<PAGE>
 
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549



                                    FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934.
 
    For the quarterly period ended September 30, 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 0-26100

                               DISCREET LOGIC INC.
             (Exact name of registrant as specified in its charter)


           Quebec                                         98-0150790
  (State or other jurisdiction                            (IRS Employer
  of incorporation or organization)                    Identification Number)


                                 10 Duke Street
                        Montreal, Quebec, Canada H3C 2L7
               (Address of principal executive offices) (Zip code)

       Registrant's telephone number, including area code: (514) 393-1616


     Indicate by check mark whether 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 
                                              ---    ---

     28,829,919 shares of the registrant's Common Shares, without par value,
were outstanding as of November 10, 1997.

<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

                                    Form 10-Q

                    For the Quarter Ended September 30, 1997

                                    CONTENTS

<TABLE> 
<CAPTION> 
 Item Number                                                                                                Page
 -----------                                                                                                ----
<S>         <C>                                                                                          <C>  
PART I:       FINANCIAL INFORMATION
Item 1.       Condensed Consolidated Financial Statements
              Balance Sheets: June 30, 1997 and September 30, 1997...................................           3
              Statements of Operations: Three months ended September 30, 1997 and October 31, 1996...           4
              Statements of Cash Flows: Three months ended September 30, 1997 and October 31, 1996...           5
              Notes to Condensed Consolidated Financial Statements...................................           6
Item 2.       Management's Discussion and Analysis of Financial Condition and Results of
              Operations.............................................................................           8
              Certain Factors That May Affect Future Results.........................................          13

PART II:      OTHER INFORMATION
Item 1.       Legal Proceedings......................................................................          15
Item 2.       Changes in Securities and Use of Proceeds..............................................          16
Item 6.       Exhibits and Reports on Form 8-K.......................................................          16
Signatures...........................................................................................          17

</TABLE> 

                                       2
<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
        (All amounts in thousands of U.S. dollars, except for share data)

<TABLE> 
<CAPTION> 
                                                                                 June 30,     September 30,
                                                                                   1997           1997
                                                                                  ------         ------
                                                                                               (Unaudited)
                                   ASSETS
<S>                                                                           <C>             <C> 
Current Assets:
     Cash and cash equivalents.............................................     $  31,668       $  16,522
     Cash restricted for settlement of class action litigation.............           --           10,800
     Accounts receivable (less reserves for doubtful accounts).............        26,893          29,416
     Inventory--
          Resale...........................................................        10,867          11,019
          Demonstration....................................................         3,054           3,539
     Income taxes receivable...............................................           448             --
     Other current assets..................................................         3,889           5,165
                                                                                ---------       --------- 
                                                                                   76,819          76,461
Property and equipment--less accumulated depreciation and amortization.....         7,728           9,134
Deferred income taxes......................................................         3,489           2,467
Other assets...............................................................         2,660           6,310
Assets held for resale.....................................................         5,248           4,186
                                                                                ---------       ---------
                                                                                $  95,944       $  98,558
                                                                                =========       =========
                    LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable and accrued expenses.................................     $  44,086        $ 50,712
     Deferred revenue......................................................         8,103           9,039
     Income taxes payable..................................................         4,734           4,945
     Customer deposits.....................................................         1,359             429
                                                                                 --------       ---------  
                                                                                   58,282          65,125
                                                                                 --------       ---------
     Deferred income taxes.................................................           713           1,060
                                                                                 --------       ---------  
Shareholders' Equity:
     Preferred shares--no par value
          Authorized--unlimited number of shares
          Issued and outstanding--none
     Common shares--no par value
          Authorized--unlimited number of shares
          Issued and outstanding--28,117,415 shares at June 30, 1997 and
             28,822,636 at September 30, 1997..............................        80,402          91,941
     Accumulated deficit...................................................       (42,639)        (57,742)
     Cumulative translation adjustment.....................................          (814)         (1,826)
                                                                                 --------       --------- 
          Total shareholders' equity.......................................        36,949          32,373
                                                                                 --------       --------- 
                                                                                $  95,944       $  98,558
                                                                                 ========       =========

</TABLE> 
The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       3
<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
      (All amounts in thousands of U.S. Dollars, except for per share data)
                                   (Unaudited)

<TABLE> 
<CAPTION> 
              
                                                                         Three Months Ended
                                                                         
                                                                    October 31,   September 30,
                                                                       1996          1997
                                                                    ----------    ------------ 
<S>                                                               <C>            <C> 
Total revenues...........................................            $  23,263      $   38,405
Cost of revenues.........................................               12,287          17,280
                                                                     ---------      ----------
     Gross profit........................................               10,976          21,125
                                                                     ---------      ----------
Operating expenses:
     Research and development (net of tax credits).......                2,678           3,512
     Sales and marketing.................................                6,017           7,433
     General and administrative..........................                1,516           1,884
     Charge for purchased research and development.......                  --           21,000
                                                                     ---------      ----------
          Total operating expenses.......................               10,211          33,829
                                                                     ---------      ----------
          Operating income (loss)........................                  765         (12,704)
Other income (expense), net..............................                 (925)            377
                                                                     ---------      ----------  
     Loss before income taxes............................                 (160)        (12,327)
Provision for income taxes...............................                  652           2,775
                                                                     ---------      ----------
     Net loss............................................            $    (812)     $  (15,102)
                                                                     =========      ==========
Net loss per common share................................            $   (0.03)     $    (0.53)
                                                                     =========      ==========
Weighted average common shares outstanding...............               27,800          28,659
                                                                     =========      ==========
</TABLE> 

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       4
<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                   (All amounts in thousands of U.S. Dollars)
                                   (Unaudited)


<TABLE> 
<CAPTION>                                                                                      Three Months Ended
                                                                                            October 31,   September 30,
                                                                                               1996          1997
                                                                                               ----          ----
<S>                                                                                      <C>            <C> 
Cash flows from operating activities:
     Net loss ..........................................................................    $   (812)     $(15,102)
     Adjustments to reconcile net loss to cash provided by (used in)
        operating activities--
          Depreciation and amortization.................................................       1,580         1,997
          Deferred income taxes.........................................................        (135)        1,369
          Write-off of in-process research and development..............................         --         21,000
          Write-off of assets for restructuring.........................................         197           109
          Compensation expense related to stock options.................................         --            167
          Changes in assets and liabilities--
               Restricted cash..........................................................         --        (10,800)
               Accounts receivable......................................................       2,373        (1,704)
               Inventory................................................................       5,480          (275)
               Income taxes receivable..................................................       1,407           448
               Other current assets.....................................................      (1,013)       (1,276)
               Accounts payable and accrued expenses....................................      (2,724)       (2,644)
               Insurance proceeds related to class action litigation....................         --          3,459
               Deferred revenue.........................................................       3,235           936
               Income taxes payable.....................................................         --            211
               Customer deposits........................................................      (1,108)         (930)
               Due to related parties...................................................         (26)          --
                                                                                             -------       -------
          Net cash provided by (used in) operating activities...........................       8,454        (3,035)
                                                                                             -------       ------- 
Cash flows from investing activities:
     Purchase of property and equipment.................................................      (1,707)       (2,323)
     Proceeds on disposal of assets held for resale.....................................         --            818
     Cash paid for D-Vision acquisition and related costs...............................         --        (10,342)
                                                                                             -------       -------
          Net cash used in investing activities.........................................      (1,707)      (11,847)
                                                                                             -------       ------- 
Cash flows from financing activities:
     Proceeds from option exercises.....................................................         184           506
     Proceeds from employee stock purchase plan.........................................         201           217
                                                                                             -------       -------
          Net cash provided by financing activities.....................................         385           723
                                                                                             -------       -------
     Foreign exchange effect on cash....................................................         834          (987)
                                                                                             -------       -------
     (Decrease) increase in cash and cash equivalents...................................       7,966       (15,146)
     Unrestricted cash and cash equivalents, beginning of period........................      21,658        31,668
                                                                                             -------       -------
     Unrestricted cash and cash equivalents, end of period..............................    $ 29,624      $ 16,522
                                                                                             =======       =======
Supplemental disclosure of cash flow information:
     Interest paid during the period....................................................    $      7      $     21
                                                                                             -------       -------
     Income taxes paid during the period................................................    $    454      $  2,110
                                                                                            --------       -------
In connection with the acquisition of D-Vision in July 1997, the following non-
   cash transaction occurred:
               Fair value of assets acquired............................................    $     --      $ 27,210
               Liabilities assumed......................................................          --        (5,811)
               Cash acquired............................................................          --          (408)
               Issuance of 555,000 shares of Common Stock...............................          --       (10,649)
                                                                                            --------       -------
Cash paid for acquisition, net of cash acquired.........................................    $     --      $(10,342)
                                                                                            =========     ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
 

                                       5
<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

(1)   BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements
      have been prepared by Discreet Logic Inc. ("Discreet Logic" or the
      "Company") pursuant to the rules and regulations of the Securities and
      Exchange Commission regarding interim financial reporting. Accordingly,
      they do not include all of the information and footnotes required by
      generally accepted accounting principles for complete financial statements
      and should be read in conjunction with the consolidated financial
      statements and notes thereto for the year ended June 30, 1997. The
      accompanying condensed consolidated financial statements reflect all
      adjustments (consisting solely of normal, recurring adjustments) which
      are, in the opinion of management, necessary for a fair presentation of
      results for the interim periods presented. The results of operations for
      the three month period ended September 30, 1997 are not necessarily
      indicative of the results to be expected for any other interim period or
      for the full fiscal year.


(2)   CHANGE OF FISCAL YEAR

      On January 9, 1997, the Board of Directors of the Company approved the
      change of the Company's fiscal year end from July 31 to June 30. This
      change was effective beginning with the Company's second fiscal quarter of
      1997. The condensed consolidated financial statements are presented for
      the three month periods ended September 30, 1997 and October 31, 1996. The
      Company prepares consolidated financial statements, re-measures accounts
      in foreign currencies to reflect changes in exchange rates, and examines
      and adjusts certain reserve accounts at the end of each quarter.
      Therefore, it is not practicable to recast prior quarterly results to
      reflect the new fiscal period. Consequently, the results for the three
      month period ended September 30, 1997 are not directly comparable to the
      results of the three month period ended October 31, 1996.


(3)   LITIGATION AND RELATED SETTLEMENT EXPENSES

      On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
      of Themselves and All Others Similarly Situated, vs. [...]Discreet Logic
      Inc., et al., case No. 978584, was filed in the Superior Court of the
      State of California, City and County of San Francisco. Named as defendants
      are the Company, certain of the Company's former and existing directors,
      officers, and affiliates, and certain underwriters and financial analysts.
      The plaintiffs purport to represent a class of all persons who purchased
      the Company's common stock between September 13, 1995, and May 1, 1996.
      The complaint alleges violations of California law through material
      misrepresentations and omissions, among other things. The Company believes
      that the allegations in the complaint are without merit and has defended
      the lawsuit vigorously.

      On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself
      and All Others Similarly Situated, vs. Discreet Logic Inc., et al., Civ.
      No. 96-11232-EFH, was filed in the United States District Court, District
      of Massachusetts. Named as defendants are the Company and certain of the
      Company's former and existing directors and officers. The plaintiff
      purports to represent a class of all persons who purchased the Company's
      common stock between November 14, 1995, and February 13, 1996. On October
      11, 1996, the plaintiff filed an amended complaint which asserts
      substantially the same factual allegations as the first complaint and
      proposes the identical class period. The complaint alleges violations of
      the United States Federal Securities law through material
      misrepresentations and omissions. The Company believes that the
      allegations in the complaint are without merit and has defended the
      lawsuit vigorously.

                                       6
<PAGE>
 
      On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
      Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly
      Situated vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in
      the United States District Court, Northern District of California. Named
      as defendants are the Company and certain of Company's former and existing
      officers, directors and affiliates, and certain underwriters. The
      complaint asserts, in all material respects, the same factual allegations
      and proposes the same class period as the above-described California state
      court complaint filed in May 1996, except asserts claims under federal
      securities law instead of state law. The Company believes that the
      allegations in the California federal complaint are without merit and has
      defended the lawsuit vigorously.

      On August 12, 1997, the Company announced that it had reached an
      agreement-in-principle to settle all three of the shareholder class
      action litigations. The parties to the class action litigations have
      executed a settlement agreement which is now awaiting final court
      approval. The proposed $10,800,000 settlement requires the Company to
      contribute approximately $7,400,000 from its own funds, with the remainder
      provided by insurance. The settlement is subject to final court approval.
      There can be no assurance that the settlement will be finally approved and
      that the Company will not have to continue its defense of the lawsuits.
      Should the proposed settlement not be finally approved for any reason, the
      Company intends to defend the lawsuits vigorously.

      In the year ended July 31, 1996, the Company had provided a $2,506,000
      litigation reserve for legal costs associated with defending the class
      action lawsuits. During the eleven month period ended June 30, 1997, the
      Company recorded a provision of $6,500,000 to accrue the additional
      estimated settlement costs to be borne by the Company, should the proposed
      settlement be finally approved. At September 30, 1997, the Company had on
      its balance sheet cash restricted for the above-mentioned settlement, in
      the amount of $10,800,000. The corresponding obligation is included in
      accounts payable and accrued expenses.

                                       7
<PAGE>
 
                      DISCREET LOGIC INC. AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Overview

     Discreet Logic Inc. ("Discreet Logic" or the "Company") develops,
assembles, markets and supports non-linear, digital systems and software for
creating, editing and compositing imagery and special effects for film, video,
and HDTV. The Company's systems and software are utilized by creative
professionals for a variety of applications, including feature films, television
programs, commercials, music videos, interactive game production and live
broadcasting.

Recent Developments

   Litigation Settlement

     On May 29, 1996, June 13, 1996 and April 29, 1997 certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior Court
of the State of California, the United States District Court, District of
Massachusetts and the United States District Court, Northern District of
California, respectively. On August 12, 1997 the Company announced that it had
reached an agreement-in-principle to settle all three of the shareholder class
action litigations. The parties to the class action litigations have executed a
settlement agreement which is now awaiting final court approval. The proposed
$10.8 million settlement requires the Company to contribute approximately $7.4
million from its own funds, with the remainder provided by insurance. The
settlement is subject to final court approval. There can be no assurance that
the settlement will be finally approved and that the Company will not have to
continue its defense of the lawsuits. Should the proposed settlement not be
finally approved for any reason, the Company intends to defend the lawsuits
vigorously.

   Recent Acquisitions

     On June 12, 1997, the Company, through its wholly-owned subsidiary 3380491
Canada Inc. ("Acquisition Sub"), acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997, among Acquisition Sub, Denim, Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a California limited
partnership, and Frank Khulusi Family Limited Partnership, a California limited
partnership (the "Denim Acquisition"). The purchased assets consisted primarily
of Denim software products, including ILLUMINAIRE Paint, ILLUMINAIRE Composition
and ILLUMINAIRE Studio and related know-how and goodwill. The aggregate purchase
price for the assets was comprised of (i) approximately $9,126,000 in cash, (ii)
the assumption of certain enumerated liabilities in an amount equal to no more
than approximately $2,209,000 in the aggregate, and (iii) the assumption of
certain on-going obligations under certain existing contracts of Denim. At
closing, cash consideration, of approximately $9,126,000 and certain
liabilities, of approximately $655,000, were paid. The cash used by the Company
to fund the acquisition was derived primarily from cash flow from operations.
The transaction was accounted for as a purchase. The Company incurred a one-time
charge of $9,800,000, or $0.35 per share for in-process research and
development, purchased and expensed in its fourth fiscal quarter ended June 30,
1997, based on an independent appraisal. The terms of the transaction and the
consideration received by Denim were the result of arms-length negotiations
between the representatives of the Company and Denim. Denim developed Apple
Macintosh OS and Microsoft Windows NT-based paint and compositing software for
producing effects, interactive content and graphics design.

     On July 15, 1997, the Company acquired all of the outstanding shares of
capital stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation,
pursuant to a Stock Purchase Agreement dated as of July 10, 1997, among 

                                       8
<PAGE>
 
the Company, D-Vision, the former stockholders of D-Vision (the "Selling
Stockholders") and certain other individuals (the "D-Vision Acquisition"). As a
result of the D-Vision Acquisition, the Company acquired the D-Vision OnLINE and
PRO software products for non-linear video and digital media editing solutions
including related know-how and goodwill. The purchase price was paid in a
combination of 555,000 newly issued Discreet Logic common shares and
approximately $10,750,000 in cash. In addition, approximately $4,000,000 of the
cash consideration is being held in escrow until September 30, 1999, subject to
(i) earlier release from escrow of up to $1,900,000 on September 30, 1998 and
(ii) the resolution of any indemnification claims made by the Company pursuant
to the Stock Purchase Agreement. The cash used by the Company to fund the
acquisition was derived primarily from cash flow from operations. The D-Vision
Acquisition was accounted for as a purchase. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was allocated
to purchased in-process research and development for which the Company incurred
a one-time charge against earnings in the amount of $21,000,000 ($0.73 per
share), based on an independent appraisal, in the quarter ended September 30,
1997. The terms of the transaction and the consideration received by the D-
Vision stockholders were the result of arms-length negotiations between the
representatives of the Company and D-Vision. D-Vision develops Microsoft Windows
NT-based non-linear, digital editing solutions.

   Restructuring

     During the fiscal year ended July 31, 1996, excluding a restructuring
charge of $15,000,000 and its related tax effects, the Company incurred a net
loss of approximately $31,000,000 on revenues of approximately $83,997,000.
During the second half of fiscal 1996, the Company identified a number of
difficulties and developments facing its business, including: (1) softening of
market demand in its core high-end visual effects market segment, (2) delays by
the Company in introducing new products aimed at new market segments, (3)
inventory build-up in anticipation of continued high sales in its core market
segment and high growth in its new market segments, (4) expense and headcount
build-up in anticipation of continued high sales in its core market segment and
high growth in new market segments, (5) the disruption caused by platform
changes by the Company's key supplier, and (6) greater use of third party
financing by customers. In addition, during the second half of fiscal 1996,
several of the Company's senior executives resigned to pursue other
opportunities.

     In response to the financial results and other developments facing the
business, the Company developed a restructuring plan during the fourth fiscal
quarter of 1996. The focus of the Company's restructuring plan was to solidify
its senior management team; reduce operating expenses through a 28% reduction of
its workforce and the closure of its Cambridge, Massachusetts, Connecticut,
London and Innsbruck offices; consolidate software research and development
activities in Montreal; discontinue the AIR, PURE, SLICE and DIPLOMAT product
lines; and restructure its sales force to emphasize indirect sales channels.
While the Company began implementation of its restructuring plan in the fourth
fiscal quarter of 1996 and had substantially completed the implementation of the
plan at the end of fiscal 1997, the Company still has approximately $3,894,000
in restructuring reserves primarily for the estimated cost of terminating
leases, resolving outstanding severance issues, and the legal and taxation
winding down of several subsidiaries.

   Change of Fiscal Year

     On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This change was
effective beginning with the Company's second fiscal quarter of 1997. The
condensed consolidated financial statements are presented for the three month
periods ended September 30, 1997 and October 31, 1996. The Company prepares
consolidated financial statements, remeasures accounts in foreign currencies to
reflect changes in exchange rates and examines and adjusts certain reserve
accounts at the end of each quarter. Therefore, it is not practicable to recast
the prior fiscal period's results to reflect the new fiscal period.
Consequently, the results for the three month period ended September 30, 1997
are not directly comparable to the results of the three month period ended
October 31, 1996.

                                       9
<PAGE>
 
Results of Operations

     The following table sets forth the percentages of total revenues
represented by certain line items in the statement of operations:

<TABLE> 
<CAPTION> 
                                                                  Three Months Ended
                                                               October 31,  September 30,
                                                                   1996       1997
                                                                   ----       ----
     <S>                                                        <C>         <C> 
     Total revenues...........................................      100%       100%
     Cost of revenues.........................................       53         45
                                                                    ---        ---
               Gross profit...................................       47         55
                                                                    ---        ---
     Operating expenses:                                            
          Research and development............................       12          9
          Sales and marketing.................................       26         19
          General and administrative..........................        6          5
          Charge for purchased research and development.......       --         55 
                                                                    ---        ---
               Total operating expenses.......................       44         88
                                                                    ---        ---
          Operating income (loss).............................        3        (33)
     Other income (expense), net..............................       (4)         1
                                                                    ---        ---
          Loss before income taxes............................       (1)       (32)
     Provision for income taxes...............................        3          7
                                                                    ---        ---
               Net loss.......................................       (4)%      (39)%
                                                                    ---        ---
</TABLE> 

Three Months Ended September 30, 1997 and October 31, 1996

     Total Revenues. The Company's revenues consist of product revenues
(including licensing of its software, sales of the Company's proprietary
hardware, and resale of third party hardware) and, to a lesser extent, revenues
from maintenance and other services (including consulting and training). For all
periods presented, the Company has recognized revenue in accordance with
Statement of Position 91-1, entitled "Software Revenue Recognition," issued by
the American Institute of Certified Public Accountants. In accordance with this
statement, in cases where the Company has delivered hardware and/or software to
customers and has insignificant or noncritical vendor obligations related to
these deliveries, the revenue attributable to such obligations has been deferred
until such obligations have been fulfilled.

     Total revenues were $38,405,000 and $23,263,000 for the three month periods
ended September 30, 1997 and October 31, 1996, respectively. The increase in
total revenues was primarily a result of an increase in worldwide revenues
generated by the Company's Special Effects (including the first full quarter of
ILLUMINAIRE shipments) and Editing (including initial shipments of OnLINE)
product lines. This was partially offset by a decrease in revenues from the
Company's Broadcast Production product line.

     Revenues from customers outside of North America were $18,264,000 (48% of
total revenues) and $11,554,000 (50% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. Revenues
from customers outside North America increased due to the growing penetration of
the Company's products in the Asian and European markets. The Company expects
that revenues from customers outside of North America will continue to account
for a substantial portion of its revenues and should increase as a percentage of
total revenues.

     Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by Silicon Graphics, Inc.
("SGI")), cost of hardware service contracts, cost of integration and hardware
assembly, cost of service personnel and the facilities, computing, benefits and
other administrative costs allocated to such personnel and the provision for
inventory reserves. Cost of revenues was $17,280,000 (45% of total revenues) and
$12,287,000 (53% of total revenues) for the three month periods ended September
30, 1997 and 

                                       10
<PAGE>
 
October 31, 1996, respectively. The decrease in cost of revenues, as a
percentage of total revenues, was due to: (1) the growing penetration of the
Company's products in the Asian market where customers typically purchase only
software or software and storage media bundles; (2) an increase in software-only
sales, including sales of the newly acquired OnLINE and ILLUMINAIRE products;
and (3) lower margins realized on systems sold in the three month period ended
October 31, 1996 under an aggressive sales program, including product discounts,
designed to reduce the inventory on hand at the end of the fourth fiscal quarter
of 1996. The Company expects that cost of revenues, as a percentage of total
revenues, will remain approximately the same.

     Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the facilities,
depreciation on research and development equipment, amortization of acquired
technologies, computing, benefits and other administrative costs allocated to
such personnel, and consulting fees. Expenditures for research and development,
after deducting Canadian federal and provincial tax credits, were $3,512,000 (9%
of total revenues) and $2,678,000 (12% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. The
increase in research and development expenses is explained primarily by: (1) an
increase in the number of software engineers (including the engineers joining
the Company as a result of the Denim and D-Vision Acquisitions) to develop and
enhance the Company's existing products and to develop new products; (2) an
increase in depreciation charges on the additional research and development
equipment required for the additional personnel; and (3) an increase in the
amortization of acquired technologies. Research and development costs are
expensed as incurred. Software development costs are considered for
capitalization once technical feasibility has been established. The Company has
not capitalized any software development costs to date. Certain research and
development expenditures are incurred substantially in advance of related
revenue and in some cases do not generate revenues. The Company expects that
research and development expenses will increase from their current levels and
increase slightly as a percentage of total revenues.

     Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative costs
allocated to the Company's sales and marketing personnel, tradeshow expenses,
and dealer commissions. Sales and marketing expenses were $7,433,000 (19% of
total revenues) and $6,017,000 (26% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. The
increase in sales and marketing expenses is explained primarily by the continued
expansion of the Company's direct and indirect sales organization, including the
operating costs of domestic sales offices and foreign subsidiaries, and an
increase in tradeshow activities. The Company expects that sales and marketing
expenses will increase from their current levels and increase slightly as a
percentage of total revenues.

     General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of the Company and
reserves for doubtful accounts receivable. General and administrative expenses
were $1,884,000 (5% of total revenues) and $1,516,000 (6% of total revenues) for
the three month periods ended September 30, 1997 and October 31, 1996,
respectively. The increase in general and administrative expenses is explained
primarily by an increase in personnel. The Company expects that general and
administrative expenses will increase from their current levels. Should revenues
increase, the Company expects that general and administrative expenses, as a
percentage of total revenues, should remain approximately the same.

     Charge for Purchased Research and Development. In connection with the
D-Vision Acquisition, the Company expensed $21,000,000 (55% of total revenues)
of in-process research and development in the three month period ended September
30, 1997.

     Other Income (Expense). Other Income (Expense) primarily consists of
foreign currency gains and losses and interest income and expense. Foreign
currency translation gains were $128,000 during the three month period ended
September 30, 1997 as compared to losses of approximately $1,135,000 during the
three month period ended October 31, 1996. These gains and losses are primarily
the result of the Company and each subsidiary translating intercompany balances
denominated in a currency other than its own functional currency. These balances
are remeasured into the functional currency of each company every reporting
period. This remeasurement results in 

                                       11
<PAGE>
 
either unrealized gains or losses depending on the exchange rate fluctuation
between the functional currency of each company and the currency in which the
monetary asset or liability is denominated.

     Provision for Income Taxes. The Company's provision for income taxes was
$2,775,000 and $652,000 for the three month periods ended September 30, 1997 and
October 31, 1996, respectively. The provision for both periods was based on the
Canadian federal statutory rate of 38% and reflects the impact of various tax
credits and foreign taxes. The tax provision for the three month period ended
September 30, 1997 differed from the statutory rate primarily as a result of the
Company recording a charge for acquired in-process research and development for
which no benefit was recorded due to the uncertainty of realizing any future tax
benefit associated with this charge offset by the realization of the benefit for
some prior year tax losses for which no benefit was previously recorded. The tax
provision for the three month period ended October 31, 1996 differed from the
statutory rate primarily as a result of the Company not recording a benefit
related to losses where the realization of the benefit was uncertain. The
Company has available foreign net operating loss carry forwards which may be
available to reduce future income tax liabilities.


Liquidity and Capital Resources

     The Company has funded its operations to date primarily through cash flow
from operations (including deferred revenue and customer deposits), borrowings
under its demand line of credit, capital leases, the private and public sales of
equity securities, and the receipt of research and development tax credits from
the Canadian federal government and the Province of Quebec. As of September 30,
1997, the Company had cash of approximately $27,322,000, which includes
$10,800,000 of cash that was restricted for the settlement of the class action
litigations and was being held in escrow at the balance sheet date. In August
1997, the Company amended its revolving demand line of credit with a bank under
which the Company may borrow up to CDN$7,000,000 (or approximately $5,072,000 at
September 30, 1997). Advances under the line accrue interest monthly at the
Canadian prime rate (4.75% at September 30, 1997) plus 0.25%. Additionally, the
Company has a CDN$600,000 (approximately $435,000 at September 30, 1997) demand
leasing facility, and a CDN$600,000 (approximately $435,000 at September 30,
1997) demand research and development tax credit facility. Advances under these
facilities accrue interest monthly at the Canadian prime rate (4.75% at
September 30, 1997) plus 1%. The line and facilities are secured by essentially
all of the Company's North American assets. As additional security, the Company
has assigned to the bank its insurance on these assets. The Company is required
to maintain certain financial ratios, including minimum levels of working
capital, debt service coverage and equity to assets ratios. As of September 30,
1997, no amounts were outstanding under the demand line of credit, the demand
leasing, or the demand research and development tax credit facilities.

     The Company's operating activities, including research and development tax
credits, used cash of $3,035,000 and provided cash of $8,454,000 for the three
month periods ended September 30, 1997 and October 31, 1996, respectively. The
principal sources of cash for the three months ended September 30, 1997 were
cash generated from operations, the receipt of insurance proceeds related to the
settlement of the class action litigations, the decrease in income taxes
receivable, the increase in deferred revenue, and the increase in income taxes
payable. These sources of cash were offset by the transfer of cash to a
restricted escrow account to be used to settle the class action litigations, the
increases in accounts receivable, inventory and other current assets, and the
decreases in accounts payable and accrued expenses, and customer deposits.
Accounts payable and accrued expenses used cash of $2,644,000 as a result of the
Company paying most of the liabilities assumed in connection with the D-Vision
Acquisition. Accounts receivable increased due to a significant increase in
revenues experienced in September 1997 as compared to October 1996. Net cash
provided by operations in the three month period ended October 31, 1996 was
composed primarily of decreases in accounts receivable, inventory, income taxes
receivable, and the increase in deferred revenue.

     The Company's investing activities used cash of $11,847,000 in the three
month period ended September 30, 1997 primarily for the acquisition of D-Vision
Systems, Inc. and the purchase of research and development equipment and related
software. Upon the acquisition of D-Vision, many of the liabilities assumed were
paid at closing. During the three month period ended September 30, 1997, the
Company received proceeds from the sale of its Montreal land and office building
which were previously included on the balance sheet as assets held for resale.
The proceeds of sale were not materially different from the carrying value of
these assets. The Company's investing activities used cash of $1,707,000 in the
three month period ended October 31, 1996, primarily for renovations to 

                                       12
<PAGE>
 
the office building in London, England and the purchase of computer equipment
and software used in the operations of the Company's business, primarily in the
research and development area.

     Financing activities provided cash of $723,000 and $385,000 in the three
month periods ended September 30, 1997 and October 31, 1996, respectively, from
proceeds from common stock option exercises and the issuance of shares under the
Employee Stock Purchase Plan.

     As of September 30, 1997, the Company did not have any material commitments
for capital expenditures. However, in August 1997, the Company entered into an
agreement-in-principle to settle the three outstanding class action lawsuits
against it. The parties to the class action litigations have executed a
settlement agreement which is now awaiting final court approval. This
settlement, should it be finally approved, requires the Company to disburse
approximately $7,400,000 from its own funds.


         The Company's ability to meet its future liquidity requirements is
dependent upon its ability to operate profitably, or in the absence thereof, to
obtain additional financing. The Company underwent a restructuring intended to
decrease operating expenses, however, there can be no assurance that the Company
will not have to take further restructurings or be profitable in the future.
Should the Company need to secure additional financing to meet its future
liquidity requirements, there can be no assurance that the Company will be able
to secure such financing, or that such financing, if available, will be on terms
favorable to the Company. Subject to the factors discussed below in Certain
Factors That May Affect Future Results, the Company believes that, with its
current levels of working capital together with funds generated from operations,
it has adequate sources of cash to meet its operations and capital expenditure
requirements through fiscal 1998.


Certain Factors That May Affect Future Results

     Information provided by the Company from time to time including statements
in this Form 10-Q which are not historical facts, are so-called forward-looking
statements, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and releases of the Securities and
Exchange Commission. In particular, statements contained in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
are not historical facts (including, but not limited to, statements regarding
the Company's anticipated cost of revenues, statements regarding the anticipated
adequacy of cash to meet operations, statements concerning anticipated expense
levels and such expenses as a percentage of revenues, statements about the
anticipated portion of revenues from customers outside North America, and the
implementation of the restructuring plan), and in the "Legal Proceedings"
section which are not historical facts may constitute forward-looking
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below, other
risks discussed in this section and elsewhere in this Form 10-Q, and the other
risks discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997, as well as, from time to time, in the Company's other
filings with the Securities and Exchange Commission, including without
limitation the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996.

     The Company's future results are subject to substantial risks and
uncertainties. The Company's future financial performance will depend in part on
the successful development, introduction and customer acceptance of its existing
and new or enhanced products. In addition, in order for the Company to achieve
sustained growth, the market for the Company's systems and software must
continue to develop and the Company must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. There can be no assurance that
the Company will be successful in marketing its existing or any new or enhanced
products. In addition, as the Company enters new markets, distribution channels,
technical requirements and levels and bases of competition may be different from
those in the Company's current markets and there can be no assurance that the
Company will be able to compete favorably. The market in which the Company
competes is characterized by intense competition and many of the Company's
current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources than the Company. These
companies may introduce additional products that are competitive with those of
the Company, and there can be no assurance that the Company's products would
compete effectively with such products. Furthermore, competitive

                                       13
<PAGE>
 
pressures or other factors, including the Company's entry into new markets, may
result in significant price erosion that could have a material adverse effect on
the Company's business and results of operations. The Company has recently
completed the purchase of certain products and technology through two
acquisitions. There can be no assurance that the products and technologies
acquired from these companies will be successful or will achieve market
acceptance, or that the Company will not incur disruptions and unexpected
expenses in integrating the operations of the two acquired businesses with those
of the Company.

     The Company's FLAME, FLINT, INFERNO, FIRE, VAPOUR AND FROST systems
currently include workstations manufactured by SGI. There are significant risks
associated with this reliance on SGI and the Company may be impacted by the
timing of the development and release of products by SGI, as was the case during
fiscal 1996. In addition, there may be unforeseen difficulties associated with
adapting the Company's products to future SGI products. The Company derives a
significant portion of its total revenues from foreign sales. Foreign sales are
subject to significant risks, including unexpected legal, tax and exchange rate
changes and other barriers. In addition, foreign customers may have longer
payment cycles and the protection of intellectual property in foreign countries
may be more difficult to enforce. The Company currently relies principally on
unregistered copyrights and trade secrets to protect its intellectual property.
Any invalidation of the Company's intellectual property rights or lengthy and
expensive defense of those rights could have a material adverse effect on the
Company. The Company recently received a letter from Avid Technology, Inc.
("Avid") stating its belief that certain of the Company's recently acquired
D-Vision products practice inventions claimed in a patent on a media editing
system. The Company has responded to Avid's letter stating the Company's belief
that the Company is not infringing any valid claim of Avid's patent. To the
Company's knowledge, Avid has not initiated any suit, action or other proceeding
alleging any infringement by the Company of such patent. The Company currently
markets its systems through its direct sales organization and through
distributors. This marketing strategy may result in distribution channel
conflicts as the Company's direct sales efforts may compete with those of its
indirect channels. The Company currently relies on SGI as the sole source for
video input/output cards used in the Company's systems. The Company's OnLINE
software requires a videographic card manufactured solely by Truevision, Inc..
An interruption in the supply or increase in the price of either one of these
components could have a material adverse effect on the Company's business and
results of operations. To date, the Company has depended to a significant extent
upon a number of key management and technical employees and the Company's
ability to manage its operations will require it to continue to recruit and
retain senior management personnel and to motivate and effectively manage its
employee base. The loss of the services of one or more of these key employees
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and
consequently, on the Company's business and results of operations.

     On May 29, 1996, June 13, 1996 and April 29, 1997 certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its officers
and directors. The three lawsuits were filed in the Superior Court of the State
of California, the United States District Court, District of Massachusetts and
the United States District Court, Northern District of California, respectively.
On August 12, 1997 the Company announced that it had reached an agreement-in-
principle to settle all of the shareholder class action lawsuits. The parties to
the class action litigations have executed a settlement agreement which is now
awaiting final court approval. The proposed $10.8 million settlement requires
the Company to contribute approximately $7.4 million from its own funds, with
the remainder provided by insurance. The settlement is subject to final court
approval. There can be no assurance that the settlement will be finally approved
and that the Company will not have to continue its defense of the lawsuits.
Should the proposed settlement not be finally approved for any reason, the
Company intends to defend the lawsuits vigorously.

     The market price of the Company's common shares could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's operating results, announcements of technological innovations or new
products by the Company, its competitors or suppliers and other events or
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have particularly affected the market prices
of many technology companies and that have often been unrelated or
disproportionate to the operational performance of these companies. These
fluctuations, as well as general economic and market conditions, may materially
and adversely affect the market price of the Company's common shares.

     The Company believes that its operating results could vary significantly
from quarter to quarter. A limited number of systems sales may account for a
substantial percentage of the Company's quarterly revenue because of the high

                                       14
<PAGE>
 
average sales price of such systems and the timing of purchase orders.
Historically, the Company has generally experienced greater revenues during the
period following the completion of the annual conference of the National
Association of Broadcasters ("NAB"), which is typically held in April. The
Company's expense levels are based, in part, on its expectations of future
revenues. Therefore, if revenue levels are below expectations, particularly
following NAB, the Company's operating results are likely to be adversely
affected as was the case for the three month periods ended April 30, 1996 and
July 31, 1996. In addition, the timing of revenue is influenced by a number of
other factors, including: the timing of individual orders and shipments, other
industry trade shows, competition, seasonal customer buying patterns, changes to
customer buying patterns in response to platform changes and changes in product
development and sales and marketing expenditures. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed in the short term, variations in
the timing of recognition of revenue could cause significant fluctuations in
operating results from quarter to quarter and may result in unanticipated
quarterly earnings shortfalls or losses. There can be no assurance that the
Company will be successful in maintaining or improving its profitability or
avoiding losses in any future period. The Company believes that quarter-to-
quarter comparisons of its financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.

PART II:   OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

     On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
of Themselves and All Others Similarly Situated, vs. [...]Discreet Logic Inc.,
et al., case No. 978584, was filed in the Superior Court of the State of
California, City and County of San Francisco. Named as defendants are the
Company, certain of the Company's former and existing directors, officers, and
affiliates, and certain underwriters and financial analysts. The plaintiffs
purport to represent a class of all persons who purchased the Company's common
stock between September 13, 1995, and May 1, 1996. The complaint alleges
violations of California law through material misrepresentations and omissions,
among other things. The Company believes that the allegations in the complaint
are without merit and has defended the lawsuit vigorously.

     On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself
and All Others Similarly Situated, vs. Discreet Logic Inc., et al., Civ. No. 96-
11232-EFH, was filed in the United States District Court, District of
Massachusetts. Named as defendants are the Company and certain of the Company's
former and existing directors and officers. The plaintiff purports to represent
a class of all persons who purchased the Company's common stock between November
14, 1995, and February 13, 1996. On October 11, 1996, the plaintiff filed an
amended complaint which asserts substantially the same factual allegations as
the first complaint and proposes the identical class period. The complaint
alleges violations of the United States Federal Securities law through material
misrepresentations and omissions. The Company believes that the allegations in
the complaint are without merit and has defended the lawsuit vigorously.

     On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly Situated
vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in the United
States District Court, Northern District of California. Named as defendants are
the Company and certain of Company's former and existing officers, directors and
affiliates, and certain underwriters. The complaint asserts, in all material
respects, the same factual allegations and proposes the same class period as the
above-described California state court complaint filed in May 1996, except
asserts claims under federal securities law instead of state law. The Company
believes that the allegations in the California federal complaint are without
merit and has defended the lawsuit vigorously.

     On August 12, 1997, the Company announced that it had reached an agreement-
in-principle to settle all three of the shareholder class action litigations.
The parties to the class action litigations have executed a settlement agreement
which is now awaiting final court approval. The proposed $10,800,000 settlement
requires the Company to contribute approximately $7,400,000 from its own
funds, with the remainder provided by insurance. The settlement is subject to
final court approval. There can be no assurance that the settlement will be
finally approved and that the


                                       15
<PAGE>
 
     Company will not have to continue its defense of the lawsuits. Should the
     proposed settlement not be finally approved for any reason, the Company
     intends to defend the lawsuits vigorously.

     In the year ended July 31, 1996, the Company had provided a $2,506,000
     litigation reserve for legal costs associated with defending the class
     action lawsuits. During the eleven month period ended June 30, 1997, the
     Company recorded a provision of $6,500,000 to accrue the additional
     estimated settlement costs to be borne by the Company, should the
     proposed settlement be finally approved. At September 30, 1997, the Company
     had, on its balance sheet, cash restricted for the above-mentioned
     settlement, in the amount of $10,800,000. A corresponding obligation is
     included in accounts payable and accrued expenses.

Item 2.   Changes in Securities and Use of Proceeds.

     (c)  Changes in Securities
          
          On July 15, 1997 the Company completed a private placement of 555,000
     of its common shares, no par value, (the "Shares") to the holders of the
     outstanding capital stock of D-Vision in exchange for all of the
     outstanding shares of the capital stock of D-Vision. This private placement
     was made to effect the acquisition of D-Vision by the Company. No
     underwriters were involved in this sale of securities. The sales were made
     in reliance on an exemption from the registration provision of the
     Securities Act of 1933, as amended (the "Securities Act"), pursuant to Rule
     506 of Regulation D under the Securities Act, in reliance upon information
     available to the Company as of July 15, 1997, including certain
     representations and warranties of the purchasers of the Shares. The Shares
     were offered only to "accredited investors" (as such term is defined in
     Regulation D). On August 29, 1997, the Company filed a registration
     statement on Form S-3 (File No. 333-34739) with the Securities and Exchange
     Commission covering the resale of the Shares, which registration statement
     became effective on September 16, 1997.

          
Items 3.-5.   Not applicable.

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

     (a)  Exhibits.
                           Exhibit                 Description of Exhibit
                           -------                 ----------------------
                           Exhibit 10.1            Employment Agreement, dated
                                                   September 24, 1997, by and
                                                   between the Company and
                                                   Graham Sharp.
                               
                           Exhibit 27.1            Financial Data Schedule

     (b)  Reports on Form 8-K.

          A Current Report on Form 8-K dated July 15, 1997 was filed on July 30,
    1997. The Current Report on Form 8-K was filed pursuant to Item 2 of Form 8-
    K announcing the completion by Discreet Logic of the acquisition of all of
    the outstanding shares of the capital stock of D-Vision Systems, Inc.
    pursuant to the terms of a Stock Purchase Agreement dated as of July 10,
    1997, among the Company, D-Vision, the former stockholders of D-Vision and
    certain other individuals. A Current Report on Form 8-K/A dated July 15,
    1997 was filed on September 29, 1997 containing the financial statements
    required by Item 7 of Form 8-K.


                                       16
<PAGE>
 
                               DISCREET LOGIC INC.

                                   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.


                                     DISCREET LOGIC INC.


                                                /s/ FRANCOIS PLAMONDON
                                     by:  --------------------------------------
                                                         Francois Plamondon
                                                Vice President, Chief Financial
                                                Officer, Treasurer and Secretary
November 14, 1997

                                       17