total service revenue for the first
half of the 1996 Fiscal Year totaled approximately $662,200 compared to the
first half of the 1995 Fiscal Year of $824,600, a decrease of $162,200 and
19.7%. On a year to date basis, the Criminal Justice Segment increased $30,500
for the 1996 Fiscal Year or an increase of 12.1%. The Software Segment's
service revenue for the first half of the 1996 Fiscal Year totaled approximately
$380,600, a decrease of $192,700 and 33.6% compared to the same period for the
1995 Fiscal Year. On a year to date basis the Criminal Justice Segment
accounted for 42.5% of the service revenue with the Software Segment
contributing 57.5%.

Costs and Expenses

Product Costs. Total product costs for the second quarter of the 1996 Fiscal
- - -------------
Year totaled approximately $334,000 or 37.4% of corresponding revenues compared
to approximately $454,200 and 31.8% for the second quarter of the 1995 Fiscal
Year, a decrease in costs of approximately $120,200 and 26.5%. The Criminal
Justice Segment's product costs totaled approximately $296,800 decreasing from
the second quarter of the 1995 Fiscal Year by $3,700. The costs were impacted
favorably by the contracting of the manufacturing to KBS, Inc. The Software
Companies' product costs for the second quarter of the 1996 Fiscal Year totaled
approximately $37,200, a decrease of $116,500 or 28.8% from the second quarter
of the 1995 Fiscal Year. The decrease in product costs is related to the
decrease in product sales by the Software Segment. Product costs for the first
half of the 1996 Fiscal Year totaled approximately $651,600, compared to
approximately $797,500 or a decrease of $145,900 from the first half of the 1995
Fiscal Year. The Criminal Justice Segment contributed approximately $560,900 of
the current year's total or 86.1%. The Software Segment accounted for the
balance or approximately $90,700 and 13.9% of the total.

Cost of Rental and Monitoring. Costs of rental and monitoring for the second
- - -----------------------------
quarter of the 1996 Fiscal Year totaled approximately $390,000 compared to
$483,000, a decrease of $93,000 or 19.3% compared to the second quarter of the
1995 Fiscal Year. On a year to date basis, the total costs for the 1996 Fiscal

<PAGE>

Year totaled approximately $879,300 and has decreased from the 1995 Fiscal
Year's total of approximately $1,128,800 or a decrease of $249,500 and 22.1%.
Costs in this category are made up entirely of the Criminal Justice Segment.

Costs of Service and Other. Costs of service and other revenues in the second
- - --------------------------
quarter of the 1996 Fiscal Year totaled approximately $104,300 compared to an
approximate total of $601,800 for the second quarter of the 1995 Fiscal Year, a
decrease of $497,500 and 82.7%. The Criminal Justice Segment totaled
approximately $83,000 with almost no change from the same period of the 1995
Fiscal Year. The Software Segment costs for the second quarter totaled
approximately $21,300 compared to $518,200 for the second quarter 1995 Fiscal
Year, or a decrease of $496,900 and 95.9%. The Company expects to further
decrease the Software Segment costs as the IBS operations are discontinued and
the Company focuses its efforts on the Criminal Justice Segment. The Criminal
Justice Segment accounted for 79.6% of the costs for this category during the
second quarter, while the Software Segment's costs accounted for 20.4% of the
total. Total costs of service for the first half of the 1996 Fiscal Year
totaled approximately $271,900 compared to $1,080,800 for the first half of the
1995 Fiscal Year or a decrease of $808,900 and 74.8%. The majority of the
decrease was experienced in the Software Segment's costs as the first half of
the 1996 Fiscal Year of $99,200 decreased from the first half of the 1995 Fiscal
Year's total of approximately $906,900 or a decrease of $807,700 and 89.1%.

Operating Expenses. Operating expenses for the second quarter of the 1996
- - ------------------
Fiscal Year totaled approximately $1,459,400 compared to the 1995 Fiscal Year's
second quarter of approximately $1,416,100, an increase of $43,300 or 3.1%. Of
the costs for the second quarter of the 1996 Fiscal Year, the Criminal Justice
Segment accounted for 68.4% with the Software Segment contributing 31.6% of the
total. Total operating costs for the first half of the 1996 Fiscal Year totaled
approximately $2,879,800 compared to $2,744,600 for the first half of the 1995
Fiscal Year, an increase of $135,200 and 4.9%. Making up the increase for the
first half of the 1996 Fiscal Year was an increase in the Criminal Justice
Segment's operating expenses of approximately $200,400, primary professional
services, and offset by a decrease in the Software Segment operating expenses
(reduced employee related expenses) of approximately $65,200. For the first
half of the 1996 Fiscal Year the Criminal Justice Segment accounted for 68.4% of
the total with the Software Segment's portion totaled 31.6%.

Research and Development. Research and development ("R&D") costs for the second
- - ------------------------
quarter of the 1996 Fiscal Year totaled $33,000 compared to the 1995 Fiscal
Year's second quarter of $68,000 or a decrease of $35,000 and 51.4%. For the
first half of the 1996 Fiscal Year, R&D costs totaled approximately $88,500
compared to a previous $203,500 for the first half of the 1995 Fiscal Year or a
decrease of $115,000 and 56.5%. Research and Development costs are
predominately made up of the Criminal Justice Segment expenditures as the R&D
costs for the Software Companies' major upgrade and product development had been
completed by the end of the 1995 Fiscal Year.

Other Income and Expenses. In the second quarter of the 1996 Fiscal Year, other
- - -------------------------
income and expenses totaled approximately $67,500 compared to $39,800 for the
same period of the prior year. The majority of the current quarter was
comprised of interest expense which totaled $66,800. The total for the first
half of the 1996 Fiscal Year was approximately $44,100 of income compared to the
first half of the 1995 Fiscal year which totaled approximately $325,400 in other
expenses. The year to date 1996 Fiscal Year other income totals are comprised
of interest expense of $123,400 and offset by interest income of $13,900 and
income of $153,600 associated with the renegotiation of the building lease after
vacating the portion of the premises relating to the manufacturing process. In
the first half of the 1995 Fiscal Year, the majority of expenses were related to
the loss on the sale of the Primedex Shares of approximately $250,000 and
interest expense of approximately $101,200.

Gross Margins

Overall gross margins for the second quarter of the 1996 Fiscal Year
were $1,189,000 or 58.9% of revenue compared to the second quarter of the 1995
Fiscal Year of $1,527,616 or 49.8% of related revenue. Of the total gross
margin for the period, the Criminal Justice Segment contributed a total of
$897,800 and 75.5%

<PAGE>

while the Software Segment added $291,200 and 24.5%. On an year to date basis,
the gross margin totaled approximately $2,706,200 compared to $2,474,900 for the
same period of the 1995 Fiscal Year, or an increase of $231,300 and 9.3%. The
Criminal Justice Segment contributed approximately $1,992,400 or 73.6% of the
total while the Software Segment contributed approximately $713,800 and 26.4%.
Compared to a prior year for the same period, the overall gross margin of 58.9%
has improved from a previous 49.8%. See Note 15. Segment Information.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1995, the Company had working capital deficiency of
approximately $256,200, as compared with a working capital deficiency of $52,000
at March 31, 1995, a decrease of $204,200. This decrease is primarily
attributable to the Company's net loss for the first half of the 1996 Fiscal
Year of $217,980.

In November 1993, Acorn Venture Capital Corporation ("Acorn") loaned the
Company $500,000 as evidenced by a $500,000 principal amount 10% Subordinated
Convertible Note Due 1996 (the "Note"). The Note, which bears interest at 10%
per annum payable semi-annually commencing in May 1994, is due in November 1996.
The Note is convertible (in whole or part) into shares of the Company's Common
Stock at the rate of one share for $1.50 of principal and/or accrued interest.
Payment of the principal and interest on the Note is subordinated to all other
debt of the Company, except such debt specifically made subordinate to the Note.
In connection with the issuance of the Note, Acorn was granted a Warrant,
expiring in November 1996 to purchase up to 750,000 shares of the Company's
Common Stock at $2.00 per share. The Company has placed an estimated value of
$75,000 on the Warrant issued to Acorn which has been recorded as a debt
discount on the Note principal. The debt discount is amortized ratably over the
term of the Note.

Management believes that it will meet its working capital requirements
through the 1996 Fiscal Year through cash flow from operations and the use of
various debt facilities. Described below are transactions that the Company
expects will provide working capital to the Company.

In November 1993, the Company entered into a receivables financing
agreement with a financing corporation (the "FC"), whereby the FC agreed, at its
sole discretion, to purchase certain receivables of the Company and advance the
Company approximately eighty (80%) percent of such receivables purchased. In
addition to the receivables financing agreement, as of September 30, 1995 the FC
has committed a line of credit to the Company to borrow $400,000 for working
capital with a payback period over 18 months. Under the receivables financing
agreement, if the FC fails to collect such receivables directly from the
Company's customers within approximately ninety days of invoice date of the
receivables, then the Company is obligated, to repurchase the receivables from
the FC or replace the receivables with others satisfactory to the FC. The
Company records as a liability such receivables sold to the FC and relieves the
liability upon notification from the FC that such receivables have been
satisfactorily collected. In conjunction with these facilities the Company has
granted the FC a continuing lien and security interest in all of the Company's
accounts receivables and certain other assets of the Company. As of September
30, 1995, the Company has recorded a liability of approximately $197,000 to the
FC. The Company has also obtained a commitment for an additional line of credit
from another financing entity of up to $800,000 for equipment financing.

The Company recognizes the substantial cash investment required to finance
sales contract and sales type lease receivables. The Company utilizes the
services of unrelated third party finance companies to finance a number of its
sales type lease and sales contracts. The Company intends to continue to use
third party financing sources to finance the sale and rental of equipment to its
customers as a means to increase cash flow. In the second quarter of the 1996
Fiscal Year, the Company sold approximately $474,000 of sales type lease and
long-term sales contract receivables to unrelated third party finance sources.
All of such receivables were financed on a non-recourse basis. In the past
years the Company has financed many transactions on a full recourse basis.

<PAGE>

Accordingly, the Company has recorded a liability for these full recourse sales
and amortizes this liability over the original payment terms (see Note 3 to the
Consolidated Financial Statements.)

As discussed, it is management's intent to continue to use third parties to
finance additional lease receivables, however, no assurance can be given that
such negotiations or other efforts of the Company will result in future sales of
its receivables. The Company does not believe it is reliant upon any one source
for future sales of its receivables. The failure by third party finance sources
to collect receivables sold with full recourse to the Company would negatively
impact the Company's cash flow. Further, the failure by a third party finance
sources to collect a receivable sold on a non-recourse basis could negatively
affect such third party's willingness to purchase receivables from the Company
in the future, whether on a full recourse or non-recourse basis.

During the fiscal quarter ended September 30, 1995, the Company
discontinued a substantial portion of the operations of its IBS subsidiary as a
result of the departure of a number of the original employees who formed a new
company to compete with IBS. See Note 12. Contingencies. IBS is continuing to
support the remaining customers.

The Company expects to incur significant professional and administrative
costs in connection with the Merger, and there can be no assurance that the
Merger will be consummated. Strategic has agreed to fund the Company's
transaction costs relative to the Merger, up to $275,000. Strategic has been
issued a one year warrant to acquire 500,000 shares of Digital at $0.25 per
share plus a conditional warrant to acquire an additional 1,500,000 Digital
shares in consideration of agreeing to bear such transaction costs which
warrants are exercisable in the event the transaction is not consummated under
certain circumstances.

In conjunction with the execution of the Merger Agreement certain principal
shareholders of both companies, including members of the Boards of the
companies, have executed a related Shareholders' Agreement whereby the
signatories have confirmed their intention to vote for and support the Merger
and to provide for certain post-closing governance matters relating to
Strategic. Strategic and Digital have also agreed to
immediately begin joint marketing of their respective product lines and
integration of certain other business operations.

<PAGE>
PART II - OTHER INFORMATION

Item 1. Legal Proceedings.
-----------------

Reference is hereby made to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995, Item 3 thereof, filed July 14, 1995
(Commission File No.: 0-9503), and to the references therein, for a list of all
material pending legal proceedings to which the Company or any of its
subsidiaries are parties. To the knowledge of the Company, no proceedings of a
material nature have been or are contemplated by governmental authorities.

On or about May 26, 1995 DPC/International Business Solutions, Inc. ("IBS")
filed suit against AFTEC, Inc., ACCESS/IBS, John P. Foss and Gustavo Valez for
money damages and injunctive relief arising out of a dispute over the ownership
interest of a software licensing agreement known as the "BABI Software" in the
case styled case No. 95007402 "FLA 17 JUD DIR 1995". The complaint sought money
damages for tortious interference with IBS advantageous business relationship,
civil conspiracy arising therefrom, breach of contract, breach of
confidentiality agreement and also sought a temporary and permanent injunction
against all defendants.
On or about November 3, 1995, defendants AFTEC, Inc. and Gustavo Valez
served a counterclaim against IBS and a third party complaint against the
Company, David J. Dell and Richard A. Angulo. The counterclaim and third party
complaint purports to seek damages for breach of contract and breach of oral
contract and for the issuance of an injunction against IBS. In addition, the
counterclaim and third party complaint seeks damages for breach of contract
against the Company, David Dell and Richard Angulo. Liability against the
Company is alleged in the complaint to exist by virtue of the fact that the
Company allegedly dominated and controlled the assets, accounts and operations
of IBS to such an extent that IBS had no independence or existence of its own
and therefore was the Company's alter ego. The counterclaim and third party
complaint states that damages sought against the Company, DPC/IBS, Angulo and
Dell are in excess of $15,000.00.

Item 2. Changes in Securities. NONE
---------------------

Item 3. Defaults Upon Senior Securities. NONE
-------------------------------

Item 4. Submission of Matters to a Vote of Security Holders. NONE
---------------------------------------------------

Item 5. Other Information. NONE
-----------------

<PAGE>

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

(a) Exhibits.

The following list sets forth the applicable exhibits (Numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:

Exhibit
Number Title
------ -----

4 Exhibits Defining the Rights of Security
----------------------------------------
Holders, Including Indentures.
-----------------------------
(a) Form of Common Stock Certificate, $.025 par
value*
(b) Form of Class B Public Warrant*
(c) Form of Warrant Agreement with American
Stock Transfer and Trust Company, with
respect to the Class B Warrants*
(d) Warrant Agreement dated as of October 13,
1995 between the Company and Strategic with
respect to 500,000 shares of Common Stock
of the Company.*
(e) Warrant Agreement dated as of October 13,
1995 between the Company and Strategic with
respect to 1,500,000 shares of Common Stock
of the Company.*

10 Material Contracts.
------------------

(a) On Guard Telecomputer System Licensing
Agreement for New Jersey*
(b) On Guard Telecomputer System Licensing
Agreement for Australia*
(c) Lease Agreement for premises at 800 N.W.
33rd Street, Pompano Beach, Florida*
(d) Registration Rights Agreement, dated
January 18, 1991*
(e) Registration Rights Agreement, dated June
4, 1992*
(f) 1991 Incentive Stock Option Plan*

(g) Agreement, dated as of November 22, 1993,
between the Company and Acorn Venture
Capital Corporation*
(h) Third Amendment Lease Agreement dated May
8, 1995 for premises at 800 Northwest 33rd
Street, Pompano Beach, Florida*
(i) Employment Agreement dated July 3, 1995
between the Company and Richard A. Angulo*
(k) Consulting Agreement dated August 1, 1995
between the Company and
John E. Dell
(m) Consulting Agreement dated August 1, 1995
between the Company and Clinton L. Pagano
(n) Agreement and Plan of Merger dated as of
October 13, 1995 among the Company,
Strategic, and Strategic Florida Inc.(with
list of omitted Schedules thereto)*
(o) Shareholders' Agreement dated as of October
13, 1995 among Strategic, certain
shareholders of Strategic, the Company and
certain shareholders of the Company*
(p) Conditional Employment Agreement dated as
of October 13, 1995 among Strategic, the
Company and Richard A. Angulo *

- - -----------
* Incorporated by reference. See Exhibit Index.

- - -----------
(b) Reports on Form 8-K.

On October 26, 1995 the Company filed a Current Report on Form 8-K dated
October 23, 1995.

<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.

Digital Products Corporation

Dated: November 17, 1995 By:/s/ Richard A. Angulo
----------------------------------
Richard A. Angulo, President and
Chief Executive Officer
(Duly Authorized Officer)

By: /s/ Gerald Parsons
------------------------------------
Gerald Parsons, Controller
(Chief Accounting Officer)

<PAGE>

DIGITAL PRODUCTS CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Fiscal Quarter Ended September 30, 1995

Exhibit Index

Exhibit
Number Description of Exhibit Location
------ ---------------------- --------
<S> <C> <C> <C>
4(a) Form of Common Stock Certificate, $.025 par value . . . . . . . *1, Ex. 4(a)
4(b) Form of Class B Public Warrant . . . . . . . . . . . . . . . . *2, Ex. 4(d)

4(c) Form of Warrant Agreement with American Stock Transfer
and Trust Company, with respect to the Class B Warrants . . . . *3, Ex. 4(k)

4(d) Warrant Agreement dated as of October 13, 1995 between the Company
and strategic with respect to 500,000 shares of Common Stock of the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . *11 Ex. 7(c)(4)

4(e) Warrant Agreement dated as of October 13, 1995 between the Company
and Strategic with respect to 1,500,000 shares of Common Stock of
the Company . . . . . . . . . . . . . . . . . . . . . . . . . . *11 Ex. 7(c)(5)
10(a) On Guard Licensing Agreement for New Jersey . . . . . . . . . . *4 Ex. 10(a)

10(b) On Guard Licensing Agreement for Australia . . . . . . . . . . *5, Ex. 10(n)

10(c) Lease Agreement for premises at 800 N.W. 33rd Street,
Pompano Beach, Florida . . . . . . . . . . . . . . . . . . . . *6, Ex. 10(c)

10(d) Registration Rights Agreement, dated January 18, 1991 . . . . . *7, Ex. 28(e)
10(e) Registration Rights Agreement, dated June 4, 1992 . . . . . . . *2, Ex. 10(m)

10(f) 1991 Incentive Stock Option Plan . . . . . . . . . . . . . . . *8, Ex. 10(o)

10(g) Agreement, dated as of November 22, 1993, between the
Company and Acorn Venture Capital Corporation . . . . . . . . . *9, Ex. 4.1
10(h) Third Amendment Lease Agreement dated May 8, 1995 for
premises at 800 Northwest 33rd Street, Pompano Beach, Florida . *10 Ex. 10(j)

10(i) Employment Agreement dated July 3, 1995 between the Company
and Richard A. Angulo . . . . . . . . . . . . . . . . . . . . . *10 Ex. 10(k)

10(j) Consulting Agreement dated August 1, 1995 between the Company and
John E. Dell . . . . . . . . . . . . . . . . . . . . . . . . . . .

10(k) Consulting Agreement dated August 1, 1995 between the Company and
Clinton L. Pagano . . . . . . . . . . . . . . . . . . . . . . . . .

</TABLE>

<PAGE>

<S> <C> <C>
10(l) Agreement and Plan of Merger dated as of October 13, 1995 among the
Company, Strategic, and Strategic Florida Inc.(with list of omitted
Schedules thereto) . . . . . . . . . . . . . . . . . . . . . . *11 Ex. 7(c)(1)

10(m) Shareholders' Agreement dated as of October 13, 1995 among
Strategic, certain shareholders of Strategic, the Company and
certain shareholders of the Company . . . . . . . . . . . . . . *11 Ex. 7(c)(3)

10(n) Conditional Employment Agreement dated as of October 13, 1995 among
Strategic, the Company and Richard A. Angulo . . . . . . . . . *11 Ex. 7(c)(6)

- - ----------

*1 Incorporated herein by reference to the Exhibit indicated above in
Amendment No. 1 to the Company's Registration Statement on Form S-2
(File No. 33-44566), filed on January 29, 1992.

*2 Incorporated herein by reference to the Exhibit indicated above in the
Company's Registration Statement on Form S-2 (File No. 33-62296),
filed on May 6, 1993.

*3 Incorporated herein by reference to the Exhibit indicated above in
Amendment No. 2 to the Company's Registration Statement On Form S-2
(File No. 33-44566), filed on February 7, 1992.

*4 Incorporated herein by reference to the Exhibit indicated above in the
Company's Registration Statement on Form S-1 (File No. 33-6303), filed
on June 9, 1986.

*5 Incorporated herein by reference to the Exhibit indicated above in the
Company's Annual Report on Form 10-K, for the year ended March 31,
1988 (File No. 0-9503), filed on June 29, 1988.

*6 Incorporated herein by reference to the Exhibit indicated above in the
Company's Registration Statement on Form S-2 (file No. 33-44566),
filed on December 16, 1991.

*7 Incorporated herein by reference to the Exhibit indicated above in the
Company's Current Report on Form 8-K (Date of Report: January 18,
1991) (File No. 0-9503), filed on February 26, 1991.

*8 Incorporated herein by reference to the Exhibit indicated above in the
Company's Quarterly Report on Form 10-Q, for the quarter ended June
30, 1993 (File No. 0-9503), filed on August 16, 1993.

*9 Incorporated herein by reference to the Exhibit indicated above in the
Company's Current Report on Form 8-K (Date of Report: November 19,
1993) (File No. 0-9503), filed on December 23, 1993.

*10 Incorporated herein by reference to the Exhibit indicated above in the
Company's Annual Report on Form 10-K, for the year ended March 31,
1995 (File No. 0-9503), filed on July 14, 1995.

*11 Incorporated herein by reference to the Exhibit indicated above in the
Company's Current Report on Form 8-K (Date of Report: October 23,
1995) (File No. 0-9503), filed on October 26, 1995.

</TABLE>

CONSULTING AGREEMENT Exhibit 10(j)
--------------------

Consulting Agreement (the "Agreement") made and entered into as of the 1st

day of August, 1995 by and between Digital Products Corporation, a Florida

Corporation (the "Company"), and John E. Dell (the "Consultant").

W I T N E S S E T H:

WHEREAS, the Company desires to retain the Consultant and the Consultant

desires to be retained by the Company, all pursuant to the terms and conditions

hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing and the mutual promises

and covenants herein contained, it is agreed as follows:

1. Retention of Consultant. The Company agrees and does hereby retain
-----------------------

the Consultant for a period commencing on the date hereof and terminating one

year from the date hereof, subject to automatic renewal for successive one year

periods unless either of the parties to this Agreement provides written notice

of non-renewal at least ninety (90) days prior to the expiration of the initial

or subsequent terms of this Agreement. The Consultant does hereby accept such

retention, subject to and upon the terms and conditions hereinafter set forth.

2. Duties of Consultant. The Company hereby retains the Consultant to
--------------------

perform consulting services as requested by the Board of Directors of the

Company and such other services as may be mutually agreeable to the Consultant

and the Company (collectively, the "Services"). The Consultant shall report to

and be reasonably available for consultation with the Chief Executive Officer of

the Company. The Consultant shall only be required to devote such time as may

be necessary to perform the Services and shall be free to accept other

employment or consulting duties during the term hereof provided that they do not

interfere with the performance of the Services hereunder. Further, it is

understood that the Consultant shall not be required to relocate from his

current residence in order to perform the Services.

3. Compensation. The Consultant shall be compensated in the amount of
------------

$48,000 per annum which shall be payable in periodic installments consistent

with the Company's normal payroll practices. The Consultant shall be

responsible for the payment of all taxes on such compensation. The Consultant

shall be compensated for his out-of-pocket expenses incurred in performing his

duties hereunder, including, but not limited to, fees, dues, or other costs

incurred by the Consultant for any professional memberships in any association

that the Consultant deems advisable and in the Company's best interest that he

<PAGE>

join. The Company shall reimburse Consultant, in accordance with the standard

business practices of accounting and receipts, for all reasonable and necessary

business and traveling expenses and other disbursements incurred by him for or

on behalf of the Company in the performance of his duties hereunder. All

reimbursable expenses in excess of $200 per month shall be subject to the prior

approval of the Chief Executive Officer of the Company. The Consultant shall be

permitted to have his spouse accompany him on any out of town travel and shall

be reimbursed for her reasonable travel and accommodation expenses, provided

that both the Company and the Consultant are in agreement that the spouse's

presence on such trips has a bonafide business purpose.

4. Death or Disability. In the event that the Consultant shall die
-------------------

or become totally disabled, this Agreement shall terminate but the Company shall

continue to pay compensation to the Consultant or his legal representative, as

the case may be, for the remainder of the initial or any extended term hereof.

5. Status of Consultant as an Independent Contractor. The Consultant is
-------------------------------------------------

retained only for the purposes and to the extent set forth herein and his

relationship to the Company during the term of this Agreement shall be that of

an independent contractor, and nothing in this Agreement shall be construed as

equating Consultant as an employee of the Company. Further, nothing herein

shall be construed as establishing a joint venture or partnership between the

Consultant and the Company. The Consultant is free to utilize his entire time,

energy and skill in such manner and for such purposes as he see fit.

6. Confidentiality. Except as may be required by the Securities and
---------------

Exchange Commission, any quasi-governmental or governmental agency, or as

otherwise required by applicable law, Consultant agrees not to disclose the

nature of the services to be performed hereunder to any third party without the

Company's written consent, and the Company agrees not to disclose the identity

of the Consultant, or the nature of the services to be performed hereunder to

any third party without the Consultant's written consent. The Consultant

further agrees that he will not, at any time during or after the term of

employment, disclose, reproduce, assign or transfer to any person, firm,

corporation or other business entity, except as required by law, any

Confidential Business Information (as hereinafter defined) concerning the

business, finances, clients, affairs, business plans, strategies, compounds,

formulations, methods, devices, apparatus, preparations, and present and future

plans of the Company, any subsidiary or affiliate thereof or any company formed

<PAGE>

or funded by the Company at any time for any reason or purpose whatsoever,

without the Company's written consent. "Confidential Business Information"

shall mean any unique and extraordinary information obtained by Consultant as a

result of his position with the Company. It is not intended to include business

information that is available in the public domain or information that was

possessed by Consultant prior to his involvement with the Company.

7. Indemnification. The Company agrees to indemnify Consultant and hold
---------------

him harmless against any and all lawsuits, claims, damages, liabilities and

costs, and all action in respect thereof and any legal or other expenses in

giving testimony or furnishing documents in response to a subpoena or otherwise

including without limitation, the cost of investigating, preparing or defending

any such action or claim whether or not in connection with litigation in which

Consultant is a party, as and when incurred, directly or indirectly caused by,

relating to, based upon or arising out of any work performed by Consultant in

connection with this Agreement to the full extent permitted by the law of the

State of Florida and by the By-Laws of the Company, regardless of whether or not

the Consultant is still a Consultant or performing pursuant to this Agreement.

The indemnification provision shall be in addition to any liability which the

Company may otherwise have to Consultant.

8. Termination. The Company may terminate this Agreement at any time
-----------

without cause upon ninety (90) days notice; provided, however, in the event this

provision is exercised by the Company, the Consultant shall not receive less

salary and benefits than would otherwise be due to him for the balance of the

duration of this Agreement, or 90 days, whichever is longer. The Consultant

shall not be required to seek or accept other employment in order to mitigate

his damages hereunder and the Company's obligation to pay him following such

termination shall not be reduced by the amount of any compensation actually

received by the Consultant for employment with any other person. The Company

may terminate this Agreement for cause and the Company shall be obligated to pay

the Consultant his salary and any vested benefits only through the date of

termination. For purposes hereof, "cause" shall mean that Consultant has (1)

acted fraudulently in his relations with the Company, (2) misappropriated or

done material, intentional damage to the property of the Company, (3) been

convicted of a felony, (4) intentionally acted in a manner that resulted in a

serious omission of the Company's interests, or (5) materially failed to follow

<PAGE>

a legal reasonable order or directive by the President, Chief Executive Officer

or the Board of Directors of the Company.

9. Notices. All notices and other communications which are required or
-------

permitted hereunder shall be in writing and shall be delivered personally or

sent by air courier (e.g., Federal Express) or first class certified or

registered mail, postage prepaid, return receipt requested to the following

addresses:

If to Consultant, addressed to:

Mr. John E. Dell
104 Carnegie Center
Suite 201
Princeton, NJ 08540

If to Company, addressed to:

Digital Products Corporation
800 N.W. 33rd Street
Pompano Beach, Florida 33064
Attn: President and CEO

Either party may designate any other address to which notice shall be given, by

giving written notice to the other of such change of address in the manner

herein provided.

10. Governing Law. This Agreement has been made in the State of Florida
-------------

and shall be construed and governed in accordance with the laws thereof.

11. Entire Agreement. This Agreement contains the entire Agreement
----------------

between the parties with respect to the rendering of the Services described

herein and may not be altered or modified,

except in writing and signed by the party to be charged thereby and supersedes

any and all previous Agreements between the parties with respect to the

services.

12. Severability. If any provision of this Agreement, or part thereof, is
------------

held to be unenforceable, the remainder of such provision of this Agreement, as

the case may be, shall nevertheless remain in full force and effect.

13. Assignment. To the extent that the obligations provided for herein
----------

require the personal performance of the Consultant, the Consultant's rights,

interests and obligations as provided herein may not be assigned.

14. Binding Effect. This Agreement shall be binding upon the Corporation
--------------

and any of its successors or assigns, including without limitation any successor

by merger or consolidation or any entity purchasing all or substantially all of

the assets or securities of the Company.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of

the date first written above.

DIGITAL PRODUCTS CORPORATION CONSULTANT

By: /s/ Richard A. Angulo /s/ John E. Dell
--------------------- ----------------
Name: Richard A. Angulo John E. Dell

Title: President and Chief Executive Officer

Exhibit 10(k)

CONSULTING AGREEMENT
--------------------

Consulting Agreement (the "Agreement") made and entered into as of the 1st

day of August, 1995 by and between Digital Products Corporation, a Florida

Corporation (the "Company"), and Colonel Clinton L. Pagano (the "Consultant").

W I T N E S S E T H:

WHEREAS, the Company desires to retain the Consultant and the Consultant

desires to be retained by the Company, all pursuant to the terms and conditions

hereinafter set forth; and

WHEREAS, the Consultant presently serves on the Board of Directors of the

Company; and

WHEREAS, the Consultant is a retired law enforcement official nationally

recognized for his outstanding credentials and government service, judgment and

experience and expertise in the regulations involving the criminal justice

industry, and the Company values his experience as well as his continued

professional memberships and activities with related organizations; and

WHEREAS, the Consultant was a primary member of the long-standing committee

on the State of New Jersey Governor's Council on Prison Overcrowding which

Committee spanned, both democratic and republican, gubernatorial leadership;

NOW, THEREFORE, in consideration of the foregoing and the mutual

promises and covenants herein contained, it is agreed as follows:

1. Retention of Consultant. The Company agrees and does hereby retain
-----------------------

the Consultant for a period commencing on the date hereof and terminating one

year from the date hereof, subject to automatic renewal for successive one year

periods unless either of the parties to this Agreement provides written notice

of non-renewal at least ninety (90) days prior to the expiration of the initial

or subsequent terms of this Agreement. The Consultant does hereby accept such

retention, subject to and upon the terms and conditions hereinafter set forth.

The Company acknowledges that the Consultant is also a member of the Board of

Directors of Capital Gaming International, Inc., Capital Gaming Development,

Inc., Crescent City Capital Development Corporation, Capital Gaming Management,

Inc. and devotes business time to other professional associations and

memberships from time to time. The Company agrees and acknowledges that the

Consultant shall be free to continue in these activities.

<PAGE>

2. Board of Directors Member. The Consultant shall be a member of the
-------------------------

Board of Directors of the Company.

3. Duties of Consultant. The Company hereby retains the Consultant to
--------------------

perform consulting services related to the marketing of the Company's electronic

home surveillance products and such other services as may be mutually agreeable

to the Consultant and the Company (collectively, the "Services"). The

Consultant shall report to and be reasonably available for consultation with the

Chief Executive Officer of the Company. The Consultant shall only be required

to devote such time as may be necessary to perform the Services and shall be

free to accept other employment or consulting duties during the term hereof

provided that they do not interfere with the performance of the Services

hereunder. Further, it is understood that the Consultant shall not be required

to relocate from his current Princeton, New Jersey location in order to perform

the Services.

4. Compensation. (a) The Consultant shall be compensated in the amount
------------

of $65,000 per annum which shall be payable in periodic installments consistent

with the Company's normal payroll practices. The Consultant shall be

responsible for the payment of all taxes on such compensation. In the event the

Consultant is required to consistently expend more than 50% of his work time on

the Company's business, the Company and the Consultant shall negotiate a salary

increase. The Consultant shall be compensated for his out-of-pocket expenses

incurred in performing his duties hereunder, including, but not limited to,

fees, dues, or other costs incurred by the Consultant for any professional

memberships in any association that the Consultant deems advisable and in the

Company's best interest that he join. The Company shall reimburse Consultant,

in accordance with the standard business practices of accounting and receipts,

for all reasonable and necessary business and traveling expenses and other

disbursements incurred by him for or on behalf of the Company in the performance

of his duties hereunder. All reimbursable expenses in excess of $200 per month

shall be subject to the prior approval of the Chief Executive Officer of the

Company. The Consultant shall be permitted to have his spouse accompany him on

any out of town travel and shall be reimbursed for her reasonable travel and

accommodation expenses, provided that both the Company and the Consultant are in

agreement that the spouse's presence on such trips has a bonafide business

purpose. The Company will also provide Consultant with office space and

secretarial assistance as required and shall pay for telephone and facsimile

<PAGE>

service at Consultant's place of residence relating to the Company's business.

The Company will also advance any costs and expenses including membership fees

of any associations, memberships or groups in the law enforcement community that

the Consultant retains membership in. The Consultant shall also be covered by

the Company's medical benefits plans.

(b) Definition. For purposes of this Agreement, a "Change of

Control" shall be deemed to have taken place only if: (i) any person, including

a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,

becomes the owner or beneficial owner (or has the right to become beneficial

owner through exercise of options or warrants) of the securities of the Company

or any company in control of the Company (the "Control Company") after the date

of execution of this Agreement, having 30% or more of the combined voting power

of the then outstanding securities of either the Company or the Control Company

that may be cast for the election of directors of the Company or the Control

Company, or (ii) the persons who were directors of the Company or the Control

Company before such transactions shall cease to constitute a majority of the

Board of the Company, or any successor to the Company, as the direct or indirect

result of, or in connection with, any tender or exchange offer, merger or other

business combination, sale of assets or contested election, of any combination

of the foregoing transactions. Notwithstanding the foregoing, the acquisition

by Strategic Technologies Inc. of the Company by a merger approved by the Board

of Directors of the Company shall not constitute a "Change of Control" for

purposes of this Agreement.

Agreement, the Company (or its successors) will (a) continue to pay a level of

compensation not less than the level applicable to Consultant on the Change of

Control Date, (b) fully perform and otherwise discharge Company's obligations

under the terms of this Agreement as in effect on the Change of Control Date,

and (c) continue benefit programs as to Consultant at levels in effect on the

Change of Control Date (but subject to such reductions as may be required to

maintain such plans in compliance with applicable federal law).

(d) Effect of Termination of Agreement by Change in Control. If

during the term of the Agreement after a Change in Control as defined in this

Section 4 has occurred: (i) Consultant's Agreement is terminated by the Company

or the successor, or (ii) there is a material reduction in Consultant's method

of compensation or related benefits, or a material change in Executive's office,

<PAGE>

place of employment, working conditions or duties and responsibilities, and

Consultant voluntarily terminates the Agreement, Consultant shall be entitled to

receive the compensation he would have received under the Agreement in a lump

sum payment except that health and medical benefits will continue until the

expiration of the Agreement.

5. Death or Disability. In the event that the Consultant shall die or
-------------------

become totally disabled, this Agreement shall terminate but the Company shall

continue to pay compensation to the Consultant or his legal representative, as

the case may be, for the remainder of the initial or any extended term hereof.

6. Status of Consultant as an Independent Contractor. The Consultant is
-------------------------------------------------

retained only for the purposes and to the extent set forth herein and his

relationship to the Company during the term of this Agreement shall be that of

an independent contractor, and nothing in this Agreement shall be construed as

equating Consultant as an employee of the Company. Further, nothing herein

shall be construed as establishing a joint venture or partnership between the

Consultant and the Company. The Consultant is free to utilize his entire time,

energy and skill in such manner and for such purposes as he see fit.

7. Confidentiality. Except as may be required by the Securities and
---------------