<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

                         Commission file number: 1-11578

                                   DISC, INC.
             (Exact name of registrant as specified in its charter)

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

          372 Turquoise Street                                      95035
          Milpitas, California                                    (Zip Code)
(Address of principal executive offices)
</TABLE>

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 October
31, 1998 was 3,695,434.


<PAGE>   2

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                                   DISC, INC.
                                  BALANCE SHEET
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     SEPTEMBER 30,       DECEMBER 31,
                                                         1998                1997
                                                     -------------       ------------
<S>                                                  <C>                 <C>         
ASSETS
Current assets:
   Cash                                              $    667,000        $    436,000
   Accounts receivable, net of allowance for
    doubtful accounts of $120,000 and $89,000           1,944,000           1,768,000
   Inventories                                          1,809,000           1,465,000
   Prepaids and deposits                                  100,000              73,000
                                                     ------------        ------------
      Total current assets                              4,520,000           3,742,000

Property and equipment, net                               438,000             402,000
                                                     ------------        ------------
                                                     $  4,958,000        $  4,144,000
                                                     ============        ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                  $    981,000        $  1,332,000
   Borrowings under credit line                         1,511,000           1,338,000
   Other accrued liabilities                              363,000             324,000
   Accrued warranty                                        76,000              79,000
                                                     ------------        ------------

      Total current liabilities                         2,931,000           3,073,000
                                                     ============        ============

Shareholders' equity:
   Convertible Preferred Stock; no par value, 
     10,000,000 shares authorized, 4,616,936 and
     3,395,304 shares issued and outstanding           14,637,000          12,742,000
   Common Stock; no par value, 20,000,000 shares
     authorized; 3,695,434 and 3,334,323 shares
     issued and outstanding                            12,053,000          11,053,000
   Accumulated deficit                                (24,663,000)        (22,724,000)
                                                     ------------        ------------
      Total shareholders' equity (deficit)              2,027,000           1,071,000
                                                     ------------        ------------
                                                     $  4,958,000        $  4,144,000
                                                     ============        ============
</TABLE>

       See the accompanying condensed notes to these Financial Statements.


                                       2

<PAGE>   3

                                   DISC, INC.
                             STATEMENT OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                               Three months ended                   Nine months ended
                                                   September 30                        September 30
                                              1998              1997              1998              1997
                                          -----------       -----------       -----------       -----------
<S>                                       <C>               <C>               <C>               <C>        
Net sales                                 $ 2,311,000       $ 2,306,000       $ 6,372,000       $ 6,153,000
                                          -----------       -----------       -----------       -----------
Costs and expenses:
   Cost of sales                            1,716,000         1,717,000         4,973,000         4,742,000
   Research and development                   340,000           381,000           992,000         1,039,000
   Marketing and sales                        482,000           522,000         1,490,000         1,511,000
   General and administrative                 251,000           218,000           764,000           688,000
                                          -----------       -----------       -----------       -----------
        Total costs and expenses            2,789,000         2,838,000         8,219,000         7,980,000
                                          -----------       -----------       -----------       -----------

Loss from operations                         (478,000)         (532,000)       (1,847,000)       (1,827,000)
Interest and other expense, net               (31,000)          (33,000)          (92,000)          (87,000)
                                          -----------       -----------       -----------       -----------
Net loss                                  $  (509,000)      $  (565,000)      $(1,939,000)      $(1,914,000)
                                          ===========       ===========       ===========       ===========

Net loss per share, basic and 
 fully diluted                            $     (0.15)      $     (0.17)      $     (0.58)      $     (0.58)
                                          ===========       ===========       ===========       ===========

Weighted average common shares
 for basic and diluted net loss 
 per share calculation                      3,334,000         3,380,000         3,334,000         3,322,000
                                          ===========       ===========       ===========       ===========
</TABLE>

       See the accompanying condensed notes to these Financial Statements.


                                       3

<PAGE>   4

                                   DISC, INC.
                             STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                      NINE MONTHS ENDED SEPTEMBER 30,
                                                         1998                1997
                                                     -------------       ------------
<S>                                                  <C>                 <C>         
Cash flows from operating activities:
   Net loss                                          $ (1,939,000)       $ (1,914,000)
   Adjustments to reconcile net loss to cash
    used in operating activities:
      Depreciation expense                                198,000             145,000
   Changes in assets and liabilities:
      Accounts receivable                                (176,000)            (27,000)
      Inventories                                        (344,000)            190,000
      Prepaids and deposits                               (27,000)           (125,000)
      Accounts payable                                   (351,000)           (366,000)
      Accrued liabilities                                  39,000             119,000
      Accrued warranty                                     (3,000)            (16,000)
                                                     -------------       ------------

Cash used in operating activities                      (2,603,000)         (1,994,000)
                                                     -------------       ------------

Cash flows used in investing activities
  for capital expenditures                               (234,000)            (94,000)
                                                     -------------       ------------

Cash flows from financing activities:
   Borrowing under bank line of credit                    173,000             169,000
   Proceeds from issuance of Common Stock               - - - -               128,000
   Proceeds from issuance of Preferred Stock            2,895,000           1,700,000
                                                     -------------       ------------

Cash provided by financing activities                   3,068,000           1,997,000
                                                     -------------       ------------

Net increase (decrease) in cash                           231,000             (91,000)
Cash at beginning of period                               436,000             305,000
                                                     -------------       ------------
Cash at end of period                                $    667,000        $    214,000
                                                     ============        ============

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest          $     90,000        $     87,000
                                                     ============        ============
</TABLE>

       See the accompanying condensed notes to these Financial Statements.


                                       4

<PAGE>   5

                                   DISC, INC.
                     CONDENSED NOTES TO FINANCIAL STATEMENTS

NOTE 1 - GENERAL

The unaudited Financial Statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the 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 those periods presented. These
Financial Statements should be read in conjunction with the Financial Statements
and notes thereto for the years ended December 31, 1997 and 1996, included in
the Company's Form 10-K. The results of operations for the interim periods are
not necessarily indicative of the results that may be expected for any other
period or for the fiscal year, which ends December 31, 1998.

NOTE 2 - INVENTORIES

The components of inventory were as follows:

<TABLE>
<CAPTION>
                                               SEPTEMBER 30,   DECEMBER 31,
                                                    1998           1997
                                                -----------    -----------
<S>                                             <C>            <C>        
Purchased component parts and subassemblies     $ 1,164,000    $ 1,052,000
Work in process                                     447,000        382,000
Finished goods                                      198,000         31,000
                                                -----------    -----------
                                                $ 1,809,000    $ 1,465,000
                                                ===========    ===========
</TABLE>

NOTE 3 - RELATED PARTY TRANSACTIONS

In February 1998, the Company sold $1,400,000 of Preferred Stock to its largest
investor. The Company issued 1,320,755 shares of Series O Preferred Stock at
$1.06 per share in connection with such sale of Preferred Stock. In addition,
holders of Series O Preferred Stock received 330,188 Common Stock Purchase
Warrants.

In March, June and September 1998, the Company received $300,000, $695,000 and
$500,000, respectively, through the issuance of subordinated convertible
debentures under its 1996 agreement (the "Agreement"), as amended, with its
largest shareholder. In accordance with the Agreement such debentures were
converted into Preferred Stock on the last day of the quarter in which the
debentures were issued. The conversion price of the debentures was 85% of the
lower of the average closing price of the Company's Common Stock for the five
trading days ended three days prior to the end of the quarter or the closing bid
price on the last day of the quarter in which the convertible debentures are
issued.

In July 1998, 111,111shares of Series D Preferred Stock and 125,000 shares of
Series E Preferred Stock were converted into 236,111 shares of the Company's
Common Stock and 12,500 shares of Series G Preferred Stock were converted into
125,000 shares of the Company's Common Stock.

NOTE 4 - NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Options and warrants to purchase shares,
and Convertible Preferred Stock outstanding were not included in the computation
of diluted net loss per share, as their effect was antidilutive for the periods
presented. Therefore, both the basic and diluted net loss per share computations
resulted in the same number and there were no reconciling items.

                           PART II - OTHER INFORMATION

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

This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934 and the Company intends that such forward-looking
statements are subject to the safe harbors created thereby. These
forward-looking statements include (i) the existence and development of the
Company's technical and manufacturing capabilities, (ii) anticipated increased
sales, (iii) potential future decreases in manufacturing costs, and (iv) the
need for, and availability of, additional financing. For this purpose, any
statements contained in this Quarterly Report on 


                                       5

<PAGE>   6

Form 10-Q except for historical information may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", believe", anticipate", "intend", "could", "estimate",
or "continue" or the negative or other variations thereof, or comparable
terminology are intended to identify forward-looking statements.

The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's 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
the control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking statements
(see "Additional Factors that May Affect Future Operating Results" on page 6 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.

Results of Operations

For the three and nine months ended September 30, 1998, the Company had sales of
$2,311,000 and $6,372,000, respectively, compared to sales of $2,306,000 and
$6,153,000 for the three and nine month periods ended September 30, 1997. These
increases were primarily due to sales to an expanded customer base. Management
believes, however, that the sales increase was limited by the continued Asian
market softness. In addition, several customers that were expected to place
large orders in the third quarter of 1998, deferred their purchasing decisions
into the fourth quarter. The general sales cycles for distribution of the
Company's products are similar to those of most businesses selling products
designed for use as part of large systems, and range from three to six months
for Value Added Resellers and small System Integrators and from one to two years
for Original Equipment Manufacturers, Product Integrators and large System
Integrators.

Cost of sales, as a percentage of sales, was 74% and 78% for the three and nine
month periods ended September 30, 1998, as compared to 74% and 77% for the
comparable 1997 periods. The Company's relatively low gross margins reflect the
Company's 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. The Company expects that, as product sales
continue to increase, 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 a result of volume purchases. The Company also
expects that its recently introduced Orion Series of products will increase the
Company's overall margins.

For the three and nine month periods ended September 30, 1998, research and
development expenses were $340,000 and $992,000, respectively, compared to
$381,000 and $1,039,000 for the comparable periods of 1997. These decreases were
primarily due to a decrease in the expenses related to the Orion project, which
was substantially complete by the end of the second quarter of 1998. The Company
believes that research and development expenses will increase moderately in the
fourth quarter of 1998 due to new projects currently under development.

Marketing and sales expenses were relatively flat at $482,000 and $1,490,000 for
the three and nine month periods ended September 30, 1998 as compared to
$522,000 and $1,511,000 for the comparable periods in 1997. The Company believes
that marketing and sales expenses will increase moderately during the remainder
of 1998 primarily related to increased direct selling expenses due to an
expected increase in sales.

General and administrative expenses were $251,000 and $764,000 for the three and
nine month periods ended September 30, 1998, compared to $218,000 and $688,000
for the comparable periods in 1997. The increase is primarily due to an increase
in headcount. General and administrative expenses are expected to remain
relatively constant in absolute terms during the remainder of 1998.

Liquidity and Capital Resources

During the nine month period ended September 30, 1998, the Company used
$2,603,000 of cash in operations, primarily to fund operating losses. During the
first nine months of 1998, the Company received $2,895,000 of equity financing
from its largest investor. 


                                       6

<PAGE>   7

The Company believes that this cash together with borrowing from the credit
line, which allows it to borrow the lesser of $1,500,000 or 80% of eligible
receivables, and cash generated from operations will be sufficient to meet its
operating requirements at least through the end of 1998, although the Company
anticipates that it will continue to incur net losses for the foreseeable
future. The ability to sustain its operations for a significant period after
December 31, 1998, will depend on the Company's ability to significantly
increase sales or raise significant additional equity or debt financing. There
is no assurance that any of these conditions will be achieved. In particular,
the Company expects to require increasing amounts of cash to finance the
Company's efforts to increase sales, which the Company plans 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, the Company intends to expand its current network of
resellers. The Company expects that it will require cash to finance purchases of
inventory to satisfy anticipated increased sales as the Company's products
achieve market acceptance.

Impact of Year 2000

Certain of the Company's business operations software programs were written 
using two digits rather than four to define the applicable year. As a result, 
those software programs are time-sensitive and recognize a date using "00" as 
the year 1900 rather than the year 2000. This could cause a system failure or 
miscalculations causing disruptions of operations, including but not limited to,
a temporary inability to process transactions, send invoices, or engage in 
similar normal business activities.

The Company has been informed by the vendor of the business operations software
used by the Company that upgrades that will bring such software into Year 2000
compliance are available and will be provided to the Company under its existing
software maintenance agreement. The Company expects to effect this upgrade of
its internal business operations software by the end of the first quarter of
1999. The Company estimates that the cost of the conversion will be
approximately $75,000.

The Company sells certain products that include various software applications.
However, the Company believes that the software components of its products,
which are self-contained software programs that run independently of external
chronology, will not be significantly affected by the year 2000. The Company is
also in the process of requesting assurance from its good and services providers
that they are, or have programs in place to be, Year 2000 compliant. The
Company's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. Although the Company has not
completed its assessment, it does not currently believe that the future costs
associated with its Year 2000 compliance program will be material.

The Company established a Year 2000 Steering Committee which reports directly to
the President and Chief Executive Officer. The committee members include
executive management and employees with expertise from various disciplines
including, but not limited to, information technology, engineering, finance,
customer service, sales, communications, facilities, procurement and human
resources. The Committee is responsible for addressing Year 2000 issues
associated with the Company's (1) business application systems including, but
not limited to, the Company's customer service, operations and financial systems
and end-user applications; (2) embedded systems, including equipment that
operates such items as the Company's telecommunications and facilities, (3)
software applications embedded in certain of the Company's products, (4) vendor
and supplier relationships; and (5) contingency planning.

The Company currently believes that neither the software developed by it as part
of its products, nor the software licensed by it for its internal use, will be
materially affected by the year 2000. However, there can be no assurance that
the Company's product software, its internal computer systems and networks or
those of its key vendors, developers and distributors will not be affected by
such Year 2000 issues, which could have a material adverse effect on the
Company's business, operating results and financial condition.

The Company is currently unable to determine its most reasonably likely worst 
case Year 2000 scenario, as it has not identified and assessed all of its 
systems, particularly its non-IT systems. As the Company completes its 
identification and assessment of internal and third-party systems, it expects 
to develop contingency plans for various worst case scenarios. The Company 
expects to have such contingency plans in place by September 1999. A failure to 
address Year 2000 issues successfully could have a material adverse effect on 
the Company's business financial condition or results of operations.

Item 4. Submission of matters to a vote of Security Holders

The Company held its Annual Meeting of Shareholders on August 25, 1998. Matters
voted upon at the meeting, and the number of shares cast for, against, or
withheld were as follows:

1.   Election of Board of Directors.

<TABLE>
<CAPTION>
                                                                                  ABSTENTIONS
                                                                                      AND
                                                 FOR             AGAINST        SHARES NOT VOTED
                                             ----------          -------        ----------------
<S>                                          <C>                 <C>                 <C>    
Frank T. Connors                             10,330,389          19,996              661,798
Michael D. Kaufman                           10,330,389          19,996              661,798
F. Rigdon Currie                             10,330,389          19,996              661,798
Arch J. McGill                               10,330,389          19,996              661,798
Michael A. McManus, Jr.                      10,330,389          19,996              661,798
J. Richard Ellis                             10,330,389          19,996              661,798
</TABLE>


2.   To increase the authorized number of shares of Preferred Stock of the
     Company to 10,000,000.

<TABLE>
<CAPTION>
                                                                        ABSTENTIONS
                                                                            AND
                                      FOR             AGAINST         SHARES NOT VOTED
                                   ----------          -------        ----------------
<S>                                <C>                 <C>                 <C>    
                                   8,833,452          60,359             2,118,372
</TABLE>


3.   Approval of appointment of Pricewaterhouse Coopers LLP as independent
     auditors for fiscal 1998.

<TABLE>
<CAPTION>
                                                                        ABSTENTIONS
                                                                            AND
                                       FOR            AGAINST         SHARES NOT VOTED
                                   ----------          -------        ----------------
<S>                                <C>                 <C>                 <C>    
                                   10,340,485          9,900               661,798
</TABLE>


Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits.

<TABLE>
<S>             <C>
          3.1   Certificate of Determination of Series O Preferred Stock, as filed, March 31, 1998.
          3.2   Certificate of Determination of Series P Preferred Stock, as filed, October 9, 1998.
          3.3   Certificate of Determination of Series Q Preferred Stock, as filed, October 9, 1998.

          10.2  Fifth Amendment to Convertible Debenture Purchase Agreement dated, September 25, 1998.

          27.1  Financial Data Schedule
</TABLE>

     (b)  Reports on Form 8-K

     During the fiscal quarter ended September 30, 1998, the Registrant did not 
file any reports on Form 8-K.


                                       7

<PAGE>   8

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

<TABLE>
<S>                                     <C>
                                        DISC, INC.

Dated November 14, 1998                 By: /s/ J. Richard Ellis
                                           -------------------------------------
                                           J. Richard Ellis
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

Dated November 14, 1998                 By: /s/ Henry Madrid
                                           -------------------------------------
                                           Henry Madrid
                                           Vice President of Finance and
                                           Chief Financial Officer
                                           (Principal Accounting Officer)
</TABLE>


                                       8

<PAGE>   9

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   DESCRIPTION
-------                                  -----------
<S>           <C>
  3.1         Certificate of Determination of Series O Preferred Stock, as filed, March 31, 1998.
  3.2         Certificate of Determination of Series P Preferred Stock, as filed, October 9, 1998.
  3.3         Certificate of Determination of Series Q Preferred Stock, as filed, October 9, 1998.
 10.2         Fifth Amendment to Convertible Debenture Purchase Agreement dated, September 25, 1998.
 27.1         Financial Data Schedule
</TABLE>