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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
________________

FORM 10-Q

|            |  |                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------
|(Mark One)x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           
|            |  | For the quarterly period ended March 31, 2002                                           
|           
|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: 1-11578DISC, 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 [ ]

The number of shares outstanding of the registrants common stock as of April 30, 2002 was 4,817,617.



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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Condensed Consolidated Financial Statements                                          
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | CONDENSED NOTES TO 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                           
|PART II  OTHER INFORMATION   
|                               | 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 10.38                 
|EXHIBIT 10.39                 
|EXHIBIT 10.40                 
|EXHIBIT 10.41                 
|EXHIBIT 10.42                 



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PART I  FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




DISC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                   |           |            |            | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------------ | --------- | -------------- | ---------- | ----------------- | --------- | ---------- | ---------- | 
|                                     |                                                                                                                 |                           |                                            |              |           | March 31, 2002 |            | December 31, 2001
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|ASSETS                               |                                                                                                                 |                           |                                            |              |           |                |            |                  
|Current assets:                      |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     | Cash                                                                                                            |                           | $                                          | 289,000      |           |                | $          | 879,000           |          
|                                     | Accounts receivable, net                                                                                        |                           |                                            | 2,005,000    |           |                |            | 2,318,000         |          
|                                     | Inventories                                                                                                     |                           |                                            | 2,964,000    |           |                |            | 2,941,000         |          
|                                     | Prepaid expenses and deposits                                                                                   |                           |                                            | 332,000      |           |                |            | 310,000           |          
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     |                                                                                                                 | Total current assets      |                                            |              | 5,590,000 |                |            |                   | 6,448,000 |           
|Property and equipment, net          |                                                                                                                 |                           | 675,000                                    |              |           |                | 771,000    |                  
|Goodwill                             |                                                                                                                 |                           | 3,182,000                                  |              |           |                | 3,182,000  |                  
|Other intangible assets, net         |                                                                                                                 |                           | 2,869,000                                  |              |           |                | 3,059,000  |                  
|Other assets                         |                                                                                                                 |                           | 40,000                                     |              |           |                | 31,000     |                  
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     |                                                                                                                 |                           |                                            | Total assets |           | $              | 12,356,000 |                   |           | $          | 13,491,000 | 
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                 |                           |                                            |              |           |                |            |                  
|Current liabilities:                 |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     | Lines of credit                                                                                                 |                           | $                                          | 877,000      |           |                | $          | 1,402,000         |          
|                                     | Current portion of long term debt                                                                               |                           |                                            | 378,000      |           |                |            | 361,000           |          
|                                     | Accounts payable                                                                                                |                           |                                            | 3,662,000    |           |                |            | 3,022,000         |          
|                                     | Accrued expenses and other liabilities                                                                          |                           |                                            | 1,805,000    |           |                |            | 2,027,000         |          
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     |                                                                                                                 | Total current liabilities |                                            |              | 6,722,000 |                |            |                   | 6,812,000 |           
|Other liabilities, long-term         |                                                                                                                 |                           | 159,000                                    |              |           |                | 119,000    |                  
|Term loans, net of current portion   |                                                                                                                 |                           | 1,318,000                                  |              |           |                | 1,422,000  |                  
|Deferred tax liability, net          |                                                                                                                 |                           | 1,151,000                                  |              |           |                | 1,151,000  |                  
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     |                                                                                                                 |                           | Total liabilities                          |              |           | 9,350,000      |            |                   |           | 9,504,000  |           
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|Shareholders equity:                |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     | Convertible Preferred Stock; no par value:                                                                      |                           |                                            |              |           |                |            |                   |          
|                                     | 10,000,000 shares authorized; 5,549,258 and
5,485,235 shares issued and outstanding                             |                           |                                            | 24,262,000   |           |                |            | 23,552,000        |          
|                                     | Common Stock; no par value: 40,000,000 shares
authorized; 4,817,617 and 4,817,617 shares
issued and outstanding |                           |                                            | 16,890,000   |           |                |            | 16,725,000        |          
|                                     | Accumulated deficit                                                                                             |                           |                                            | (38,165,000  | )         |                |            | (36,254,000       | )        
|                                     | Accumulated other comprehensive income (loss)                                                                   |                           |                                            | 19,000       |           |                |            | (36,000           | )        
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|Total shareholders equity           |                                                                                                                 |                           | 3,006,000                                  |              |           |                | 3,987,000  |                  
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  
|                                     |                                                                                                                 |                           | Total liabilities and shareholders equity |              | $         | 12,356,000     |            |                   | $         | 13,491,000 |           
|                                     |                                                                                                                 |                           |                                            |              |           |                |            |                  

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,
|                                                                                    |                            |   |                             
|                                                                                    |                            |   | 2002                         |           | 2001
|                                                                                    |                            |   |                              |           |     
|Net sales                                                                           |                            | $ | 2,653,000                    |           |      | $ | 1,562,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          
|Costs and expenses:                                                                 |                            |   |                              |           |      |   |            |          
|                                                                                    | Cost of sales              |   |                              | 2,235,000 |      |   |            | 1,404,000 | 
|                                                                                    | Research and development   |   |                              | 610,000   |      |   |            | 372,000   | 
|                                                                                    | Marketing and sales        |   |                              | 1,079,000 |      |   |            | 752,000   | 
|                                                                                    | General and administrative |   |                              | 387,000   |      |   |            | 278,000   | 
|                                                                                    | Intangible amortization    |   |                              | 190,000   |      |   |            |          | 
|                                                                                    |                            |   |                              |           |      |   |            |          
|                                                                                    |                            |   | 4,501,000                    |           |      |   | 2,806,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          
|Loss from operations                                                                |                            |   | (1,848,000                   | )         |      |   | (1,244,000 | )        
|Interest and other expense, net                                                     |                            |   | (63,000                      | )         |      |   | (23,000    | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss                                                                            |                            |   | (1,911,000                   | )         |      |   | (1,267,000 | )        
|Deemed preferred stock dividend                                                     |                            |   | (495,000                     | )         |      |   | (466,000   | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss attributable to common shareholders                                        |                            | $ | (2,406,000                   | )         |      | $ | (1,733,000 | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Net loss per share attributable to common
shareholders  basic and diluted          |                            | $ | (0.50                        | )         |      | $ | (0.45      | )        
|                                                                                    |                            |   |                              |           |      |   |            |          
|Weighted average common shares for basic
and diluted net loss per share calculation |                            |   | 4,818,000                    |           |      |   | 3,844,000  |          
|                                                                                    |                            |   |                              |           |      |   |            |          

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,
|                                                  |                                                                         |                                               |                                           |            |                             
|                                                  |                                                                         |                                               |                                           |            | 2002                         |          | 2001   
|                                                  |                                                                         |                                               |                                           |            |                              |          |        
|Cash flows from operating activities:             |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  | Net loss                                                                |                                               | $                                         | (1,911,000 | )                            |          | $       | (1,267,000 | )       
|                                                  | Adjustments to reconcile net loss to cash used
in operating activities: |                                               |                                           |            |                              |          |         |            |         
|                                                  |                                                                         | Depreciation and amortization expense         |                                           |            | 294,000                      |          |         |            | 76,000   |           
|                                                  |                                                                         | Provision for allowance for doubtful accounts |                                           |            | 12,000                       |          |         |            | 4,000    |           
|                                                  |                                                                         | Provision for inventory reserve               |                                           |            | 41,000                       |          |         |            | 23,000   |           
|                                                  | Changes in assets and liabilities:                                      |                                               |                                           |            |                              |          |         |            |         
|                                                  |                                                                         | Accounts receivable                           |                                           |            | 288,000                      |          |         |            | 431,000  |           
|                                                  |                                                                         | Inventories                                   |                                           |            | (93,000                      | )        |         |            | (43,000  | )         
|                                                  |                                                                         | Prepaid expenses and deposits                 |                                           |            | (23,000                      | )        |         |            | (114,000 | )         
|                                                  |                                                                         | Accounts payable                              |                                           |            | 673,000                      |          |         |            | (284,000 | )         
|                                                  |                                                                         | Accrued expenses and other liabilities        |                                           |            | (172,000                     | )        |         |            | 110,000  |           
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  |                                                                         |                                               | Net cash used in operating activities     |            |                              | (891,000 | )       |            |          | (1,064,000 | )
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Cash flows used in investing activities:          |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  | Purchase of property and equipment                                      |                                               |                                           | (13,000    | )                            |          |         | (76,000    | )       
|                                                  | Purchase of other assets                                                |                                               |                                           | (9,000     | )                            |          |         |           |         
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  |                                                                         |                                               | Net cash used in investing activities     |            |                              | (22,000  | )       |            |          | (76,000    | )
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Cash flows from financing activities:             |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  | Term loans, net                                                         |                                               |                                           | (58,000    | )                            |          |         |           |         
|                                                  | Lines of credit, net                                                    |                                               |                                           | (506,000   | )                            |          |         | 505,000    |         
|                                                  | Proceeds from issuance of Common Stock                                  |                                               |                                           |           |                              |          |         | 6,000      |         
|                                                  | Proceeds from issuance of Preferred Stock and
warrants for Common Stock |                                               |                                           | 875,000    |                              |          |         | 1,300,000  |         
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  |                                                                         |                                               | Net cash provided by financing activities |            |                              | 311,000  |         |            |          | 1,811,000  |  
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Effect of exchange rate change on cash            |                                                                         |                                               | 12,000                                    |            |                              |          |        |           
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Net increase (decrease) in cash                   |                                                                         |                                               | (590,000                                  | )          |                              |          | 671,000 |           
|Cash at beginning of period                       |                                                                         |                                               | 879,000                                   |            |                              |          | 128,000 |           
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Cash at end of period                             |                                                                         | $                                             | 289,000                                   |            |                              | $        | 799,000 |           
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           
|Supplemental disclosure of cash flow information: |                                                                         |                                               |                                           |            |                              |          |         |           
|                                                  | Interest paid                                                           |                                               | $                                         | 63,000     |                              |          | $       | 23,000     |         
|                                                  |                                                                         |                                               |                                           |            |                              |          |         |           

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

We
have prepared the unaudited condensed interim 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, 2001 and 2000 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, 2002, or for any other period.

In March 2002, we received a written commitment from our largest investor,
MK GVD Fund, to provide the necessary financial and other resources to us to
support our operations through April 16, 2003. We believe that this funding
commitment, together with cash generated from operations, will be sufficient to
meet our operating requirements through April 16, 2003, although we anticipate
that we will continue to incur net losses for the foreseeable future. The
ability to sustain our operations for a significant period after April 16, 2003
will depend on our 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 our business.

Basis of Consolidation

The
unaudited condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All 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 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, |           | December 31,
|                         |                                             |   | 2002      |           | 2001        
|                         |                                             |   |           |           |             
|Inventories:             |                                             |   |           |           |              |   |           |          
|                         | Purchased component parts and subassemblies |   | $         | 2,037,000 |              |   | $         | 2,119,000 |  
|                         | Work-in-process                             |   |           | 515,000   |              |   |           | 494,000   |  
|                         | Finished goods                              |   |           | 412,000   |              |   |           | 328,000   |  
|                         |                                             |   |           |           |              |   |           |          
|                         |                                             | $ | 2,964,000 |           |              | $ | 2,941,000 |          
|                         |                                             |   |           |           |              |   |           |          
|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              |   |           | (507,000  | )            |   |           | (317,000  | )
|                         |                                             |   |           |           |              |   |           |          
|                         |                                             | $ | 2,869,000 |           |              | $ | 3,059,000 |          
|                         |                                             |   |           |           |              |   |           |          

Accounts receivable at March 31, 2002 and December 31, 2001 are presented
net of an allowance for doubtful accounts of $253,000 and $275,000,
respectively.

Note 3  Related Party Transactions

During the three months ended March 31, 2002, the Company sold and MK GVD
Fund, the principal shareholder, purchased 2,252, 16,260, 6,667, 24,138, and
14,706 shares of convertible preferred stock, Series GG, HH, II, JJ, and KK,
respectively, and warrants under a formula set out in a March 1996 agreement
for aggregate proceeds of $25,000, $200,000, $100,000, $350,000 and $200,000
respectively. The warrants allow the holder to purchase 5,630, 40,650, 16,666,
60,344, and 36,764 shares of common stock for an exercise price of $1.39,
$1.54, $1.87, $1.81 and $1.70 per share, respectively. 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 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 was determined using a Black Scholes option
pricing model with the following assumptions: volatility of 144.4%; risk free
interest rates ranging from 4.51%-4.94%; expected life: 5 years and no dividend
yield. The fair value of the warrants is recorded in shareholders equity.

Note 4  Term Loans

DISC
GmbH is in the process of renegotiating its term loans with their
bank. The Company expects this process to be completed by the end of
June 2002.

Note 5  Comprehensive Loss

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

|                                  |  |                              |            |      |  |   |            |  
|--------------------------------- |  | ---------------------------- | ---------- | ---- |  | - | ---------- | -
|                                  |  | Three Months ended March 31,
|                                  |  |                             
|                                  |  | 2002                         |            | 2001
|                                  |  |                              |            |     
|Net loss                          |  | $                            | (1,911,000 | )    |  | $ | (1,267,000 | )
|Foreign currency translation gain |  |                              | 55,000     |      |  |   |           |  
|                                  |  |                              |            |      |  |   |            |  
|Total comprehensive loss          |  | $                            | (1,856,000 | )    |  | $ | (1,267,000 | )
|                                  |  |                              |            |      |  |   |            |  

Note 6  Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which is effective for fiscal years beginning after March 15, 2001.
SFAS No. 142 requires, among other things, the

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discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing
goodwill and other intangibles. The Company has implemented SFAS
No. 142 effective January 1, 2002 and has subsequently
performed the transitional impairment test and has determined that
there was no impairment.

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,
|              |  |                             
|              |  | 2002                         |           | 2001
|              |  |                              |           |     
|North America |  | $                            | 1,773,000 |      |  | $ | 1,397,000 | 
|Europe        |  |                              | 676,000   |      |  |   | 162,000   | 
|Asia          |  |                              | 102,000   |      |  |   |          | 
|Others        |  |                              | 102,000   |      |  |   | 3,000     | 
|              |  |                              |           |      |  |   |           | 
|              |  | $                            | 2,653,000 |      |  | $ | 1,562,000 | 
|              |  |                              |           |      |  |   |           | 

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

Results of Operations

For the three months ended March 31, 2002, the company had sales of
$2,653,000, compared to sales of $1,562,000 for the three months ended March
31, 2001. The increase was primarily related to our July 2001 acquisition of
NSM Storage GmbH and an increase in the sale of media and service revenue. 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
information technology 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 84% for the three
months ended March 31, 2002, as compared to 90% for the comparable 2001 period,
primarily due to the addition of the NSM product line which has a lower per
unit cost. 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, 2002, research and development
expenses were $610,000 compared to $372,000 for the comparable period of 2001.
The increase for the three month period ended March 31, 2002 as compared to the
comparable period of 2001 was primarily due to an increase in headcount in
connection with the acquisition of NSM. We believe that research and
development expenses will remain relatively constant in dollar
amounts during the remainder of
2002.

Marketing and sales expenses were $1,079,000 for the three months ended
March 31, 2002 compared to $752,000 for the comparable period in 2001. The
increase for the three months ended March 31, 2002 as compared to the
comparable period in 2001 is primarily due to an increase in headcount and
related marketing and sales expenses related to the acquisition of NSM. We
believe that marketing and sales expenses will increase in dollar
amounts during the remainder of
2002 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.

General and administrative expenses were $387,000 for the three months
ended March 31, 2002 compared to $278,000 for the comparable period in 2001.
The increase is primarily due to an increase in headcount in connection with
the acquisition of NSM. General and administrative expenses are expected to
remain relatively constant in dollar amounts during the remainder of 2002.

Intangible amortization of $190,000 for the three months ended March 31,
2002 consists of the amortization of acquired intangible assets. The July 2001
acquisition of NSM 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 2002.

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Amortization could be affected by other acquisitions or impairment of
existing identified intangible assets in future periods.

Interest expense was $63,000 for the three months ended March 31, 2002 as
compared to $23,000 for the three months ended March 31, 2001. The increase is
primarily due to the interest on the debt assumed from the acquisition of NSM.

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, 2002 was $891,000 compared to $1,064,000 used for the comparable
period in 2001. Net cash used in operating activities in 2002 primarily
reflects a loss of $1,911,000 partially offset by an increase in accounts
payable of $673,000, a decrease in accounts receivable of $288,000 and
depreciation and amortization of $294,000. Net cash used in operating
activities in 2001 primarily reflects a loss of $1,267,000 partially offset by
a decrease in accounts receivable of $431,000.

Net cash used in investing activities was $22,000 for the three months
ended March 31, 2002 compared to $76,000 for the three months ended March 31,
2001 and primarily consisted of purchases of information systems hardware.

Net cash provided by financing activities was $311,000 for the three
months ended March 31, 2002 compared to $1,811,000, provided for the three
months ended March 31, 2001. 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. Net cash provided in 2001 consisted primarily
of $1,300,000 of net proceeds from the issuance of preferred stock and a
$505,000 increase in the borrowings under the companys factoring agreement.

We have a factoring agreement that allows us to borrow the lesser of
$1,500,000 or 85% of eligible receivables. At December 31, 2001
and March 31, 2002, we were not
in compliance with the tangible net assets covenant of the agreement. The
Company has requested a waiver of the non-compliance, and although a waiver has
not been received, borrowings have continued under the agreement. DISC
GmbH is in the process of renegotiating its term loans with their
bank. The Company expects this process to be completed by the end of
June 2002.

At March 31, 2002, we had a cash balance of approximately $289,000. In
addition, we have a written commitment from our largest investor, MK GVD Fund,
to provide the necessary resources to support the companys operation through
April 16, 2003. We believe this commitment, together with
cash generated from operations, will be sufficient to meet our operating
requirements through April 16, 2003. However, we anticipate that we will
continue to incur net losses for the foreseeable future. The ability to
sustain our operations for a significant period after April 16, 2003 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 and the support

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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;
|
| |  |  | 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.                     

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
Additional Factors that May Affect Future Operating Results and the Market
Price of our Stock starting on page 9 of our annual report on Form 10-K for
the year ended December 31, 2001 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.
-9-Table of ContentsFactors That May Affect Future Operating Results and the Market Price of Our
StockOur 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:Any inability to meet our future capital requirements would limit our
ability to grow.To date, we have not generated enough cash from operations to fund our
business, and we will likely need to seek additional funding in the future. In
the event we need to raise additional funds, we may not be able to do so on
favorable terms, if at all. We have a firm commitment from our largest
investor, MK GVD Fund, to provide us with the necessary financial resources to
support our operations through April 16, 2003. However, there can be no
assurance that this investor, or any of our other investors, will be willing to
make similar commitments in the future. 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. If we cannot raise funds on acceptable terms or if
financing is not available at all, we may not be able to fund our operations,
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements.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, 2002 had an accumulated deficit of $38,165,000. 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, 2002 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. 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.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;
   
   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;-10-Table of Contents
   
   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 Storage 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 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
-11-Table of Contentswe 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.We recently acquired NSM Storage GmbH, which we renamed DISC, GmbH. If we
are not successful in integrating its products, services, technology and
operations with ours, including coordinating our research development and sales
and marketing efforts, the net sales and operating results of the combined
company could decline. During the integration of NSM, our financial
performance will be subject to risks commonly associated with an acquisition,
including the financial impact of expenses necessary to realize benefits from
the acquisition and the potential for disruption of operations, including the
diversion of managements attention. We will face difficulties integrating
personnel with disparate backgrounds and combining corporate cultures, and we
may lose key employees. We may also lose customers and potential customers of
NSM in connection with the transition of ownership or otherwise.In
addition, 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 product 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. We may not be able to accurately predict a potential impairment of the
goodwill resulting from the acquisition or of the identified intangible assets.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;-12-Table of Contents
   
   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 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;-13-Table of Contents
   
   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.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, 2002, our executive officers, directors and principal
shareholders beneficially owned, in the aggregate, approximately 88% of our
outstanding common stock, preferred stock and warrants, on an as-if-converted
basis. In particular, our largest investor beneficially owns approximately 87%
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
-14-Table of Contentsofficers, 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.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.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 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.
-15-Table of ContentsUndetected 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.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, 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.
-16-Table of ContentsWe rely on a continuous power supply to conduct our operations, and
Californias current energy crisis could disrupt our operations and increase
our expenses.In early 2001, California experienced an energy crisis that disrupted the
operations of many companies in California. In the event of an acute power
shortage, that is, when power reserves for the state of California fall below
certain critical levels, California has on some occasions implemented, and may
in the future continue to implement, rolling blackouts throughout California.
We currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for
any damages our customers or we may suffer as a result of any interruption in
our power supply. If California were to experience a similar energy crisis in
the future, and if blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our California facilities. Any
such interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market RiskWe are not exposed to significant market risk related to fluctuations in
interest rates related to interest income, because we are not expected to have
significant investments in fiscal 2002. 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.-17-Table of Contents
PART II  OTHER INFORMATION
Item 2. Changes in Securities and Use of ProceedsAs more fully discussed in Note 4 to the Condensed Notes to Consolidated
Financial Statements, we have issued 2,252 shares of our Series GG preferred
stock, 16,260 shares of our Series HH preferred stock, 6,667 shares of our
Series II preferred stock, 24,138 shares of our Series JJ preferred stock and
14,706 shares of our Series KK preferred stock. The preferred stock have
certain rights, privileges and preferences (including liquidation preferences)
over our common stock.
Item 4. Submission of Matters to a Vote of Security HoldersNo matters were submitted to a vote of our security holders during the
first quarter of the fiscal year ended December 31, 2002.
Item 6. Exhibits and Reports on Form 8-K(a) Exhibits.

|        |  |                                                                                          
|------- |  | -----------------------------------------------------------------------------------------
|Exhibit |  |                                                                                          
|Number  |  | Description                                                                              
|        |  |                                                                                          
|10.38   |  | Twentieth Amendment to Convertible Debenture Purchase
Agreement dated March 6, 2002.     
|10.39   |  | Twenty-First Amendment to Convertible Debenture Purchase
Agreement dated March 15, 2002. 
|10.40   |  | Twenty-Second Amendment to Convertible Debenture Purchase
Agreement dated March 19, 2002.
|10.41   |  | Twenty-Third Amendment to Convertible Debenture Purchase
Agreement dated March 26, 2002. 
|10.42   |  | Twenty-Fourth Amendment to Convertible Debenture Purchase
Agreement dated March 27, 2002.

(b) Reports on Form 8-K

Current Report on Form 8-K filed on March 12, 2002 announcing the
appointment of Robert W. Riland III to President and CEO.

-18-



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##### Table of Contents






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, 2002 |  | By:        |  | /s/ Robert W. Riland III
Robert W. Riland III
President and Chief Executive Officer
(Principal Executive Officer)               
|                   
|                   
|Dated: May 15, 2002 |  | By:        |  | /s/ Henry Madrid
Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

-19-



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                          
|------- |  | -----------------------------------------------------------------------------------------
|Exhibit |  |                                                                                          
|Number  |  | Description                                                                              
|        |  |                                                                                          
|10.38   |  | Twentieth Amendment to Convertible Debenture Purchase
Agreement dated March 6, 2002.     
|10.39   |  | Twenty-First Amendment to Convertible Debenture Purchase
Agreement dated March 15, 2002. 
|10.40   |  | Twenty-Second Amendment to Convertible Debenture Purchase
Agreement dated March 19, 2002.
|10.41   |  | Twenty-Third Amendment to Convertible Debenture Purchase
Agreement dated March 26, 2002. 
|10.42   |  | Twenty-Fourth Amendment to Convertible Debenture Purchase
Agreement dated March 27, 2002.