There Reynold Sachs sat, staring down into his drink at Harry's bar in the American Stock Exchange building, telling his troubles to a man he had just met.

Sachs had taken over a Reston company trying to build a state-of-the-art telephone switch, but there was no money to meet the payroll 48 hours away and then engineers would leave and the company would die.

"Wait a minute," the stranger said. The man got up, made a few telephone calls, and came back with a Manhattan address. "Go see my cousin Dick Crooks."

Brooks turned out to be a vice president of Allen & Co. Inc., a major investment banking firm. "I told Crooks there was a one-in-a-hundred chance he'd ever get his money back," Sachs recalls. Good enough odds for a serious horse player like Crooks, and within a few days, Sachs had $50,000 from Allen & Co. to keep his company alive. That was in January 1980.

Nearly four years later, that company--Digital Switch Corp.--is switched on and flying high. From a loss of $3.4 million in 1981, Digital Switch expects sales of at least $125 million this year with an aftertax profit of $25 million. A growing stream of orders is flowing into Digital's new headquarters outside Dallas from MCI Communications, GTE Sprint, and the other discount long-distance telephone companies.

And Sachs is sitting on $45 million of Digital Switch stock that he acquired for $3,900.

Sachs, a consultant to Digital Switch but no longer an officer, told the story of the company's ruin-to-riches rise last week to an audience of entrepreneurs, small business owners, lawyers and others at a seminar at George Mason University.

The seminar, "High Technology Goes Public," was sponsored by the George Mason Institute at the university, and three major players in the public offering sweepstakes: Arthur Andersen & Co., the accounting firm; Howard & Co., a Philadelphia financial consulting and venture capital firm, and R. R. Donnelley & Sons Co., a major printer of financial documents.

An early turning point for Digital was an initial public sale of the company's stock in July 1980 that raised $7.5 million, enabling its engineers to finish perfecting its sole product--an electronic switch that routes telephone calls. The use of cheap, fast microprocessors and digital voice transmission made the switch a state-of-the-art device.

But the story of Digital's birth in Reston is not for people with nervous stomachs.

Sachs, an economist and attorney, ran Digital through two years of almost continuous crisis, between 1979 and 1981, as the company scrambled to stay alive while it sought Securities and Exchange Commission approval of the public stock offering.

The legal and accounting calamities that Digital got into in the late 1970s provide a case study of what not to do in going public, Sachs said.

The lessons include these:

If you're even dreaming about taking a company public, get advice from an attorney who understands securities law.

The stockbrokers and engineers who founded Digital (and are long since departed) were apparently too busy to do that, Sachs said. Stock was given out at the company Christmas party. It was handed out for services (although the company charter didn't permit that, making those shares invalid), and stock was redeemed at times for cash, although the company had no cash surplus. That, essentially, was illegal, Sachs says.

"They didn't know from day to day, or week to week, or any other interval, how many shareholders they had or how many shares they had outstanding," he said.

In April 1980, the SEC filed suit accusing the brokers of securities fraud for selling unregistered shares of Digital, a suit that was ultimately settled without admission of guilt.

Don't underestimate the difficulty, duration and cost of starting a business and qualifying it for a public stock offering.

When Sachs was brought in to run Digital, in August 1979, he forced out the founders and hired lawyers and accountants to unravel the "mess" in Digital's books. In the succeeding months, he was able to raise $1.4 million to keep the company afloat--but half of that went to the accountants and the lawyers straightening out Digital's affairs.

Sometimes, the lawyers aren't right. Asked for an opinion about Digital's prospects, John M. Fedders, then a Washington attorney, now director of the SEC's enforcement division, said the situation was hopeless. "Fedders said Digital would never go public," said Sachs.

If you decide to go public, be prepared to air all the dirty linen.

Sachs and his advisers abided by the SEC's full disclosure requirements in preparing the prospectus for the July 1980 initial stock offering, spelling out in appalling detail the company's troubled origins and risks that the switch might not be built.

But, says Sachs, he had satisfied himself on one critical point: if the switch could be built, it would be special. After he joined the company, he asked friends from Massachusetts Institute of Technology and Northern Telecom to visit the Reston plant and look at the engineering plans for the switch.

At that time, automated telephone switches were controlled by large central computers. The designers of the Digital switch, taking advantage of the miniaturization of computer chips, planned to equip it with its own microprocessors and software--a much cheaper, more efficient system. "Everybody told me if you can finish it, you have something," Sachs said.

If you can, be lucky.

Digital Switch nearly failed a half-dozen times, in the months prior to its public offering.

If the cash ran out and the engineers quit, there could be no stock sale, but the attempt to find new pockets of private financing became tougher and tougher during the first half of 1980.

In May, 1980, the money had run out again and the well was dry.

Fate produced a tremendous thunderstorm. The roof collapsed, dumping "a ton of water" on the switch prototype, ruining it. Digital collected $40,000 from its insurance company and paid the employes.

Be prepared to settle for less than you wanted from the public offering.

Before Sachs arrived, Digital had planned to raise $2.5 million through an initial public offering. That was too little to complete development of the switch, Sachs determined. So the target became $10 million through a straight stock sale of 2 million shares at $5 each.

But Digital's troubles scared the market and at the eleventh hour, the underwriters said the offer had to be watered down to an $8.5 million deal, with investors paying $5 to receive one share plus a warrant to buy a second share. This made the offer potentially twice as rich for investors, but diluted the insiders' holdings by half.

The stock sale raised $7.5 million for Digital, after it paid the underwriting costs. That, plus the funds raised privately, totaled $11.1 million--the cost of developing the switch and taking the company public.

The stock dipped down to $3 a share in 1980, rose to $10.50 in the spring of 1981, then dropped again to $6.50 that fall.

But in 1981, orders began coming in to the company, which had moved to Richardson, Tex. and was under the management of president James L. Donald and chairman James M. Nolan. Former top officers of Northern Telecom's Danray Division, they knew the telecommunication switch business.

In May 1982, the first switch was delivered, and the stock took off. It reached a high of $47.75 this spring, after a 3-for-1 split May 23. ("It was fun on the way up," says Sachs, whose holdings rose to $70 million).

The Wall Street runup did not last, however, because of Digital's dependence on orders from the Bell System's long-distance competitors. In August, the Federal Communications Commission spelled out a new formula governing the costs of long-distance service that threatened to cut severely into the price advantage that MCI and the other discounters enjoy over the Bell System. (The FCC subsequently decided to reconsider the decison).

MCI's stock was hit first, then Digital Switch's, which fell nearly $10 a share in two days, ending at $28.75 on Aug. 24.

Although Digital continues to rely on a relatively few customers, Sachs notes that the orders backlog is large and solid, assuming the long distance market remains competitive.

Digital is also planning a new central office switch for local telephone companies, potentially a much larger market than the one Digital now is in and with the deregulation of the Bell System, one that is now open to Digital.