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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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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 March 31, 2003

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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: 1-11578

DISC, INC.

(Exact name of registrant as specified in its charter)


|                                                                          |  |                                                   
|------------------------------------------------------------------------- |  | --------------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 77-0129625
(I.R.S. Employer
Identification Number)

|                                                                                   |  |                 
|---------------------------------------------------------------------------------- |  | ----------------
|372 Turquoise Street
Milpitas, California
(Address of principal executive offices) |  | 95035
(Zip Code)

Registrants telephone number, including area code: (408) 934-7000

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).

Yes o  No x

The number of shares outstanding of the registrants common stock as of April 30, 2003 was 4,827,867.



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TABLE OF CONTENTS



|                               |                                                                                               |  |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Condensed Consolidated Financial Statements                                          
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Changes in Securities and Use of Proceeds                                            
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|INDEX TO EXHIBITS             
|EXHIBIT 10.63                 
|EXHIBIT 10.64                 
|EXHIBIT 10.65                 
|EXHIBIT 10.66                 
|EXHIBIT 10.67                 
|EXHIBIT 10.68                 
|EXHIBIT 99.1                  



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PART I  FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements

DISC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                   |                                                                                                                                |                            |            |                |           |                   |            |             |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ---------- | -------------- | --------- | ----------------- | ---------- | ----------- | --------- | 
|                                                   |                                                                                                                                |                            |            | March 31, 2003 |           | December 31, 2002
|                                                   |                                                                                                                                |                            |            |                |           |                  
|Assets:                                            |                                                                                                                                |                            |            |                |           |                   |            |            
|Cash                                               |                                                                                                                                | $                          | 245,000    |                |           | $                 | 461,000    |            
|Accounts receivable, net                           |                                                                                                                                |                            | 2,112,000  |                |           |                   | 2,483,000  |            
|Inventories                                        |                                                                                                                                |                            | 2,595,000  |                |           |                   | 2,391,000  |            
|Prepaid expenses and deposits                      |                                                                                                                                |                            | 273,000    |                |           |                   | 295,000    |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | Total current assets       |            |                | 5,225,000 |                   |            |             | 5,630,000 | 
|Property and equipment, net                        |                                                                                                                                |                            | 502,000    |                |           |                   | 514,000    |            
|Goodwill                                           |                                                                                                                                |                            | 2,294,000  |                |           |                   | 2,294,000  |            
|Other intangible assets, net                       |                                                                                                                                |                            | 2,107,000  |                |           |                   | 2,297,000  |            
|Other assets                                       |                                                                                                                                |                            | 48,000     |                |           |                   | 46,000     |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | $                          | 10,176,000 |                |           | $                 | 10,781,000 |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|Liabilities and Shareholders Equity:              |                                                                                                                                |                            |            |                |           |                   |            |            
|Accounts payable                                   |                                                                                                                                | $                          | 3,278,000  |                |           | $                 | 3,058,000  |            
|Borrowings, current portion                        |                                                                                                                                |                            | 727,000    |                |           |                   | 1,062,000  |            
|Deferred revenues, current portion                 |                                                                                                                                |                            | 472,000    |                |           |                   | 465,000    |            
|Accrued warranty                                   |                                                                                                                                |                            | 244,000    |                |           |                   | 241,000    |            
|Accrued expenses and other liabilities             |                                                                                                                                |                            | 1,444,000  |                |           |                   | 1,405,000  |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | Total current liabilities  |            |                | 6,165,000 |                   |            |             | 6,231,000 | 
|Deferred revenues and other liabilities, long-term |                                                                                                                                |                            | 354,000    |                |           |                   | 333,000    |            
|Term loans, net of current portion                 |                                                                                                                                |                            | 1,501,000  |                |           |                   | 1,480,000  |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | Total liabilities          |            |                | 8,020,000 |                   |            |             | 8,044,000 | 
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|Shareholders equity:                              |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   | Convertible Preferred Stock; no par value,
10,000,000 shares authorized; 6,237,276 and
6,122,687 shares issued and outstanding |                            |            | 28,647,000     |           |                   |            | 27,941,000  |          
|                                                   | Common Stock; no par value, 40,000,000 shares
authorized; 4,827,867 and 4,817,617 shares
issued and outstanding                |                            |            | 17,872,000     |           |                   |            | 17,711,000  |          
|                                                   | Accumulated deficit                                                                                                            |                            |            | (44,022,000    | )         |                   |            | (42,620,000 | )        
|                                                   | Accumulated other comprehensive loss                                                                                           |                            |            | (341,000       | )         |                   |            | (295,000    | )        
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | Total shareholders equity |            |                | 2,156,000 |                   |            |             | 2,737,000 | 
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            
|                                                   |                                                                                                                                | $                          | 10,176,000 |                |           | $                 | 10,781,000 |            
|                                                   |                                                                                                                                |                            |            |                |           |                   |            |            

See the accompanying condensed notes to these consolidated financial statements.





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DISC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                    |                            |   |                              |           |      |   |            |           | 
|----------------------------------------------------------------------------------- | -------------------------- | - | ---------------------------- | --------- | ---- | - | ---------- | --------- | 
|                                                                                    |                            |   | Three Months ended March 31,
|                                                                                    |                            |   |                             
|                                                                                    |                            |   | 2003                         |           | 2002
|                                                                                    |                            |   |                              |           |     
|Net sales                                                                           |                            | $ | 3,001,000                    |           |      | $ | 2,653,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          
|Costs and expenses:                                                                 |                            |   |                              |           |      |   |            |          
|                                                                                    | Cost of sales              |   |                              | 2,372,000 |      |   |            | 2,235,000 | 
|                                                                                    | Research and development   |   |                              | 548,000   |      |   |            | 610,000   | 
|                                                                                    | Marketing and sales        |   |                              | 845,000   |      |   |            | 1,079,000 | 
|                                                                                    | General and administrative |   |                              | 370,000   |      |   |            | 387,000   | 
|                                                                                    | Intangible amortization    |   |                              | 190,000   |      |   |            | 190,000   | 
|                                                                                    |                            |   |                              |           |      |   |            |          
|                                                                                    |                            |   | 4,325,000                    |           |      |   | 4,501,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          
|Loss from operations                                                                |                            |   | (1,324,000                   | )         |      |   | (1,848,000 | )        
|Interest expense                                                                    |                            |   | (70,000                      | )         |      |   | (63,000    | )        
|Other income (expense), net                                                         |                            |   | (8,000                       | )         |      |   |           |          
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss                                                                            |                            |   | (1,402,000                   | )         |      |   | (1,911,000 | )        
|Deemed preferred stock dividend                                                     |                            |   | (330,000                     | )         |      |   | (495,000   | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss attributable to
common shareholders                                        |                            | $ | (1,732,000                   | )         |      | $ | (2,406,000 | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss per share
attributable to common
shareholders - basic and
diluted          |                            | $ | (0.36                        | )         |      | $ | (0.50      | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Weighted average common shares
for basic and diluted net loss
per share calculation |                            |   | 4,825,000                    |           |      |   | 4,818,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          

See the accompanying condensed notes to these consolidated financial statements.





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DISC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                  |               |                                                                         |                                               |                                           |            |                              |          |        |            |          |          |  
|------------------------------------------------- | ------------- | ----------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ---------- | ---------------------------- | -------- | ------ | ---------- | -------- | -------- | -
|                                                  |               |                                                                         |                                               |                                           |            | Three Months ended March 31,
|                                                  |               |                                                                         |                                               |                                           |            |                             
|                                                  |               |                                                                         |                                               |                                           |            | 2003                         |          | 2002  
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Cash flows used in operating activities:          |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               | Net loss                                                                |                                               | $                                         | (1,402,000 | )                            |          | $      | (1,911,000 | )       
|                                                  |               | Adjustments to reconcile net loss to cash used
in operating activities: |                                               |                                           |            |                              |          |        |            |         
|                                                  |               |                                                                         | Depreciation and amortization expense         |                                           |            | 269,000                      |          |        |            | 294,000  |         
|                                                  |               |                                                                         | Provision for doubtful accounts               |                                           |            | 5,000                        |          |        |            | 12,000   |         
|                                                  |               |                                                                         | Provision for excess and obsolete inventories |                                           |            | 50,000                       |          |        |            | 41,000   |         
|                                                  |               | Changes in assets and liabilities:                                      |                                               |                                           |            |                              |          |        |            |         
|                                                  |               |                                                                         | Accounts receivable                           |                                           |            | 385,000                      |          |        |            | 288,000  |         
|                                                  |               |                                                                         | Inventories                                   |                                           |            | (206,000                     | )        |        |            | (93,000  | )       
|                                                  |               |                                                                         | Prepaid expenses and deposits                 |                                           |            | 22,000                       |          |        |            | (23,000  | )       
|                                                  |               |                                                                         | Accounts payable                              |                                           |            | 158,000                      |          |        |            | 673,000  |         
|                                                  |               |                                                                         | Accrued expenses and other liabilities        |                                           |            | 36,000                       |          |        |            | (172,000 | )       
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               |                                                                         |                                               | Net cash used in operating activities     |            |                              | (683,000 | )      |            |          | (891,000 | )
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Cash flows used in investing activities:          |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               | Purchase of property and equipment                                      |                                               |                                           | (57,000    | )                            |          |        | (13,000    | )       
|                                                  |               | Purchase of other assets                                                |                                               |                                           |           |                              |          |        | (9,000     | )       
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               |                                                                         |                                               | Net cash used in investing activities     |            |                              | (57,000  | )      |            |          | (22,000  | )
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Cash flows provided by financing activities:      |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               | Net repayments of lines of
credit and term loans                        |                                               |                                           | (390,000   | )                            |          |        | (564,000   | )       
|                                                  |               | Proceeds from issuance of Common Stock                                  |                                               |                                           | 6,000      |                              |          |        |           |         
|                                                  |               | Proceeds from issuance of Preferred Stock and
warrants for Common Stock |                                               |                                           | 860,000    |                              |          |        | 875,000    |         
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  |               |                                                                         |                                               | Net cash provided by financing activities |            |                              | 476,000  |        |            |          | 311,000  |  
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Effect of exchange rate change on cash            |               |                                                                         | 48,000                                        |                                           |            |                              | 12,000   |       
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Net decrease in cash                              |               |                                                                         | (216,000                                      | )                                         |            |                              | (590,000 | )     
|Cash at beginning of period                       |               |                                                                         | 461,000                                       |                                           |            |                              | 879,000  |       
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Cash at end of period                             |               | $                                                                       | 245,000                                       |                                           |            | $                            | 289,000  |       
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       
|Supplemental disclosure of cash flow information: |               |                                                                         |                                               |                                           |            |                              |          |       
|                                                  | Interest paid |                                                                         | $                                             | 70,000                                    |            |                              | $        | 63,000 |           
|                                                  |               |                                                                         |                                               |                                           |            |                              |          |       

See the accompanying condensed notes to these consolidated financial statements.





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DISC, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  The Company

Basis of Presentation and Liquidity

We have prepared the unaudited interim condensed consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. We have condensed or omitted certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles pursuant to these rules and
regulations. In our opinion, the unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position,
operating results and cash flows for the periods presented. These unaudited
condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and accompanying notes for the
years ended December 31, 2002 and 2001 included in our Annual Report on Form
10-K. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the fiscal year, which ends
December 31, 2003, or for any other period.

The unaudited condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern.

The Company has incurred substantial losses from operations, negative cash
flows from operations and has a working capital deficit. In addition, the
Company anticipates that it will continue to incur net losses for the
foreseeable future. These factors raise substantial doubt about the Companys
ability to continue as a going concern. In the past, the Company has obtained
investor funding and credit facilities to maintain operations. In order for the
Company to sustain its operations and meet its obligations going forward, it
plans to seek additional financing from investors and to significantly increase
sales. Subsequent to December 31, 2002 and through April 30, 2003, the Company
has received funding of $860,000 in equity financing and $340,000 in debt
financing from investors and generated cash from sales of its products. The
ability to sustain its operations will depend on the Companys ability to
significantly increase sales or raise significant additional equity or debt
financing. Additional financing may not be available on acceptable terms, if at
all, and the inability to obtain that financing could adversely affect the
continued operations of the Companys business. The consolidated financial
statements do not include any adjustment that might result should the Company
be unable to continue as a going concern.

Basis of Consolidation

The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.

Foreign Currency Translation

The functional currency of the Companys foreign subsidiaries is the local
currency. Accordingly, the assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. Dollars using the exchange rates in
effect at the balance sheet date. Income and expense items are translated at
average exchange rates for the period. Foreign currency translation
adjustments are included in accumulated other comprehensive loss as a separate
component of stockholders equity. Foreign currency transaction gains or
losses were not material in any of the periods presented.





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Note 2  Balance Sheet Details

|                                 |                                                       |                                |                                       |            |                |          |                   |            |            |          |  
|-------------------------------- | ----------------------------------------------------- | ------------------------------ | ------------------------------------- | ---------- | -------------- | -------- | ----------------- | ---------- | ---------- | -------- | -
|                                 |                                                       |                                |                                       |            | March 31, 2003 |          | December 31, 2002
|                                 |                                                       |                                |                                       |            |                |          |                  
|Accounts receivable, net:        |                                                       |                                |                                       |            |                |          |                   |           
|                                 | Trade accounts receivable                             |                                | $                                     | 2,358,000  |                |          | $                 | 2,726,000  |           
|                                 |                                                       |                                | Less: Allowance for doubtful accounts |            |                | (246,000 | )                 |            |            | (243,000 | )
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       | $                              | 2,112,000                             |            |                | $        | 2,483,000         |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|Allowance for doubtful accounts: |                                                       |                                |                                       |            |                |          |                   |           
|                                 | Opening balance                                       |                                | $                                     | 243,000    |                |          | $                 | 275,000    |           
|                                 | Additions                                             |                                |                                       | 5,000      |                |          |                   | 34,000     |           
|                                 | Deductions due to write-off of uncollectible accounts |                                |                                       | (2,000     | )              |          |                   | (66,000    | )         
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 | Closing balance                                       |                                | $                                     | 246,000    |                |          | $                 | 243,000    |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|Inventories, net:                |                                                       |                                |                                       |            |                |          |                   |           
|                                 | Raw materials                                         |                                | $                                     | 1,785,000  |                |          | $                 | 1,818,000  |           
|                                 | Work-in-process                                       |                                |                                       | 372,000    |                |          |                   | 275,000    |           
|                                 | Finished goods                                        |                                |                                       | 438,000    |                |          |                   | 298,000    |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       | $                              | 2,595,000                             |            |                | $        | 2,391,000         |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|Property and equipment:          |                                                       |                                |                                       |            |                |          |                   |           
|                                 | Computer and other equipment                          |                                | $                                     | 2,064,000  |                |          | $                 | 1,989,000  |           
|                                 | Tooling                                               |                                |                                       | 479,000    |                |          |                   | 463,000    |           
|                                 | Evaluation units                                      |                                |                                       | 794,000    |                |          |                   | 773,000    |           
|                                 | Leasehold improvements                                |                                |                                       | 44,000     |                |          |                   | 44,000     |           
|                                 | Furniture and fixtures                                |                                |                                       | 45,000     |                |          |                   | 45,000     |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       |                                | 3,426,000                             |            |                |          | 3,314,000         |           
|                                 | Less: Accumulated depreciation and amortization       |                                |                                       | (2,924,000 | )              |          |                   | (2,800,000 | )         
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       | $                              | 502,000                               |            |                | $        | 514,000           |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|Other Intangible Assets:         |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       | Developed Technology           |                                       | $          | 2,604,000      |          |                   | $          | 2,604,000  |         
|                                 |                                                       | Core Technology                |                                       |            | 72,000         |          |                   |            | 72,000     |         
|                                 |                                                       | Patents                        |                                       |            | 471,000        |          |                   |            | 471,000    |         
|                                 |                                                       | Tradenames                     |                                       |            | 229,000        |          |                   |            | 229,000    |         
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       |                                | 3,376,000                             |            |                |          | 3,376,000         |           
|                                 |                                                       | Less: Accumulated amortization |                                       |            | (1,269,000     | )        |                   |            | (1,079,000 | )       
|                                 |                                                       |                                |                                       |            |                |          |                   |           
|                                 |                                                       | $                              | 2,107,000                             |            |                | $        | 2,297,000         |           
|                                 |                                                       |                                |                                       |            |                |          |                   |           

|                  |                                      |  |                         |         |                         |  |   |          |  
|----------------- | ------------------------------------ |  | ----------------------- | ------- | ----------------------- |  | - | -------- | -
|                  |                                      |  | Quarter Ended March 31, |         | Year ended December 31,
|                  |                                      |  | 2003                    |         | 2003                   
|Accrued Warranty: |                                      |  |                         |         |                         |  |   |         
|                  | Opening balance                      |  | $                       | 241,000 |                         |  | $ | 295,000  |  
|                  | Additions (charged to cost of sales) |  |                         | 9,000   |                         |  |   | 46,000   |  
|                  | Deductions due to warranty costs     |  |                         | (6,000  | )                       |  |   | (100,000 | )
|                  |                                      |  |                         |         |                         |  |   |         
|                  | Closing balance                      |  | $                       | 244,000 |                         |  | $ | 241,000  |  
|                  |                                      |  |                         |         |                         |  |   |         

Note 3  Related Party Transactions

During the three months ended March 31, 2003, the Company sold and MK GVD Fund,
the principal shareholder, purchased 114,589 shares of convertible preferred
stock and warrants under a formula set out in a March 1996 agreement for
aggregate proceeds of $860,000. The warrants allow the holder to purchase
286,473 shares of common stock for exercise prices ranging from $0.94-$0.96.
Under the agreement the number of shares of preferred stock was determined
based on the lower of 85% of the closing bid price or the





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average closing price
of the Companys Common Stock for the five trading days ended three days prior
to the issuance date, but not to exceed $2.50 per share as converted into
common stock.

The fair value of the warrants issued during the three months ended March 31,
2003, $230,000 was determined using a Black Scholes option pricing model with
the following assumptions: volatility of 140.51%; risk free interest rates
ranging from 2.58% to 3.12%; expected life of five years and no dividend yield.
The fair value of the warrants is recorded in shareholders equity.

A beneficial conversion feature is computed as the intrinsic value of the
spread between the quoted market price of common stock and the conversion price
multiplied by the number of common shares into which the preferred stock
converts. This beneficial conversion feature is accounted for as a deemed
dividend to the preferred stockholders and increases the net loss attributable
to common shareholders.

Note 4  Debt

In December 2002, the Company renewed its factoring agreement with Summit
Financial Resources, L.P. (Summit) for an additional year. Receivables
purchased under this agreement are limited to the lesser of $1,500,000 or 85%
of eligible receivables and are collateralized by substantially all of the
assets of the Company. Interest under the agreement is prime rate plus 4% and
0.0825% of the amount of receivables purchased, with a minimum charge of $7,500
per month. At March 31, 2003 borrowings were $252,000 under this agreement.
At December 31, 2002, and March 31, 2003 the Company was not in compliance with
the net tangible asset covenant of the agreement. The Company is having
discussions with Summit regarding this non-compliance. Although the Company has
not received a waiver, borrowings have continued under the agreement.

In
January 2003 we reached agreement with DISC GmbHs German bank to
restructure our long-term debt. The four outstanding term loans were
consolidated into two loans. One of the loans is payable in monthly
installments of 23,000 Euros at an interest rate of 4.85% per annum
beginning in January 2003 and the other loan is payable in monthly
installments of 27,000 Euros beginning in 2007, at an interest rate
of 5.25% per annum.

The loans are collateralized by substantially all the assets of DISC GmbH and a
guaranty of its Parent (DISC, Inc.) Under the terms of the loans, if the bank
believes that GmbHs financial condition has materially deteriorated or is
expected to materially deteriorate, the bank has the right to accelerate
payment of the loans. See further discussion on the terms of the loans in Note
6 of our Financial Statements for the year ended December 31, 2002 and 2001
included in the Companys Annual Report on Form 10-K.

Note 5  Comprehensive Loss

A summary of comprehensive loss for the periods presented is as follow:

|                                         |  |                              |            |      |  |   |            |  
|---------------------------------------- |  | ---------------------------- | ---------- | ---- |  | - | ---------- | -
|                                         |  | Three Months ended March 31,
|                                         |  |                             
|                                         |  | 2003                         |            | 2002
|                                         |  |                              |            |     
|Net loss                                 |  | $                            | (1,402,000 | )    |  | $ | (1,911,000 | )
|Foreign
currency translation gain (loss) |  |                              | (46,000    | )    |  |   | 55,000     |  
|                                         |  |                              |            |      |  |   |            |  
|Total comprehensive loss                 |  | $                            | (1,448,000 | )    |  | $ | (1,856,000 | )
|                                         |  |                              |            |      |  |   |            |  





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##### Table of Contents



Note 6  Recent Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 will be
effective for exit or disposal activities that are initiated after December 31,
2002 and early application is encouraged. We adopted SFAS 146 during the third
quarter of 2002. The provisions of EITF No. 94-3 shall continue to apply for an
exit activity initiated under an exit plan that met the criteria of EITF No.
94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.

In November 2002, FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability for the fair value be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entitys product warranty liabilities. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company believes that the adoption of this standard
will have no material impact on its financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF
Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21 will apply to
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company believes that the adoption of this standard will have no
material impact on its financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company has adopted the
disclosure provisions of SFAS 148.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created





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##### Table of Contents



or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2000. The Company believes that the adoption of this
standard will have no material impact on its financial statements.

Note 7  Operating Segments

The Company operates in one industry segment.

The following is a summary of the Companys revenue attributed to the
geographic regions:

|              |  |                              |           |      |  |   |           | 
|------------- |  | ---------------------------- | --------- | ---- |  | - | --------- | 
|              |  | Three Months ended March 31,
|              |  |                             
|              |  | 2003                         |           | 2002
|              |  |                              |           |     
|North America |  | $                            | 1,508,000 |      |  | $ | 1,773,000 | 
|Europe        |  |                              | 1,408,000 |      |  |   | 676,000   | 
|Asia          |  |                              | 49,000    |      |  |   | 102,000   | 
|Others        |  |                              | 36,000    |      |  |   | 102,000   | 
|              |  |                              |           |      |  |   |           | 
|              |  | $                            | 3,001,000 |      |  | $ | 2,653,000 | 
|              |  |                              |           |      |  |   |           | 

Note 8  Stock-Based Compensation

Since all the Companys stock options were granted at fair market value at the
date of grant, no compensation cost has been recognized for its fixed stock
option plans. Had compensation cost for the Companys three stock-based
compensation plans been determined consistent with SFAS 123, the Companys net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:

|                                                                                                                                 |  |             |  |   |            |                    |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | - | ---------- | ------------------ | -------- | -
|                                                                                                                                 |  |             |  |   |            | Three Months ended
|                                                                                                                                 |  |             |  |   |            | March 31, 2003    
|                                                                                                                                 |  |             |  |   |            |                   
|Net loss                                                                                                                         |  | As Reported |  | $ | (1,732,000 | )                 
|Additional compensation
expense, net of tax, that
would have been included in
net loss if the fair value
method had been applied |  |             |  |   |            |                    | (103,000 | )
|                                                                                                                                 |  |             |  |   |            |                    |          |  
|Net loss                                                                                                                         |  | Pro Forma   |  | $ | (1,835,000 | )                 
|                                                                                                                                 |  |             |  |   |            |                    |          |  
|Basic and diluted net loss
attributable to common
shareholders per share                                                         |  | As Reported |  | $ | (0.36      | )                 
|                                                                                                                                 |  |             |  |   |            |                    |          |  
|                                                                                                                                 |  | Pro Forma   |  | $ | (0.38      | )                 
|                                                                                                                                 |  |             |  |   |            |                    |          |  

The compensation cost calculated under SFAS 123 is based on options
granted from 1996 through three months ended March 31, 2003, and because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of the pro forma effects of option grants on
reported net income for future years.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 120.75% for three months
ended March 31, 2003, dividend yield of 0% for all years; risk-free interest
rates for the last day of the month in which the options were granted; and
expected lives of four years for the 1990 Plan and the 2001 Plan, and five
years for the Non-Employee Option Plan.





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##### Table of Contents






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

The following information should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto included in Item 1 of this
Quarterly Report and with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and notes thereto contained in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 2003.

Results of Operations

For the three months ended March 31, 2003, we had sales of $3,001,000, compared
to sales of $2,653,000 for the three months ended March 31, 2002. The increase
in sales for the three months ended March 31, 2003 from the same period in 2002
is primarily due to an increase in sales in Europe. This increase was partially
offset by a decrease in net sales in North America due to the continued slow
down by the Federal Government in information technology spending and continued
weakness in the storage industry. The general sales cycles for distribution of
our products are similar to those of most businesses selling products designed
for use as part of large systems, and range from three to six months for value
added resellers and small system integrators and from one to two years for
original equipment manufacturers, product integrators and large system
integrators. Because our products are part of large systems, the sales cycles
for our products vary significantly and are difficult to predict for any
particular transaction. The long and often unpredictable sales cycles for our
products complicate forecasting for operational planning and may cause net
sales and operating results to vary significantly from quarter to quarter.

Cost of sales, as a percentage of sales, decreased to 79% for the three months
ended March 31, 2003, as compared to 84% for the comparable 2002 period. The
decrease for the three months ended March 31, 2003 from the same period in 2002
is primarily due to headcount reduction enacted after the first quarter of 2002
and a company wide 10% salary reduction enacted in January 2003. Our
relatively low gross margins reflect our low levels of net sales, which have
resulted in unabsorbed manufacturing costs and high costs of materials due to
the inability to achieve purchasing economies of scale. We expect that, if
product sales increase significantly, costs of sales per unit of product will
decrease because fixed manufacturing costs will be distributed over the larger
sales volume, and material costs will decrease as the result of volume
purchases. However, even with product sales increases, cost of sales per unit
of product may not decrease significantly or at all because the magnitude of
the sales increase may not be sufficient or because manufacturing, material and
other costs may independently increase.

For the three months ended March 31, 2003, research and development expenses
were $548,000, compared to $610,000 for the comparable period of 2002. The
decrease for the three month periods ended March 31, 2003 as compared to the
comparable periods of 2002 was primarily due to a headcount reduction enacted
after the first quarter of 2002 and a company wide salary reduction enacted in
January 2003. We believe that research and development expenses will remain
relatively constant in dollar amounts during the remainder of 2003.

Marketing and sales expenses were $845,000 for the three months ended March 31,
2003 compared to $1,079,000 for the comparable period in 2002. The decrease for
the three months ended March 31, 2003 from the same period in 2002 is primarily
due to a decrease in headcount enacted after the first quarter of 2002 and a
company wide 10% salary wide salary reduction enacted in January 2003. We
believe that marketing and sales expenses will increase moderately in dollar
amounts during the remainder of 2003 as we have added significant resources in
marketing and business development to allow us to address new markets and
expand our customer base, but decline as a percentage of sales in the long
term.





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General and administrative expenses were $370,000 for the three months ended
March 31, 2003 compared to $387,000 for the comparable period in 2002. General
and administrative expense remained relatively constant for the three months
ended March 31, 2003 and 2002. We expect general and administrative expenses
to remain relatively constant in dollar amounts during the remainder of 2003,
although the Company is still assessing the costs associated with the
implementation of the Sarbanes Oxley Act that will take effect in 2003.

Intangible amortization of $190,000 for the three months ended March 31, 2003
consists of the amortization of acquired intangible assets. The July 2001
acquisition of DISC GmbH generated approximately $3,376,000 in identified
intangibles, which are currently being amortized over periods ranging from four
to six years. We expect amortization expense to be approximately $190,000 for
each quarter during 2003. Amortization could be affected by other acquisitions
or impairment of existing identified intangible assets in future periods.

Interest expense was $70,000 for the three months ended March 31, 2003 as
compared to interest expense of $63,000 for the comparable period in 2002.
Interest expense remained relatively constant for the three months ended March
31, 2003 and 2002. Interest expense is expected to increase moderately due to
an expected increase in borrowings from our factoring agreement during the
remainder of 2003.

Notwithstanding the foregoing, we may incur significant, unexpected expenses as
a result of attempts to respond to technological advances, increased
competition, new product announcements and releases by our competitors, changes
in the data storage market, market opportunities and other factors discussed
below in Factors That May Affect Future Operating Results and the Market Price
of Our Stock.

Liquidity and Capital Resources

Net cash used in operating activities for the three month period ended
March 31, 2003 was $683,000 compared to $891,000 used for the comparable period
in 2002. Net cash used in operating activities in 2003 primarily reflects a
loss of $1,402,000 partially offset by a decrease in accounts receivable of
$385,000, a increase in inventory of $206,000, an increase in accounts payable
of $158,000, and depreciation and amortization of $269,000. Net cash used in
operating activities in 2002 primarily reflects a loss of $1,911,000 partially
offset by a decrease in accounts receivable of $288,000, an increase in
accounts payable of $673,000, a decrease in accrued expenses and other
liabilities of $172,000, and depreciation and amortization of $294,000.

Net cash used in investing activities was $57,000 for the three months ended
March 31, 2003 compared to $22,000 for the three months ended March 31, 2002
and primarily consisted of purchases of hardware.

Net cash provided by financing activities was $476,000 for the three
months ended March 31, 2003 compared to $311,000, provided for the three months
ended March 31, 2002. Net cash provided in 2003 consisted primarily of
$860,000 of net proceeds from the issuance of preferred stock offset by the
repayment of $390,000 of debt. Net cash provided in 2002 consisted primarily
of $875,000 of net proceeds from the issuance of preferred stock offset by the
repayment of $564,000 of debt.

We have a factoring agreement that allows us to borrow the lesser of $1,500,000
or 85% of eligible receivables. At March 31, 2003, borrowings under the
agreement totaled $252,000 and we were not in compliance with the tangible net
assets covenant of the agreement. We are having discussions with Summit
regarding this non-compliance. Although we have not received a waiver,
borrowings have continued under the agreement.





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We have incurred substantial losses from operations and have a working capital
deficit. We anticipate that we will continue to incur net losses for the
foreseeable future. These factors raise substantial doubt about our ability to
continue as a going concern. In the past, we have obtained investor funding
and credit facilities to maintain operations. In order for us to sustain
operations and meet our obligations going forward, we plan to seek additional
financing from investors and to significantly increase sales. Subsequent to
December 31, 2002 and through April 30, 2003, we have supported our operations
with $860,000 in equity financing and $340,000 in debt financing from investors
and cash generated from sales of our products. The ability to sustain our
operations will depend on our ability to significantly increase sales or raise
significant additional equity or debt financing on terms acceptable to us.
There is no assurance that any of these conditions will be achieved. In
particular, we expect to require increasing amounts of cash to finance our
efforts to increase sales, which we plan to achieve by increasing selling
efforts to large system integrators and OEMs, by hiring additional sales and
sales support staff and by making evaluation units available. In addition, we
intend to expand our current network of resellers. We may require cash to
finance purchases of inventory to satisfy anticipated increased sales as our
products achieve market acceptance. In addition, we expect that the continued
integration of our acquisition of NSM GmbH and the support of its operations
will require cash as well. If we incur greater expenditures than we anticipate
in these or other matters, and we cannot raise funds at acceptable terms or at
all, we may not be able to develop or enhance our products, take advantage of
other opportunities or respond to competitive pressures or unanticipated
requirements.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
and we intend that these forward-looking statements are subject to the safe
harbors created by those provisions. These forward-looking statements include
statements relating to:



| |  |  | future research and development projects;                                                          
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | increasing our sales efforts and possible increases in sales;                                      
|
| |  |  | potential future decreases in costs of sales per unit;                                             
|
| |  |  | expected research and development, marketing and sales and
general and administrative expenditures;
|
| |  |  | expected amortization expense for each quarter;                                                    
|
| |  |  | expanding our sales channels;                                                                      
|
| |  |  | expected sales cycles;                                                                             
|
| |  |  | the need for, and availability of, additional financing; and                                       
|
| |  |  | actual and potential acquisitions and their effects on our financial position.                     

Without limiting the generality of the foregoing, words such as may, will,
expect, believe, anticipate, intend, could, estimate or continue,
or the negative or other variations those terms, or comparable terminology are
intended to identify forward-looking statements.





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##### Table of Contents



The forward-looking statements included in this quarterly report on Form 10-Q
are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions
regarding our business, which involve judgments with respect to, among other
things, future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, we cannot assure that the
results contemplated in forward-looking statements will be realized. In
addition, our business and operations are subject to substantial risks which
increase the uncertainty inherent in such forward-looking statements (see Risk
Factors that May Affect Future Operating Results starting on page 7 of our annual report on Form 10-K for the year ended
December 31, 2002 and Factors that May Affect Future Operating Results and the
Market Price of our Stock below). In light of the significant uncertainties
inherent in the forward-looking information included in this quarterly report
on Form 10-Q, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives or plans will be
achieved.





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##### Table of Contents



Factors That May Affect Future Operating Results and the Market Price of Our Stock

Our future operating results, and stock price, may be affected by a number of
factors, many of which are beyond our control. These factors include the
following:

We will need additional funding to continue our operations.

To date, we have not generated enough cash from operations to fund our
business, and we will need additional funding in the future in order to fund
our operations. We may not be able to do so on favorable terms, if at all.
There also can be no assurance that funding sources will be available to us on
a timely basis to fund our operations on terms acceptable to us, or at all. If
we are unable to raise sufficient funding as required, the operations and
prospects of our company, and our ability to continue as a going concern, will
be severely harmed.

We have a history of losses and we expect to incur future losses.

We have experienced significant operating losses since our inception, and as of
March 31, 2003 had an accumulated deficit of $44,022,000. We expect to
continue to incur net losses for the foreseeable future, and our ability to
sustain our operations for a significant period after December 31, 2003 will
depend on our ability to significantly increase or even maintain sales or raise
significant additional debt or equity financing. There can be no assurance we
will be able to increase sales or that additional financing will be available
on acceptable terms, or at all. Further, if we issue equity securities,
shareholders may experience additional dilution or the new equity securities
may have rights, preferences or privileges senior to those of our existing
securities. Even if we are able to increase sales, we may incur net losses for
the foreseeable future due to anticipated spending increases primarily on
sales, marketing and research and development efforts. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis.

Recent terrorist and military activities could adversely affect our business.

In response to terrorist attacks, the United States is actively using
military force to pursue those behind these attacks and to pursue broader
actions against global terrorism. The continued threat of terrorism within the
United States and Europe, the escalation of military action and heightened
security measures in response to such further threats may cause significant
disruption to commerce throughout the world. To the extent that such
disruptions result in further reductions in capital expenditures or spending on
information technology, longer sales cycles, deferral or delay of customer
orders, or an inability to effectively market our products, our revenues would
decline, which would materially and adversely affect our business and results
of operations.

Our quarterly revenues and operating results may fluctuate for a number of
reasons, which may cause our stock price to fluctuate.

Our quarterly operating results have varied in the past and are likely to vary
significantly in the future due to several factors, including:



| |  |  | the size and timing of significant customer orders;
| | - |  | ---------------------------------------------------
|
| |  |  | shifts in product or distribution channel mix;     
|
| |  |  | increased competition and pricing pressure;        





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| |  |  | timing of new product announcements and releases by us or our competitors;             
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | new product developments by storage device manufacturers;                              
|
| |  |  | the rate of growth in the data storage market;                                         
|
| |  |  | market acceptance of new and enhanced versions of our products;                        
|
| |  |  | timing and levels of our sales and operating expenses;                                 
|
| |  |  | gain or loss of significant customers or distributors;                                 
|
| |  |  | changes in economic conditions;                                                        
|
| |  |  | personnel changes; and                                                                 
|
| |  |  | our ability to effectively integrate the products and operations of NSM GmbH with ours.

Our quarterly revenue and operating results have been affected by seasonal
trends. These trends often result in lower revenue in the first quarter of
each fiscal year compared to the fourth quarter of the previous fiscal year due
to customer purchasing and budgetary practices.

The general sales cycles for distribution of our products are similar to those
of most businesses selling products designed for use as part of large systems,
and range from three to six months for value-added resellers, or VARs, and
small system integrators and from one to two years for original equipment
manufacturers, or OEMs, product integrators and large system integrators. Our
variable and extended sales cycle makes it difficult to predict if or when
revenue will be earned. Since our operating expenses are based on anticipated
revenue levels and because a high percentage of these expenses are relatively
fixed, a delay in a sale or revenue recognition for a sale could cause
significant variations in our operating results from quarter to quarter and
could cause unexpected results.

Operating results in any period should not be considered indicative of the
results investors can expect for any future period. Due to the forgoing and
other factors related to our industry, past results are a much less reliable
predicator of future results than is the case in many older, more stable and
less dynamic industries. We cannot assure you that we will be able to increase
or even sustain our recent levels of quarterly revenue and net sales, as
normalized for unusual or one-time items, or that we will attain or maintain
profitability in any future period. Any unfavorable change in the factors
described above or any other factors could adversely affect our operating
results for a particular quarter. In addition, it is likely that in some
future quarters our operating results will be below the expectations of public
market analysts and investors. In any of these events, the price of our common
stock would likely decline.

Because we operate with little backlog, our operating results could be
adversely affected if we do not accurately anticipate future sales levels.

Historically, we have operated with little order backlog and, due to the nature
of our business, do not anticipate that we will have significant backlog in the
future. Consequently, a large portion of our revenue in each quarter results
from orders placed during that quarter. Because of the relatively large dollar
size of orders from our distributors and OEMs, delay in the placing of a small
number of orders by a small number of purchasers could negatively affect our
operating results for a particular period. In addition, our operating expense
levels are, in the short term, largely fixed and are based, in part, on
expectations regarding future





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##### Table of Contents



revenue. Thus, our operating results could be
disproportionately affected if we do not receive the expected number of orders
in a given quarter and our net sales falls below our expectations.

We depend on certain key suppliers and if we are unable to obtain adequate
supplies, our sales and operating results could be significantly adversely
affected.

We do not possess proprietary optical disk, high-density disk or other storage
technologies and, consequently, we depend on a limited number of third-party
manufacturers to supply us with the devices that we incorporate into our
products. In some cases, these manufacturers are sole-source providers of the
device technology. Our suppliers have in the past been, and may in the future
be, unable to meet our supply needs, including our needs for timely delivery,
adequate quantity and high quality. We do not have long-term contracts with
any of our significant suppliers. If these suppliers were to decide to pursue
the disc library market directly, they may cease supplying us with disc drives
and media, in which case we may be unable to obtain adequate supplies of disc
drives and media at acceptable prices, if at all. The partial or complete loss
of any of our suppliers could result in significant lost sales, added costs and
production delays or may otherwise harm our business, financial condition,
operating results and customer relationships.

We have a concentrated customer base, and therefore the loss of a single
customer could negatively affect our operating results.

The majority of our end users purchase our products from distributors, VARs,
OEMs and systems integrators. We have no long-term orders with any of our
significant customers or distributors. Generally we sell products pursuant to
purchase orders. In addition, our distributors carry competing product lines
which they may promote over our products.
A distributor may not continue to purchase our products or market them
effectively. Moreover, certain of our contracts with our distributors contain
most favored nation pricing provisions which mandate that we offer our
products to these customers at the lowest price offered to other similarly
situated customers. Our operating results could be adversely affected if any
of the following factors were to occur relating to one or more of our
significant resellers:



| |  |  | the reduction, delay or cancellation of orders or the return of a significant amount of products;      
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | the loss of one or more of such resellers; or                                                          
|
| |  |  | any financial difficulties of those resellers that result in
their inability to pay amounts owed to us.

There are substantial risks associated with the acquisition of NSM Storage
GmbH.

In connection with the acquisition of DISC GmbH, we assumed debt payable to
financial institutions. To the extent DISC GmbH does not generate sufficient
cash flow to meet its working capital requirements and such working capital is
not available from other sources, our operations may be curtailed or otherwise
adversely impacted.

The market for DISC GmbH products may not materialize or be of sufficient size
to enable us to recover our investment, resulting in the impairment of
goodwill, intangible or other long lived assets. Moreover, we may not be able
to accurately predict a potential impairment of the goodwill resulting from the
acquisition or of the identified intangible assets, which could require us to
write-off a significant portion of the goodwill or the identified intangible
assets, thereby adversely affecting our operating results.





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##### Table of Contents



Because we are dependent on international sales for a substantial amount
of our net revenues, we face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results.

We expect that international revenues will continue to represent a significant
portion of our net revenues in the foreseeable future. Doing business
internationally involves greater expenses and many additional risks. For
example, because the products we sell abroad and the products and services we
buy abroad are priced in foreign currencies, we may be affected by fluctuating
exchange rates. We might not successfully protect ourselves against currency
rate fluctuations, and our financial performance could be harmed as a result.
In addition, we face other risks of doing business internationally, including:



| |  |  | unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | reduced protection for intellectual property rights in some countries;       
|
| |  |  | differing labor regulations;                                                 
|
| |  |  | compliance with a wide variety of complex regulatory requirements;           
|
| |  |  | changes in a countrys or regions political or economic conditions;         
|
| |  |  | greater difficulty in staffing and managing foreign operations; and          
|
| |  |  | increased financial accounting and reporting burdens and complexities.       

Our international operations require significant attention from our management
and substantial financial resources. We do not know whether our investments in
other countries will produce desired levels of net revenues or profitability.

Our stock price may be extremely volatile.

The market price of our common stock has experienced fluctuations and is likely
to fluctuate significantly in the future. Our stock price can fluctuate for a
number of reasons, including:



| |  |  | announcements about us or our competitors;                                             
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | quarterly variations in operating results;                                             
|
| |  |  | the introduction of new technologies or products;                                      
|
| |  |  | changes in product pricing policies by us or our competitors;                          
|
| |  |  | comments regarding us and the data storage market made on Internet bulletin boards; and
|
| |  |  | changes in earnings estimates by analysts or changes in accounting policies.           

In addition, stock markets have experienced extreme price and volume volatility
in recent years. This volatility has had a substantial effect on the market
prices of securities of many smaller public companies for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. In addition, the securities of many high technology companies,
including our securities, have historically been





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##### Table of Contents



subject to extensive price and
volume fluctuations that may affect the market price of their common stock.
These broad market fluctuations may adversely affect the market price of our
common stock.

Competition in the computer information storage market may lead to reduced
market share, declining prices and reduced profits.

The markets for data storage solutions are intensely competitive, fragmented
and characterized by rapidly changing technology and evolving standards. These
conditions could render our products less competitive or obsolete and could
harm our business, financial condition and ability to market our products.
Some of our competitors have significantly more financial, technical,
manufacturing, marketing and other resources than we have. As a result, our
competitors may be able to respond more quickly than we can to new or changing
opportunities, technologies, standards or customer requirements. Competitors
may develop products and technologies that are less expensive or
technologically superior to our products. In addition, our competitors may
manufacture and market their products more successfully than we do our
products. Competition from computer companies and others diversifying into the
field is expected to increase as the market develops. We may face substantial
competition from new entrants in the industry and from established and emerging
companies in related industries. There is significant price competition in the
markets in which we compete, and we believe that pricing pressures are likely
to continue. Certain competitors may reduce prices in order to preserve or
gain market share. This pricing pressure could result in significant price
erosion, reduced gross profit margins and loss of market share, any of which
could negatively affect our business, financial condition and operating
results.

The storage device market is characterized by rapid technological
evolution, and our success depends on our ability to develop new products.

The market for our products is characterized by rapidly changing technology and
evolving industry standards and is highly competitive with respect to timely
innovation. At this time, the data storage market is particularly subject to
change with the emergence of Fibre Channel protocol and new storage solutions
such as storage area networks and network attached storage devices. The
introduction of new products embodying new or alternative technology or the
emergence of new industry standards could render our existing products obsolete
or unmarketable. Our future success will depend in part on our ability to
anticipate changes in technology, to gain access to such technology for
incorporation into our products and to develop new and enhanced products on a
timely and cost-effective basis. Risks inherent in the development and
introduction of new products include:

     the difficulty in forecasting customer demand accurately;

     the possibility that sales of new products may cannibalize sales of our current products;

     delays in our initial shipments of new products;

     competitors responses to our introduction of new products; and

     the desire by customers to evaluate new products for longer
periods of time before making a purchase decision.

In addition, we must be able to maintain the compatibility of our products with
significant future device technologies, and we must rely on producers of new
device technologies to achieve and sustain market acceptance of those
technologies. Development schedules for high-technology products are subject
to uncertainty, and we may not meet our product development schedules.





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We have in the past experienced delays in the introduction of some new
products. If we are unable, for technological or other reasons, to develop
products in a timely manner or if the products or product enhancements that we
develop do not achieve market acceptance, our business will be harmed.

A failure to develop and maintain propriety technology will negatively
affect our business.

Because our business depends on technology, our ability to compete effectively
depends in part on our ability to develop and maintain proprietary aspects of
our technology. We hold United States and German patents covering various
aspects of our technology, including the overall system design of our products.
These patents expire between 2007 and 2014. We cannot be certain that these
patents will provide meaningful protection for our product innovations. We
also rely on a combination of copyright, trademark, trade secret and other
intellectual property laws and various contract rights to protect our
proprietary rights. Such rights, however, may not preclude competitors from
developing products that are substantially equivalent or superior to our
products. There can be no assurance that our proprietary technology will
remain a trade secret or that others will not develop a similar technology and
use that technology to compete with us. In addition, many aspects of our
products are not subject to intellectual property protection and can therefore
be reproduced by our competitors.

While we are not currently engaged in any intellectual property litigation or
proceedings, we may become so involved in the future. However, there can be no
assurance that such claims will not be made in the future. An adverse outcome
in litigation could subject us to significant liabilities to third parties,
require us to license technology from others or require us to cease marketing
or using certain products, any of which could negatively affect our business,
financial condition and operating results. If we are required to seek licenses
under patents or proprietary rights of others, we may not be able to acquire
these licenses on acceptable terms, if at all. In addition, the cost of
responding to an intellectual property infringement claim, in terms of legal
fees and expenses and the diversion of management resources, whether or not the
claim is valid, could harm our business, financial condition and operating
results.

Concentration of ownership among our existing executive officers,
directors and principal shareholders may prevent other investors from
influencing significant corporate decisions.

As of March 31, 2003, our executive officers, directors and principal
shareholders beneficially owned, in the aggregate, approximately 91% of our
outstanding common stock, preferred stock and warrants, on an as-if-converted
basis. In particular, our largest investor beneficially owns approximately 90%
of our outstanding common stock, preferred stock and warrants, on an
as-converted basis. As a result, these shareholders, if acting together, will
be able to exercise control over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could disadvantage other
shareholders with interests different from those of our officers, directors and
principal shareholders. For example, our officers, directors and principal
shareholders could delay or prevent an acquisition or merger even if the
transaction would benefit other shareholders.

Downturns in the computer information storage market and related markets
may decrease our revenues and margins.

The market for our products depends on economic conditions affecting the
broader information technology and related markets. Downturns in these markets
may cause our customers to delay or cancel information technology projects,
reduce their information technology budgets or reduce or cancel orders for our
products. In this environment, customers may experience financial difficulty,
cease operations or fail to budget for the purchase of our products. This, in
turn, may lead to longer sales cycles, delays in payment and collection, and
price pressures, causing us to realize lower revenues and margins. A prolonged
economic





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##### Table of Contents



downturn would also increase our exposure to credit risk on trade
receivables. In particular, capital spending in the information technology
sector generally has decreased in the past 12 months, and many of our customers
and potential customers have experienced declines in their revenues and
operations.
If capital spending in our markets continues to decline or does not increase,
it may be necessary for us to gain significant market share from our
competitors in order to achieve our financial goals and achieve profitability.

Undetected software or hardware errors could increase our costs and reduce
our revenue.

We may not be able to adequately control and eliminate manufacturing flaws. If
flaws in design, production, assembly or testing were to occur in our products
or those of our vendors, we could experience a rate of failure in our products
that would result in substantial repair or replacement costs and potential
damage to our reputation. Continued improvement in manufacturing capabilities
and control of material and manufacturing quality and costs are critical
factors in our future growth. We cannot assure you that our efforts to
monitor, develop and implement appropriate test and manufacturing processes for
our products will be sufficient to permit us to avoid a rate of failure in our
products that results in substantial shipment delays, significant repair or
replacement costs and damage to our reputation. In addition, our products are
combined with products from other vendors. As a result, when problems occur,
it is difficult to identify the source of the problem. These problems may
cause us to incur significant warranty and repair costs, divert the attention
of our engineering personnel from our product development efforts and cause
significant customer relations problems.

We may be sued by our customers for product liability claims as a result
of failures in our data storage products.

We face potential liability for performance problems of our products because
our end users employ our storage technologies for the storage and backup of
important data. Although we maintain general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of our insurance
coverage could harm our business.

The costs of compliance with recent developments in corporate governance
regulation may affect our business, operating results and financial condition
in ways that presently cannot be predicted.

Beginning with the enactment of the Sarbanes-Oxley Act of 2002, a significant
number of new corporate governance requirements have been adopted or proposed
through legislation and regulation by the Securities and Exchange Commission
and Nasdaq National Stock Market. We expect these developments to increase our
legal compliance and accounting costs, and to make some activities more
difficult, such as shareholder approval of new stock options plans. We expect
these developments to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur substantially higher costs to obtain coverage.
These developments could make it more difficult for us to attract and retain
qualified members of our board of directors, or qualified executive officers.
We are presently evaluating and monitoring regulatory developments and cannot
estimate the timing or magnitude of additional costs we may incur as a result,
or the effect that these costs may have on our operating results.

A number of key personnel are critical to the success of our business.

Our future success depends in large part on our ability to retain certain key
executives and other personnel, some of whom have been instrumental in
establishing and maintaining strategic relationships with key suppliers and
customers. Our future growth and success will depend in large part on our
ability to hire,





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motivate and retain highly qualified management, technical,
operations and sales and marketing personnel. Competition for such personnel
is intense in the high-technology industry, particularly in the San Francisco
Bay area. We may not be able to retain our existing personnel or attract
additional qualified personnel in the future. In addition, companies in our
industry whose employees accept positions with competitors frequently claim
that their competitors have engaged in unfair hiring practices. We may receive
such claims in the future as we seek to hire qualified personnel, and such
claims could result in litigation. Regardless of the merits of these claims,
we could incur substantial costs in defending ourselves against these claims.

If our securities are delisted from Nasdaq, the trading market and prices
of our securities would be harmed.

The trading of our common stock on the Nasdaq SmallCap Market is conditioned
upon our meeting certain asset, revenues and stock price tests. If we fail any
of these tests, our common stock may be delisted from trading on the Nasdaq
system, which could materially adversely affect the trading market and prices
for those securities. In addition, low price stocks are subject to additional
risks including additional state regulatory requirements and the potential loss
of effective trading markets.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are not exposed to significant market risk related to fluctuations in
interest rates related to interest income, because we have not, and are not
expected to have significant investments in fiscal 2003. In addition, we do
not use derivative financial instruments of any kind.

We are exposed to short-term fluctuations in interest rates as our borrowings
on our lines of credit have variable interest rates. A sharp increase in
interest rates would have an adverse impact on our interest expense.

International sales are made mostly from our German subsidiary and have
historically typically been denominated in German Marks, and beginning January
1, 2002 are typically denominated in Euro. Our German subsidiary also incurs
most of its expenses in the local currency, the Euro. Accordingly, our foreign
subsidiary uses its local currency as its functional currency.

Our international business is subject to risks typical of an international
business including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors. We are also exposed to foreign exchange rate fluctuations as the
financial results of our foreign subsidiaries are translated into United States
Dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
performance.

We plan to assess the need to enter into foreign currency exchange forward
contracts to offset the impact of currency fluctuations on certain
nonfunctional currency assets and liabilities, primarily denominated in Euro.
We also plan to assess the need to periodically hedge anticipated transactions.





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##### Table of Contents






Item 4. Controls and Procedures

Within 90 days prior to the date of the Quarterly Report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the President and Chief
Executive Officer together with the Companys Vice President of Finance and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Companys President and Chief Executive
Officer together with the Companys Vice President of Finance and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic Securities and Exchange Commission
filings. There have been no significant changes in the Companys internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.





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##### Table of Contents






PART II  OTHER INFORMATION




Item 1. Legal Proceedings

In the ordinary course of business, we may from time to time become involved in
certain legal proceeding. As of the date of this quarterly report, we are not a
party to any pending material legal proceedings.




Item 2. Changes in Securities and Use of Proceeds

During the first quarter ended March 31, 2003, we sold and MK GVD Fund,
our principal shareholder, purchased 114,589 shares of convertible preferred
stock and warrants under a formula set out in a March 1996 agreement for
aggregate proceeds of $860,000. The warrants allow the holder to purchase
286,473 shares of our common stock for exercise prices ranging form
$0.94-$0.96. Pursuant to the 1996 agreement, the number of shares of preferred
stock was determined based on the lower of 85% of the closing bid price or the
average closing price our common stock for five trading days ended three days
prior to the issuance date, but not to exceed $2.50 per share as converted into
common stock. The shares of preferred stock are convertible into a total of
2,864,730 shares of our common stock. These securities were not registered
under the Securities Act of 1933, as amended (the Securities Act) in reliance
upon the exemption provided by Section 4(2) of the Securities Act.

As more fully discussed in Note 3 to the Condensed Notes to the Condensed
(consolidated Financial Statements, we have issued preferred stock during the
first quarter ended March 31, 2003. The preferred stock has certain rights,
privileges and preferences (including liquidation preferences) over our common
stock.




Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the quarter
ended March 31, 2003.




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits.
| | --- |  | ---------

| |  |         |       |             |  |                                                                                                                                                                               
| |  | ------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit |       |            
| |  | Number  |       | Description
| |  |         |       |            
| |  |         | 10.63 |             |  | Forty-Fifth Amendment to Convertible Debenture Purchase
Agreement dated February 12, 2003.                                                                                    
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.64 |             |  | Forty-Sixth Amendment to Convertible Debenture Purchase
Agreement dated February 18, 2003.                                                                                    
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.65 |             |  | Forty-Seventh Amendment to Convertible Debenture Purchase
Agreement dated March 5, 2003.                                                                                      
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.66 |             |  | Forty-Eighth Amendment to Convertible Debenture Purchase
Agreement dated March 14, 2003.                                                                                      
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.67 |             |  | Forty-Ninth Amendment to Convertible Debenture Purchase
Agreement dated March 21, 2003.                                                                                       
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.68 |             |  | Fiftieth Amendment to Convertible Debenture Purchase
Agreement dated March 27, 2003.                                                                                          
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 99.1  |             |  | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.





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##### Table of Contents





| | (b) |  | Reports on Form 8-K                                                              
| | --- |  | ---------------------------------------------------------------------------------
|
| |     |  | We did not file any reports on Form 8-K during the quarter ending March
31, 2003.




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.

|                    |  |            |  |                                                                                                                
|------------------- |  | ---------- |  | ---------------------------------------------------------------------------------------------------------------
|                    |  | DISC, INC.
|                    |  |            |  |                                                                                                                
|Dated: May 15, 2003 |  | By:        |  | /s/ ROBERT W. RILAND III                                                                                       
|                    |  |            |  |                                                                                                                
|                    |  |            |  | Robert W. Riland III
President and Chief Executive Officer
(Principal Executive Officer)                       
|                    |  |            |  |                                                                                                                
|Dated: May 15, 2003 |  | By:        |  | /s/ HENRY MADRID                                                                                               
|                    |  |            |  |                                                                                                                
|                    |  |            |  | Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)





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##### Table of Contents



I, Robert W. Riland III, certify that:

|   |  |                                                                                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | I have reviewed this quarterly report on Form 10-Q of DISC, Inc.;                                                                                                                                                                                                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                               
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|   |  |                                                                                                                                                                                                                                                                                                                               
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;                   
|   |  |                                                                                                                                                                                                                                                                                                                               
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      

| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being
prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

|   |  |                                                                                                                                                                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent
function):





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##### Table of Contents



| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrants ability to
record, process, summarize and report financial
data and have identified for the registrants
auditors any material weaknesses in internal
controls; and
| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | b) |  | any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrants internal
controls; and                                                                                                                                        

|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | The registrants
other certifying
officer and I have
indicated in this
quarterly report
whether or not there
were significant
changes in internal
controls or in other
factors that could
significantly affect
internal controls
subsequent to the
date of our most
recent evaluation,
including any
corrective actions
with regard to
significant
deficiencies and
material weaknesses.

|                    |  |     |  |                                                                                         
|------------------- |  | --- |  | ----------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ ROBERT W. RILAND III                                                                
|                    |  |     |  |                                                                                         
|                    |  |     |  | Robert W. Riland III
President and Chief Executive Officer
(Principal Executive Officer)





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##### Table of Contents



I, Henry Madrid, certify that:

|   |  |                                                                                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | I have reviewed this quarterly report on Form 10-Q of DISC, Inc.;                                                                                                                                                                                                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                               
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|   |  |                                                                                                                                                                                                                                                                                                                               
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|   |  |                                                                                                                                                                                                                                                                                                                               
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                      

| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | designed such disclosure
controls and procedures to
ensure that material information
relating to the registrant,
including its consolidated
subsidiaries, is made known to
us by others within those
entities, particularly during
the period in which this
quarterly report is being
prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | b) |  | evaluated the effectiveness of
the registrants disclosure
controls and procedures as of a
date within 90 days prior to the
filing date of this quarterly
report (the Evaluation Date);
and                                                                                                  
| |  |    |  |                                                                                                                                                                                                                                                                                                
| |  | c) |  | presented in this quarterly
report our conclusions about the
effectiveness of the disclosure
controls and procedures based on
our evaluation as of the
Evaluation Date;                                                                                                                        

|   |  |                                                                                                                                                                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of the registrants board of directors (or persons
performing the equivalent function):





---



##### Table of Contents



| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) |  | all significant deficiencies in
the design or operation of
internal controls which could
adversely affect the
registrants ability to record,
process, summarize and report
financial data and have
identified for the registrants
auditors any material weaknesses
in internal controls; and
| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | b) |  | any fraud, whether or not
material, that involves
management or other employees
who have a significant role in
the registrants internal
controls; and                                                                                                                                        

|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                    |  |     |  |                                                                                                                
|------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------
|Dated: May 15, 2003 |  | By: |  | /s/ HENRY MADRID                                                                                               
|                    |  |     |  |                                                                                                                
|                    |  |     |  | Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)





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##### Table of Contents






INDEX TO EXHIBITS

| |  |         |       |             |  |                                                                                                                                                                               
| |  | ------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit |       |            
| |  | Number  |       | Description
| |  |         |       |            
| |  |         | 10.63 |             |  | Forty-Fifth Amendment to Convertible Debenture Purchase
Agreement dated February 12, 2003.                                                                                    
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.64 |             |  | Forty-Sixth Amendment to Convertible Debenture Purchase
Agreement dated February 18, 2003.                                                                                    
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.65 |             |  | Forty-Seventh Amendment to Convertible Debenture Purchase
Agreement dated March 5, 2003.                                                                                      
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.66 |             |  | Forty-Eighth Amendment to Convertible Debenture Purchase
Agreement dated March 14, 2003.                                                                                      
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.67 |             |  | Forty-Ninth Amendment to Convertible Debenture Purchase
Agreement dated March 21, 2003.                                                                                       
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 10.68 |             |  | Fiftieth Amendment to Convertible Debenture Purchase
Agreement dated March 27, 2003.                                                                                          
| |  |         |       |             |  |                                                                                                                                                                               
| |  |         | 99.1  |             |  | Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.