<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                              --------------------
                                   FORM 10-K/A

(MARK ONE)

    [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       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)


               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 office)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                           COMMON STOCK, NO PAR VALUE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      NONE


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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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K/X is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A/X/.

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock as of March
21, 2001 as quoted on the Nasdaq Small-Cap Market was approximately $5,700,000.

The number of outstanding shares of the registrant's Common Stock as of March
21, 2001 was 3,849,637.

================================================================================

REASON FOR THE AMENDMENT

The Company has restated its 2000, 1999, 1998, financial statements to account
for the beneficial conversion feature associated with the issuances of
convertible preferred stock. See Note 11 to the financial statements.


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                                   DISC, INC.
                                   FORM 10-K/A

                                      INDEX

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<S>      <C>                                                                                  <C>
                                        PART I

Item 1.  Business.........................................................................      1

Item 2.  Properties.......................................................................      8

Item 3.  Legal Proceedings................................................................      8


Item 4.  Submission of Matters to a Vote of Security Holders..............................      8

                                        PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters............     11

Item 6.  Selected and Supplementary Financial Data........................................     11

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of
           Operations.....................................................................     13

Item 7A. Quantitative And Qualitative Disclosures About Market Risk ......................     15

Item 8.  Financial Statements and Supplementary Data......................................     15

Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial
           Disclosure.....................................................................     16

                                        PART III

Item 10.  Directors and Executive Officers of the Registrant..............................     16

Item 11.  Executive Compensation..........................................................     17

Item 12.  Security Ownership of Certain Beneficial Owners and Management..................     21

Item 13.  Certain Relationships and Related Transactions..................................     24

                                        PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.................     24
</TABLE>
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                                     PART I

INTRODUCTORY NOTE

This Annual Report on Form 10-K/A 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 such forward-looking statements are subject to the safe harbors created by
those provisions. These forward-looking statements include (i) the existence and
development of our technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, (v) potential future entry into new
markets, and (vi) the need for, and availability of, additional financing. For
this purpose, any statements contained in this Annual Report on Form 10-K/A
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 those terms, or comparable
terminology are intended to identify forward-looking statements.

The forward-looking statements included in this Annual Report on Form 10-K/A 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, there can be no assurance 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 the forward-looking statements (see "ADDITIONAL FACTORS
THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR STOCK" in
Item 1 and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS"). In light of the significant uncertainties inherent
in the forward-looking information included in this Annual Report on Form
10-K/A, 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 or that expectations will be realized.

ITEM 1. BUSINESS.


GENERAL

DISC, Inc. was incorporated under the laws of the State of California in 1986.
We operate in one business segment, the computer mass storage system business.
We design, manufacture, and market a family of high-end computer nearline
storage systems, which use 5.25 inch rewritable, magneto optical disks (MO),
DVD-RAM, and CD-ROM disks. We believe we are the only supplier of information
storage products currently offering a range of storage capacities up to 9.5
terabytes in the 5.25-inch optical disk libraries and up to 1,470 CD-ROM
platters.

PRODUCTS

We have spent most of 2000 redefining our product offering to address the
storage requirements of today's enterprise storage networks. Traditionally,
applications for our products include federal and local government, military
applications, insurance, banking, legal, multimedia, medical applications and
network storage environments on a worldwide basis. Sales of our initial product
line commenced in 1991 and have been primarily to distributors, value added
resellers (VARs), original equipment manufacturers (OEMs) and system integrators
(SIs), who combine DISC nearline storage systems with software and/or other
products and resell the combination to the end-user or other members of the
supply channel.

However, to implement our new strategy and vision of delivering storage
solutions for enterprise networks, a refocusing of our product lines and sales
and marketing efforts was required. As the demand for storage in traditional
networking environments grows at unprecedented rates, the capacity points have
reached the levels of the niche markets that we have historically served. Our
new product lines are built around the fact that we build storage devices that
add capacity to networks for a fraction of the cost of RAID (Redundant Array of
Intelligent Disks.) In addition to offering cost-effective nearline storage
devices, we have


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spent a considerable amount of our resources designing and delivering network
attach storage (NAS) servers to enable seamless connectivity of our storage
devices.

Our products, which add storage capacity to networks for a fraction of the cost
of RAID, are based upon reliable, industry proven storage technologies. The
underlying technologies are DVD-RAM and 5.25-inch Magneto-optical. With a shelf
life exceeding 30 years, random access reading and writing, the DISC family of
products is suited for today's network storage environments.

We are currently shipping three classes of products that provide nearline
storage solutions for mainstream network environments. The first class is our
Orion series, an automated library system built around the magneto-optical
technology. These enterprise level products scale in capacity from 180 gigabytes
(GB) of storage to 9.59 terabytes (TB) of storage. The Orion D-1050 is largest
of these products and provides 9.59 TB of storage in 13.75 square feet of floor
space, with an end-user price per megabyte as little 3.5 cents.

The second class of product that we offer is the DV Series, an automated library
system built around DVD-RAM and CD technology. These DV Series scale in capacity
from 40 GB of storage to 2.8TB of storage and give our customers an entry-level
storage solution that was not previously available. The DV Series product line
is based on a modular technology that allows the same options and upgrades to be
used throughout the DV-Series product line. The DV Series offers some of the
most cost-effective storage in the industry with an end-user cost per megabyte
as little as 1.2 cents.

The third class of products that we offer is our DISCstor/NAS product line of
network-attach storage (NAS) products. These products allow all of our products
to be seamlessly connected to multiple network environments. The DISCstor/NAS
product line allows users to attach our storage products to networks with a
simplicity that has not previously existed. The DISCstor/NAS product line gives
us the ability to sell complete storage solutions into any networking
environments and allows users to add multi-terabyte storage solutions to their
networks with an unprecedented level of simplicity.

The DISC family of products is designed to provide additional storage capacity
to networks for a fraction of the cost of RAID, and is built with the high
quality and reliability that is demanded at the enterprise storage level.

MARKETING AND SALES

Over the last year we have made considerable investments in sales and marketing.
Our marketing efforts have been fortified with new personnel, new company image
and a new web presence. Along these same lines we have added a host of new sales
tools that will allow us to penetrate the new markets of mainstream data
storage.

We have also re-vamped our entire sales organization by adding sales
professionals that are focused on selling solutions for data storage. The entire
sales force is focused on growing our channel of storage VARs and providing them
with better data storage solutions to offer their customer.

Our products are installed and serviced by an international network of
maintenance technicians from Kodak and Anacomp Inc. Our support staff, located
strategically across the country, provides technical assistance and second level
support.

Our sales offices are located in Milpitas, California; Boston, Massachusetts;
Washington, District of Columbia; Dallas, Texas; Phoenix, Arizona; Chicago,
Illinois and Crowborough, East Sussex, England. Our sales staff currently
consists of ten professional salespersons.

COMPETITION

We are currently selling nearline storage solutions for networks. While there
are few direct competitors selling the type of solutions that we sell, there are
many indirect competitors. Our main competition in this new market is the
end-users next purchase of storage capacity for their network storage system. As
end-users need to increase their pool of available storage, our products are one
of the most cost-effective alternatives. This being said, our competitors
include the top vendors that supply enterprise-level storage. These companies
are EMC, Dell, Sun Microsystems, Hewlett-Packard and IBM.

         In the traditional automated library business, our competitors are
Hewlett-Packard, Plasmon, Advanced Digital Information Corporation (ADIC), JVC
and Pioneer.

All of these competitors may compete with us by selling similar products for
lower prices or by introducing new products that provide greater storage
capacity, faster access time or other improved features, any of which could
reduce demand for our


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products or require us to reduce its prices. This competition could have a
material adverse effect on our results of operations. Many of our competitors
have significantly greater financial, technical, manufacturing and marketing
resources than our company, as well as significant market shares and installed
customer bases in certain market areas addressed by us. As a result, we may not
have the ability to keep pace with rapid competitive developments and
technological advances to the same extent as its competitors.

However, we maintain an active program of research and development in an effort
to keep pace with potential competition and we have close relationships with
companies developing new high-density optical storage technologies.

The principal market requirements for our products are large storage capacity,
low cost per megabyte, reliability, compact physical size and random access.
While desired capabilities generally vary by product family and end user
application, we believe that, because of its modular design, easy scalability,
high performance and reliability, DISC products will compete favorably with
respect to the requirements of the secondary mass data storage market.

Further discussion relating to the competitive conditions in the computer mass
storage system industry and our competitive position in the marketplace may be
found in "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE
MARKET PRICE OF OUR STOCK" under the heading "COMPETITION IN THE COMPUTER
INFORMATION STORAGE MARKET MAY LEAD TO REDUCED MARKET SHARE, DECLINING PRICES
AND REDUCED PROFITS."

MANUFACTURING AND COMPONENTS

Our manufacturing operations consist of final system assembly and product test
activities. The majority of the parts and subassemblies in the DISC libraries
are standard, off-the-shelf components or are fabricated to DISC's manufacturing
documentation. These include power supplies, castings, motors, bearings, timing
belts and electronic components. Our proprietary components, such as the frame,
backplate, printed circuit assemblies and other machined and fabricated parts
are subcontracted out to independent vendors.

We purchase certain components from a single source of supply. Where we rely on
single sources of supply, we generally have been able to obtain supplies of
these components in a timely manner and maintain an adequate inventory of
components to meet our needs. We believe alternative supplies for several
components are available on reasonable terms. However, failure of sources of
supply and an inability of to develop alternative sources of supply as required
in the future could have a material adverse effect on our operations.

RESEARCH AND DEVELOPMENT

We have focused our research and development programs to provide software
storage solutions for our automated library systems. Network attached storage
(NAS) server development has been the most important aspect of our development
efforts over the past year. These efforts have yielded products that allow our
customers to seamlessly connect our storage products to networks. Our efforts
continue to be active and consist of nine full-time employees in the areas of
mechanical and electrical engineering and software design. One of the keys to
our success going forward is continued improvement of our storage connectivity
solutions. We expended $1,158,000 $1,111,000 and $1,290,000 on research and
development for the years ended December 31, 2000, 1999 and 1998, respectively.
We have completed our major development efforts with respect to our 5.25 inch
optical and CD products. We intend to continue to expand research and
development activities in order to conduct on-going development of existing
products and to develop new products targeted at the general storage market.

SALES AND BACKLOG

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.

Our backlog at December 31, 2000 was approximately $245,000 as compared to a
backlog of approximately $75,000 at December 31, 1999. We include in backlog
only orders for products which are believed to be firm and which are due to be
shipped within 12 months. We include in backlog orders that may be canceled by
customers upon payment of cancellation charges which vary depending on the
scheduled shipment date of the order. Because of the possibility of customer
changes in delivery schedules or cancellation of orders, our backlog as of any
particular date may not be indicative of actual revenues for


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any specific future period. Although we have never experienced material
cancellation problems, no assurance can be given that we will continue to avoid
cancellation problems in the future.

PATENTS AND OTHER INTELLECTUAL PROPERTY

We have received U.S. patents covering various aspects of our technology,
including the overall system design of our products. Our existing patents expire
between 2007 and 2014. There can be no assurance that any subsequent patent
applications will be granted. We believe that ownership of our patents is an
important factor in our business and our success does depend in part on the
ownership of them. However, we believe that the improvement of its existing
products, reliance upon trade secrets and copyrights and on unpatented
proprietary know-how and innovation in the development of new products are
generally as important as patent protection in establishing and maintaining our
technological advantage. We believe that the value of our products is partly
dependent upon our confidentiality and invention assignment agreements with our
employees. While we believe that patent, copyright and trade secret laws should
afford adequate protection of our proprietary technology, 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. Such competition could have a material adverse effect on us. In
addition, policing unauthorized use of our technology, particularly in foreign
countries, may be difficult. We have not received claims from third parties
alleging that our products infringe the proprietary rights of third parties or
seeking indemnification against such infringements and know of no basis for any
such claims. However, there can be no assurance that such claims will not be
made in the future. Such claims, if asserted, may involve costly and protracted
litigation and we may be required to license proprietary rights from third
parties. There can be no assurance that we would be able to obtain licenses from
third parties on commercially reasonable terms.

ENVIRONMENTAL LAWS

Compliance with U.S. federal, state and local laws enacted for the protection of
the environment has to date had no material effect upon our capital
expenditures, earnings or competitive position. Although we do not anticipate
any material adverse effects in the future based on the nature of our operations
and the thrust of those laws, no assurance can be given that such laws, or any
future laws enacted for the protection of the environment, will not have a
material adverse effect on us.

EMPLOYEES

As of February 28, 2001, we employ 54 people on a full-time basis, including 6
employees in administration and accounting, 12 employees in marketing and sales,
10 employees in engineering, 18 employees in manufacturing, 3 employees in
quality assurance and 5 employees in customer support. Our future success is
dependent, in part, on our continued ability to attract, retain and motivate
highly skilled personnel. We believe that our relations with all employees are
satisfactory. None of our employees are covered by a collective bargaining
agreement.

OTHER MATTERS

Compaq Computer Corporation and Commvault Systems Inc., two OEM customers,
accounted for 14% and 13%, respectively, of our total revenue in 2000. Commvault
Systems Inc. accounted for 23% of our total revenue in 1999. No single customer
accounted for 10% or more of our total revenue in 1998.

No material portion of our business is subject to renegotiation of profits or
contract termination at the election of the U.S. government.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE
OF OUR STOCK

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

OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE FOR A NUMBER OF
REASONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.


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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;

-    timing and levels of our operating expenses;

-    gain or loss of significant customers or distributors; and

-    personnel changes

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.

Operating results in any period should not be considered indicative of the
results investors can expect for any future period. 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.

OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.

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

-    announcements about us or our competitors;

-    quarterly variations in operating results;

-    the introduction of new technologies or products;

-    changes in product pricing policies by us or our competitors;

-    comments regarding us and the data storage market made on Internet bulletin
     boards; and

-    changes in earnings estimates by analysts or changes in accounting
     policies.

In addition, stock markets have experienced extreme price and volume volatility
in recent years. This volatility has had a substantial effect on the market
prices of securities of many smaller public companies for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of our common stock.


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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 System 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.

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, or SANs, and network attached storage, or NAS,
devices. The introduction of new products embodying new or alternative
technology or the emergence of new industry standards could render our existing
products obsolete or unmarketable. Our future success will depend in part on our
ability to anticipate changes in technology, to gain access to such technology
for incorporation into our products and to develop new and enhanced products on
a timely and cost-effective basis. Risks inherent in the development and
introduction of new products include:

-    the difficulty in forecasting customer demand accurately;

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

-    delays in our initial shipments of new products;

-    competitors' responses to our introduction of new products; and

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

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

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
December 31, 2000 had an accumulated deficit of $30,956,000. 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, 2001 will
depend on our ability to significantly increase sales or raise significant
additional debt or equity financing. There can be no assurance that we will be
able to increase sales or that additional financing will be available on
acceptable terms, or at all.

ANY INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW.


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We may need, or could elect, 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 commitment from our largest investor to
invest up to $3,900,000 during 2001, if needed, to help fund our capital
requirements. 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, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT OTHER INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.

As of February 28, 2001, our executive officers, directors and principal
shareholders will beneficially own, in the aggregate, approximately 90% of our
outstanding common stock and preferred stock, on an as-if-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 be a disadvantage to other shareholders with interests
different from those of our officers, directors and principal shareholders. For
example, our officers, directors and principal shareholders could delay or
prevent an acquisition or merger even if the transaction would benefit other
shareholders.

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 customers, 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 sales. 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.

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

WE HAVE A CONCENTRATED CUSTOMER BASE, AND THEREFORE THE LOSS OF A SINGLE
CUSTOMER COULD NEGATIVELY AFFECT OUR OPERATING RESULTS.

The majority of our end users purchase our products from distributors,
value-added resellers, original equipment manufacturers, and systems
integrators. In fiscal 2000, Compaq Computers Corporation and Commvault Systems
Inc. accounted for 14% and 13% of our total revenue. 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;


                                       7
<PAGE>

-    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.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.

California is in the midst of an energy crisis that could disrupt our operations
and increase our expenses. 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 we
or our customers may suffer as a result of any interruption in our power supply.
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.

Furthermore, the deregulation of the energy industry instituted in 1996 by the
California government has caused power prices to increase. Under deregulation,
utilities were encouraged to sell their plants, which traditionally had produced
most of California's power, to independent energy companies that were expected
to compete aggressively on price. Instead, due in part to a shortage of supply,
wholesale prices have skyrocketed over the past year. If wholesale prices
continue to increase, the operating expenses associated with our facilities are
located in California will likely increase which would harm our results of
operations.

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. We do not have any employment agreements with our employees. 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.

ITEM 2. PROPERTIES.


Our executive offices and engineering/manufacturing operations are located in
approximately 17,000 square feet of space in Milpitas, California. We lease the
facility pursuant to a lease that will expire on October 31, 2005. We believe
that the lease can be renewed at satisfactory terms and that this facility will
be sufficient to support operations for the foreseeable future. In addition, we
believe that, if necessary, additional space will be available in the area to
house our operations.

ITEM 3. LEGAL PROCEEDINGS.


We are not party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.


                                       8
<PAGE>


We held our Annual Meeting of Shareholders on November 9, 2000. Matters voted
upon at the meeting, and the number of shares cast for, against or withheld were
as follows:


                                       9
<PAGE>




1.      Election of Directors.

<TABLE>
<CAPTION>
                                                                                ABSTENTIONS AND
                                                          FOR        AGAINST    SHARES NOT VOTED
                                                      ----------     -------    ----------------
<S>                                                   <C>            <C>        <C>
        J. Richard Ellis...........................   15,149,540        --           10,916
        Michael D. Kaufman.........................   15,149,540        --           10,916
        Frank Connors..............................   15,149,540        --           10,916
        F. Rigdon Curries..........................   15,149,540        --           10,916
        Arch J. McGill.............................   15,149,540        --           10,916
        Michael A. McManus, Jr. ...................   15,149,540        --           10,916
</TABLE>


2.      To increase the number of shares of common stock reserved for issuance
        under our 1990 Stock Plan to 1,600,000.


<TABLE>
<CAPTION>
                                                                                ABSTENTIONS AND
                                                          FOR        AGAINST    SHARES NOT VOTED
                                                      ----------     -------    ----------------
<S>                                                   <C>            <C>        <C>
                                                      13,925,883      56,483       1,178,090
</TABLE>


3.      To increase the number of shares of common stock reserved for issuance
        under our 1995 Stock Plan for non-employee Directors to 250,000.


<TABLE>
<CAPTION>
                                                                                ABSTENTIONS AND
                                                          FOR        AGAINST    SHARES NOT VOTED
                                                      ----------     -------    ----------------
<S>                                                   <C>            <C>        <C>
                                                      13,926,581      55,785       1,178,090
</TABLE>


4.      To increase the authorized number of shares of common stock to
        40,000,000.

<TABLE>
<CAPTION>
                                                                                ABSTENTIONS AND
                                                          FOR        AGAINST    SHARES NOT VOTED
                                                      ----------     -------    ----------------
<S>                                                   <C>            <C>        <C>
                                                      15,096,159      50,960         13,337
</TABLE>

5.      Approval of PricewaterhouseCoopers LLP as independent auditors for the
        fiscal year ending December 31, 2000.


<TABLE>
<CAPTION>
                                                                                ABSTENTIONS AND
                                                         FOR          AGAINST   SHARES NOT VOTED
                                                      ----------     -------    ----------------
<S>                                                   <C>            <C>        <C>
                                                      15,135,869      15,150         9,437
</TABLE>


                                       10
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock is traded on the NASDAQ Small Cap Market under the symbol DCSR.
The high and low sales prices set forth below are as reported by the NASDAQ
Small Cap Market System.

<TABLE>
<CAPTION>
                                                2000                1999
                                          ----------------    ----------------
                                           HIGH       LOW      HIGH      LOW
                                          ------    ------    ------    ------
<S>                                       <C>       <C>       <C>       <C>
First quarter ended March 31 .........    $9.750    $1.500    $3.250    $0.500
Second quarter ended June 30 .........     5.875     2.063     3.500     1.563
Third quarter ended September 30 .....     4.500     1.750     2.688     1.125
Fourth quarter ended December 31 .....     3.500     2.125     2.375     0.719
</TABLE>


The closing price of our common stock on March 21, 2001, as reported by the
NASDAQ Small Cap Market System was $2.75. As of March 21, 2001, according to the
records of our transfer agent, we had approximately 40 shareholders of record.
Because many of our shares are held by brokers and other institutions on behalf
of stockholders, the number of record holders is not necessarily indicative of
the total number of stockholders. As of September 27, 2000 (the record date for
our 2000 annual meeting), we had over 1,000 shareholders, and we believe that we
presently have over 1,000 shareholders. We have never paid cash dividends and
has no present plans to pay dividends. See "LIQUIDITY AND CAPITAL RESOURCES" in
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and Note 5 of Notes to Financial Statements regarding dividend
requirements on the Convertible Preferred Stock.

RECENT SALES OF UNREGISTERED SECURITIES

See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a description
of equity securities we sold during the last fiscal year that were not
registered under the Securities Act. The sales of preferred stock and
convertible debentures during the last fiscal year were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transaction.

ITEM 6. SELECTED AND SUPPLEMENTARY FINANCIAL DATA.


The following selected financial information has been derived from our audited
financial statements. The information set forth below is not necessarily
indicative of results of future operations, and should be read in conjunction
with "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the financial statements and related notes to the
financial statements included in Item 8 of this Form 10-K in order to fully
understand factors that may affect the comparability of the information
presented below.


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                           ------------------------------------------------------------------
                                                              2000          1999          1998          1997         1996
                                                           ----------    ----------    ----------    ----------    ----------
                                                           (Restated)    (Restated)    (Restated)    (Restated)    (Restated)
                                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                        <C>           <C>           <C>           <C>           <C>
Net sales ..............................................       $6,821        $9,746        $9,145        $8,655        $7,761
Cost of sales ..........................................        5,775         7,315         6,924         6,704         6,549
Research and development ...............................        1,158         1,111         1,290         1,439         1,297
Marketing and sales ....................................        2,665         2,169         2,011         1,960         2,155
General and administrative .............................        1,048         1,085         1,030           924           984
                                                           ----------    ----------    ----------    ----------    ----------
Loss from operations ...................................       (3,825)       (1,934)       (2,110)       (2,372)       (3,224)
Interest and other expense, net ........................         (113)         (125)         (125)         (117)         (118)
                                                           ----------    ----------    ----------    ----------    ----------
Net loss ...............................................      $(3,938)      $(2,059)      $(2,235)      $(2,489)      $(3,342)
Deemed preferred stock dividend ........................      $(1,640)        $(534)        $(432)        $(326)      $(1,185)
Net loss attributable to common shareholders
  Before cumulative effect of accounting change
Cumulative effect of change in accounting principle ....        $(686)

Net loss attributable to
  common shareholders ..................................      $(6,264)      $(2,593)      $(2,667)      $(2,815)      $(4,527)
Basic and diluted net loss attributable
  to common shareholders per share .....................       $(1.65)       $(0.70)       $(0.76)       $(0.85)       $(1.46)
Weighted average common shares for
   basic and diluted net loss per
   share calculation ...................................        3,803         3,700         3,515         3,308         3,106
                                                           ==========    ==========    ==========    ==========    ==========
</TABLE>


                                       12
<PAGE>


<TABLE>
<CAPTION>
                                                               AT DECEMBER 31,
                                               -----------------------------------------------
                                                2000      1999      1998      1997      1996
                                               ------    ------    ------    ------    ------
<S>                                            <C>       <C>       <C>       <C>       <C>
Working capital ...........................    $1,664    $1,600    $1,611    $  689    $  691
Total assets ..............................     3,885     4,848     4,970     4,144     4,110
Shareholders' equity ......................     2,096     2,069     2,041     1,071     1,132
</TABLE>

SUPPLEMENTARY QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                       FISCAL 2000 QUARTER ENDED
                                           -------------------------------------------------
                                           MAR. 31       JUNE 30       SEP. 30       DEC. 30
                                           -------       -------       -------       -------
                                          (Restated)    (Restated)    (Restated)    (Restated)
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>           <C>           <C>           <C>
Net sales ...........................      $ 1,615       $ 1,457       $ 1,838       $ 1,911
Gross margin ........................          241           133           388           284
Income (loss) from operations .......         (804)       (1,095)         (868)       (1,058)
Net income (loss) ...................         (831)       (1,123)         (895)       (1,089)
Net income (loss)
  available to common shareholders ..       (1,495)       (1,463)       (1,192)       (2,114)
Basic and diluted earnings (loss)
  per share .........................        (0.40)        (0.38)        (0.31)        (0.56)
</TABLE>

<TABLE>
<CAPTION>
                                                       FISCAL 1999 QUARTER ENDED
                                           -------------------------------------------------
                                           MAR. 31       JUNE 30       SEP. 30       DEC. 30
                                           -------       -------       -------       -------
                                          (Restated)    (Restated)    (Restated)    (Restated)
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>           <C>           <C>           <C>
Net sales ...........................      $ 2,704       $ 2,331       $ 2,206       $ 2,505
Gross margin ........................          801           648           392           590
Income (loss) from operations .......         (263)         (535)         (669)         (467)
Net income (loss) ...................         (299)         (568)         (697)         (495)
Net income (loss)
  available to common shareholders ..         (356)         (747)         (822)         (668)
Basic and diluted earnings (loss)
  per share .........................        (0.10)        (0.20)        (0.22)        (0.18)
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This section and other parts of this Annual Report on Form 10-K contain 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 such forward-looking statements are subject to the
safe harbors created thereby. See "INTRODUCTORY NOTE" on page 3 hereof.
Forward-looking statements involve risks and uncertainties, and our actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in the subsection entitled "ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND THE MARKET PRICE OF OUR
STOCK" in Item 1 above and elsewhere in this Annual Report on Form 10-K. The
following discussion should be read in conjunction with the financial statements
and notes thereto included in Item 8 of this Form 10-K.


                                       13
<PAGE>

RESULTS OF OPERATIONS

Net Sales. We had net sales of $6,821,000 in 2000, $9,746,000 in 1999 and
$9,145,000 in 1998. The decrease in net sales in 2000 as compared to 1999 was
due in part to one of our major customers changing their focus from selling
integrated storage solutions, which included the DISC product line as a major
component, to software-only sales. In addition, although units sales in 2000
remained relatively flat as compared to 1999, our average selling price
decreased due to a shift in the product mix towards our lower priced units.
Also, the units sold in 2000 generally had fewer media slots, and our revenue
from the sale of media decreased. Our traditional customers moved to purchasing
lower end units because the storage capacity is greater than the capacity of
lower end units in prior years because of technological improvements. In
response to the decline in demand in our traditional markets, we are pursuing
new markets, including corporate environments requiring nearline solutions. We
believe that these new markets have a growing requirement for the high capacity
nearline storage solutions that we offer. In 1999, the number of units sold was
relatively flat as compared to 1998 as customers deferred spending on new
information storage systems while they completed their year 2000 testing
activities. The increase in net sales in 1999 as compared to 1998 was primarily
due to our renewed emphasis on selling media along with our products. 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 (VAR) and small System
Integrators and from one to two years for Original Equipment Manufacturers
(OEM), Product Integrators and large System Integrators.

Cost of Sales. Cost of sales, as a percentage of sales, was approximately 85% in
2000, 75% in 1999 and 76% in 1998. Our relatively low gross margins reflect our
low sales volumes, which have resulted in unabsorbed manufacturing costs and
high costs of materials due to the inability to achieve purchasing economies of
scale due to low sales volume. If we are able to increase sales, then we expect
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.

Research and Development Expenses. Research and development expenses were
$1,158,000 in 2000, $1,111,000 in 1999 and $1,290,000 in 1998. Although expenses
remained relatively flat in 2000 as compared to 1999, expenses decreased in 1999
as compared to 1998 primarily due to a reduction in headcount due to attrition.
We believe that research and development expenses will increase moderately in
2001 due to current projects under development.

Marketing and Sales Expenses. Marketing and sales expenses were $2,665,000 in
2000, $2,169,000 in 1999 and $2,011,000 in 1998. Expenses increased in 2000 as
compared to 1999 primarily due to an increase in head count. Expenses increased
in 1999 as compared to 1998 primarily due to increased participation in industry
trade shows. We believe that in 2001 marketing and sales expenses will increase
in connection with our continued efforts to broaden market acceptance of our
products. In particular, we intend to increase our sales force and increase our
spending on market awareness activities.

General and Administrative Expenses. General and administrative expenses have
remained relatively flat and were $1,048,000 in 2000, $1,085,000 in 1999 and
$1,030,000. We believe that general and administrative expenses continue to
remain relatively flat during 2001.

Restated Net Loss Available to Common Shareholders and Earnings Per Share.
Under EITF Nos. 98-5 and 00-27 and related standards, if a company issues
convertible preferred stock with a beneficial conversion feature, then the value
of the beneficial conversion feature is accounted for as a deemed dividend. A
beneficial conversion feature is computed as the intrinsic value of the spread
between the quoted market price of common stock and the conversion price
multiplied by the number of common shares into which the preferred stock
converts. As described in Note 5, the Company has funded its operations through
the sales, in private placements, of preferred stock and warrants to its
principal investor. Management believes that these equity transactions were made
in the best interests of the Company. In determining whether there was a
beneficial conversion feature, management utilized an estimated fair value of
common stock which was lower than its quoted market price. Management believed
that the negotiated price of the stock was representative of the market price of
the stock in a private placement of that size. Management concluded that there
was no beneficial conversion feature associated with the issuance of convertible
preferred stock and warrants, and the Company did not record a deemed dividend.

Recently, the Company became aware that the SEC has insisted that the quoted
market price be used in calculating a beneficial conversion feature. As the
result of the SEC's position, the Company has restated its financial statements
to reflect a deemed dividend as a charge to accumulated deficit and earnings per
share. The restatement did not affect the Company's assets, liabilities,
revenues or expenses as originally reported. In the restatement, the deemed
dividend is added to net loss to determine net loss attributable to common
shareholders.

In addition to the restatement to use the quoted market price to measure the
beneficial conversion feature, the Company restated to report a cumulative
effect of accounting change as of October 1, 2000, representing the effect of
the change in accounting method from use of the stated conversion price to use
of the accounting conversion price in applying the intrinsic value method for
determining the beneficial conversion feature for all convertible preferred
stock issuances as required by EITF 00-27. The


                                       14
<PAGE>

EITF required that the effect of adopting the accounting conversion price be
recorded in the fourth quarter of 2000. The loss per share for each period is
revised to reflect the net loss attributable to common shareholders, as
presented below:

<TABLE>
<CAPTION>
                                                                                    Year Ended
                                                                        -----------------------------------
                                                                         2000          1999          1998
                                                                        -------       -------       -------
                                                                        (in thousands, except per share data)
<S>                                                                     <C>           <C>           <C>
Net loss, as originally reported                                        $(3,938)      $(2,059)      $(2,235)
Deemed dividend, including cumulative effect adjustment                  (2,326)         (534)         (432)
Net loss attributable to shareholders, as restated                      $(6,264)      $(2,593)      $(2,667)

Net loss per share, as originally reported                              $ (1.04)      $ (0.56)      $ (0.64)
Net loss attributable to common shareholder per share, as restated      $ (1.65)      $ (0.70)      $ (0.76)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

During 2000, 1999 and 1998, we used cash of $3,565,000, $1,149,000 and
$2,816,000, respectively, primarily to fund operating losses. In fiscal 2000, we
raised $3,870,000 through the issuance of convertible preferred stock. At
December 31, 2000, we had a cash balance of approximately $128,000. In addition,
we have a commitment from our largest investor to invest up to $3,900,000, if
needed. That commitment was increased in July 2001 by approximately $1,000,000.
We believe this committed future investment, together with borrowing from a
factoring agreement with a financial institution, which allows it to borrow the
lesser of $1,500,000 or 85% of eligible receivables, and cash generated from
operations, will be sufficient to meet its operating requirements at least
through the end of 2001, 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 December 31, 2001 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.

Although we have not committed to make any material capital expenditures as of
December 31, 2000, our budget for capital equipment expenditures for 2001 is
approximately $200,000. The majority of these purchases are expected to be in
the areas of process and molding tooling to reduce cost and improve
producibility of our products.

The terms of the Series C Preferred Stock and outstanding warrants may limit the
availability of financing for us, particularly equity financing, because of the
superior preferences of the Series C Preferred Stock and the potential dilutive
effect of the outstanding warrants. Holders of Series C Preferred Stock are
entitled to receive cumulative dividends in the amount of approximately $112,000
per year [WHEN AND IF DECLARED]. We have never paid cash dividends and have no
present plans to pay dividends.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are not exposed to significant market risk related to fluctuations in
interest rates as we are not expected to have a significant investment portfolio
in fiscal 2001. In addition, we do not use derivative financial instruments of
any kind and currently all of our transactions are in U.S. currency.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.(a)1 for a listing of financial
statements provided in the section titled "FINANCIAL STATEMENTS."


                                       15
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

       None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

J. Richard Ellis, 55, is our Chairman of the Board and Chief Executive Officer.
Mr. Ellis joined us as President and Chief Operating Officer in July 1994 and
became Chief Executive Officer in January 1995. Mr. Ellis was appointed to our
Board of Directors on July 13, 1994 and became Chairman of the Board of
Directors in August 1996.

Frank T. Connors, 67, has been our Secretary since May 1990, a member of our
Board of Directors since June 1988 and was Chairman of the Board of Directors
from June 1988 to August 1996 and our Chief Executive Officer from May 1990 to
December 1994. Mr. Connors is Chairman of the Board of Directors of STM
Wireless, Inc., a publicly held manufacturer of satellite communication
networks.

Michael D. Kaufman, 60, became a member of our Board of Directors in December
1988. Since October 1987, he has been the Managing General Partner of MK Global
Ventures, MK Global Ventures II and MK GVD Fund, in Palo Alto, California,
venture capital firms specializing in early-stage and start-up financing of high
technology companies. Mr. Kaufman also serves on the Boards of Directors of
Davox Corp., a telecommunications company, Syntellect Inc., a telecommunications
company, Asante Technologies Inc., a networking company, and Human Pheromones
Sciences, Inc., a company that develops and markets consumer products containing
human pheromones.

F. Rigdon Currie, 70, became member of our Board of Directors in December 1988.
Since February 1988, he has been Special Limited Partner of MK Global Ventures
II and MK GVD Fund. Mr. Currie serves on the Board of Directors of Synbiotics
Corporation, a manufacturer of animal health test kits and instruments and
several private companies.

Arch J. Mcgill, 68, became member of our Board of Directors in August 1993.
Since October 1985, he has been President of Chardonnay, Inc., a venture capital
investment and executive business advisory services company. Mr. McGill serves
on the Board of Directors of CIBER, Inc., a provider of system integration
services.

Michael A. McManus, Jr., 57, became a member of our Board Directors in August
1993. He is presently the President and Chief Executive Officer of Misonix Inc.,
a medical device company. From November 1991 to March 1998, he was President and
Chief Executive Officer of New York Bancorp, Inc., the holding company for Home
Federal Savings Bank. Mr. McManus also serves on the Boards of Directors of
National Wireless Holdings Inc., a communications company, Novavax, Inc., a
biopharmaceutical company, and the United States Olympic Committee.

Henry Madrid, 44, is our Vice President, Finance and Chief Financial Officer.
Mr. Madrid, a certified public accountant, joined us as Vice President of
Finance and Chief Financial Officer in January 1990.

Brian Irvine, 55, is our Vice President, Engineering. Mr. Irvine joined us in
April 1990, and has held various engineering positions in our company including
Director of Engineering, before being promoted to Vice President of Engineering
in December 1997.

Robert Cellucci, 58, joined us in February 1998 as our Vice President,
Operations. From September 1997 to January 1998 he served as Manufacturing and
Materials consultant for Cyberdent, a dental equipment start-up and from 1994 to
August 1997, Mr. Cellucci served as the Vice President of Operations at Ion
Systems, a manufacturer of static control equipment and systems.

Robert W. Riland III, 37, joined us in March 2000 as Vice President of Marketing
and was promoted to Vice President of Sales and Marketing in July 2000. From
July 1997 to February 2000, Mr. Riland served as Vice President of Sales at
Maxoptix Corporation, a manufacturer of high capacity magneto-optical drives and
library systems, and from August 1989 to June 1997, served as Director of Sales
and Marketing for U-tron Technologies, Inc., a manufacturer of personal
computers, workstations and servers.


                                       16
<PAGE>

Each of our directors is elected at the annual meeting of shareholders and holds
office until the next annual meeting. Our executive officers are appointed by
our board of directors or our president and serve at the discretion of our board
of directors. There are no family relationships between any director, executive
officer or person nominated or chosen by us to become a director or executive
officer.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten percent shareholders also
are required by rules promulgated by the Securities and Exchange Commission to
furnish us with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to us, the
absence of a Form 3 or Form 5 or written representations that no Forms 5 were
required, we believe that, during fiscal year 2000, our officers, directors and
greater than ten percent beneficial owners complied with all applicable Section
16(a) filing requirements, except that the Form 4's required to be filed by each
of J. Richard Ellis, Henry Madrid, Brian Irvine, Robert Cellucci and Robert
Riland for a transaction occurring in November 2000 were filed late.

ITEM 11. EXECUTIVE COMPENSATION.

The following Summary Compensation Table shows compensation paid by us for
services rendered during fiscal years 2000, 1999 and 1998 to the person who was
our Chief Executive Officer and the other executive officers who received salary
and bonus compensation which exceeded $100,000 in fiscal year 2000.


                                       17
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                            LONG-TERM COMPENSATION
                                                                          --------------------------
                                                   ANNUAL COMPENSATION    SECURITIES
                                                   --------------------   UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION                        YEAR    SALARY($)(1)   OPTIONS(2)    COMPENSATION
---------------------------                        ----    ------------   ----------    ------------
<S>                                                <C>        <C>         <C>           <C>
J. Richard Ellis..............................     2000       173,000       200,000        1,000(3)
   President and Chief Executive Officer           1999       165,000            --        1,000(3)
                                                   1998       157,000       225,000+       1,000(3)


Henry Madrid..................................     2000       126,000       100,000        1,000(3)
   Vice President, Finance and                     1999       116,000            --        1,000(3)
   Chief Financial Officer                         1998       115,000        50,000+       1,000(3)


Brian Irvine..................................     2000       120,000        35,000        1,000(3)
   Vice President, Engineering                     1999       114,000            --        1,000(3)
</TABLE>


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                            LONG-TERM COMPENSATION
                                                                          --------------------------
                                                   ANNUAL COMPENSATION    SECURITIES
                                                   --------------------   UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION                        YEAR    SALARY($)(1)   OPTIONS(2)    COMPENSATION
---------------------------                        ----    ------------   ----------    ------------
<S>                                                <C>     <C>            <C>           <C>
                                                   1998       109,000        65,000+       1,000(3)


Robert Cellucci(4)............................     2000       122,000        35,000        1,000(3)
   Vice President, Operations                      1999       109,000            --        1,000(3)
                                                   1998        97,000        50,000        1,000(3)


Robert W. Riland III(5).......................     2000       143,000       240,000        1,000(3)
   Vice President, Sales and Marketing             1999            --            --           --
                                                   1998            --            --           --
</TABLE>

+ Option grants reflect repricing of options previously granted pursuant to our
1990 Stock Plan.

(1) No bonuses were paid during 2000.

(2) Options are awarded pursuant to our Stock Plan, which is administered by the
Board of Directors. The Board of Directors determines the eligibility of
employees and consultants, the number of shares to be granted and the terms of
such grants.

(3) The amounts shown represent life insurance premiums paid by us.

(4) Mr. Cellucci joined us in February 1998.

(5) Mr. Riland joined us in March 2000.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                      INDIVIDUAL GRANTS                                  POTENTIAL
                                           --------------------------------------                     REALIZABLE VALUE
                                                          PERCENT                                        AT ASSUMED
                                                         OF TOTAL                                       ANNUAL RATES
                                           NUMBER OF      OPTIONS                                      OF STOCK PRICE
                                           SECURITIES   GRANTED TO                                    APPRECIATION FOR
                                           UNDERLYING    EMPLOYEES      EXERCISE                        OPTION TERM
                                            OPTIONS      IN FISCAL       PRICE      EXPIRATION     ----------------------
NAME                                       GRANTED(#)      YEAR          ($/SH)        DATE         5%($)        10%($)
----                                       ----------   -----------     --------    ----------     --------     ---------
<S>                                        <C>          <C>             <C>         <C>            <C>          <C>
J. Richard Ellis......................      200,000         22%           $3.25      Nov. 2005      830,000     1,047,000
   President and Chief Executive
   Officer


Henry Madrid..........................      100,000         11%           $3.25      Nov. 2005      415,000       523,000
   Vice President, Finance and
   Chief Financial Officer


Brian Irvine..........................       35,000          4%           $3.25      Nov. 2005      145,000       183,000
   Vice President, Engineering


Robert Cellucci.......................       35,000          4%           $3.25      Nov. 2005      145,000       183,000
   Vice President, Operations(3)


Robert W. Riland III..................      240,000         27%           $3.00 -    May -          950,000     1,200,000
   Vice President, Sales and Marketing                                    $3.25      Nov. 2005
</TABLE>



                                       19
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table provides information on the value of options exercised in
fiscal 2000 and the value of unexercised in-the-money options held by the named
executive officers as December 31, 2000

<TABLE>
<CAPTION>
                                                         NUMBER OF SECURITIES
                                                               UNDERLYING               VALUE OF UNEXERCISED
                                                          UNEXERCISED OPTIONS           IN-THE-MONEY OPTIONS
                               SHARES                     AT DECEMBER 31, 2000        AT DECEMBER 31, 2000(1)
                            ACQUIRED ON     VALUE     ---------------------------   ---------------------------
NAME                          EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                        -----------    --------   -----------   -------------   -----------   -------------
<S>                         <C>            <C>        <C>           <C>             <C>           <C>
J. Richard Ellis.........        --           --        149,479        275,521        $200,000       $110,000
Henry Madrid.............        --           --         34,375        115,625        $ 44,000       $ 24,000
Brian Irvine.............        --           --         42,708         57,292        $ 58,000       $ 32,000
Robert Cellucci..........        --           --         33,021         51,979        $ 44,000       $ 24,000
Robert W. Riland III.....        --           --         22,500        217,500        $    --        $     --
</TABLE>


                                       20
<PAGE>

(1) Market value of underlying securities at year-end minus the exercise price
of "in-the-money" options. The closing sale price for our common stock as of
December 29, 2000 on the NASDAQ Small Cap Market System was $2.125.

COMPENSATION OF DIRECTORS

Pursuant to the our 1995 Stock Option Plan for Non-Employee Directors, each
non-employee director receives an initial grant of options to purchase 25,000
shares of our common stock upon commencement of service as a director. In
addition to such initial grant of 25,000 options, each non-employee director is
granted an option to purchase 5,000 shares of the Company's Common Stock during
each year of service as a director commencing with fiscal year 1995.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Frank T. Connors, Michael A. McManus, Jr. and F. Rigdon Currie comprised the
Board's Compensation Committee during fiscal 2000. Mr. Connors has been our
Secretary since May 1990 and was our Chief Executive Officer from May 1990 to
December 1994. Neither Mr. McManus nor Mr. Currie has been an officer or
employee of our company. Please see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" for a discussion of certain relationships and transactions between
Mr. Currie and DISC. During fiscal year 2000, none of our executive officers (i)
served as a member of the Compensation Committee (or other board committee
performing equivalent functions or, in the absence of any such committee, the
board of directors) of another entity, one of whose executive officers served on
our Compensation Committee, (ii) served as a director of another entity, one of
whose executive officers served on the Company's Compensation Committee, or
(iii) served as a member of the compensation committee (or other board committee
performing equivalent functions or, in the absence of any such committee, the
board of directors) of another entity, one of whose executive officers served as
a member of our Board of Directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 15, 2001, as to (a) all directors, (b)
the named executive officers identified in the Summary Compensation Table
located in Item 11, (c) all directors and executive officers as a group, and (d)
each person known to us to be the beneficial owner of more than 5% of any class
of our voting securities.

Each share of the our Series C, Series D, Series E and Series I through Series O
Preferred Stock is convertible into one share of common stock and is entitled to
one vote per share. Each share of our Series F Preferred Stock is convertible
into two shares of common stock and is entitled to two votes per share. Each
share of Series G, Series H and Series P through Series AA Preferred Stock is
convertible into ten shares of common stock and is entitled to ten votes per
share. Because our outstanding Preferred Stock votes together with and has the
same rights to cumulative voting as the common stock, the number of shares held
by each beneficial owner includes all shares of common stock and Preferred Stock
on an as-if-converted basis, and "Percentage of Class" represents the total of
our common and Preferred Stock, on an as-if-converted basis, issued and
outstanding as of March 15, 2001. Except as otherwise indicated, we believe,
based on information furnished by these owners, that the beneficial owners of
the common stock and Preferred Stock have sole investment and voting power with
respect to such shares, subject to applicable community property laws.


                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                                        AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER                                    BENEFICIAL OWNERSHIP        PERCENT OF CLASS
------------------------------------                                    --------------------        ----------------
<S>                                                                     <C>                         <C>
MK Global Ventures +.............................................              769,558(1)                 4.0%
MK Global Ventures II +..........................................              769,250(2)                 4.0%
MK GVD Fund +....................................................           15,319,605(3)                80.5%
Michael D. Kaufman +.............................................           16,430,736(4)(7)             88.6%
J. Richard Ellis ++..............................................              199,063(5)                 1.0%
Frank T. Connors ++..............................................              137,558(6)                   *
F. Rigdon Currie ++..............................................               55,000(7)                   *
Arch J. McGill ++................................................               55,000(7)                   *
Michael A. McManus, Jr. ++.......................................               67,500(7)                   *
Brian Irvine ++..................................................               55,751(8)                   *
Robert Cellucci ++...............................................               40,833(9)                   *
Henry Madrid ++..................................................               94,583(10)                  *
Robert W. Riland III ++..........................................               94,583(11)                  *
Directors and Executive Officers as a group
   (ten (10) persons)............................................           17,693,320(12)              89.79%
</TABLE>

*      Less than 1%


                                       22
<PAGE>

+      The address of such beneficial owner is 2471 E. Bayshore Road, Palo Alto,
       CA 94303.

++     The address of such beneficial owner is c/o DISC, Inc., 372 Turquoise
       Street, Milpitas, CA 95035.

(1) MK Global Ventures beneficially owns 759,093 shares of Common Stock and
10,465 shares of Series C Preferred Stock. See the first paragraph of this Item
12 for a description of the conversion and voting rights with respect to the
Series C Preferred Stock.

(2) MK Global Ventures II beneficially owns 310,462 shares of Common Stock,
361,831 shares of Series C Preferred Stock and 77,566 shares of Series I
Preferred Stock. See the first paragraph of this Item 12 for a description of
the conversion and voting rights with respect to the Series C and Series I
Preferred Stock. Beneficial ownership also includes warrants for 19,391 shares
of Common Stock exercisable on March 15, 2001 or within 60 days thereafter.

(3) MK GVD Fund beneficially owns 595,049 shares of Common Stock; 333,333 shares
of the Series D Preferred Stock; 375,000 shares of the Series E Preferred Stock;
250,000 shares of the Series F Preferred Stock; 97,500 shares of the Series G
Preferred Stock; 26,109 shares of the Series H Preferred Stock; 84,999 shares of
the Series I Preferred Stock; 244,966 shares of the Series J Preferred Stock;
235,110 shares of the Series K Preferred Stock; 199,275 shares of the Series L
Preferred Stock; 179,372 shares of the Series M Preferred Stock; 666,667 shares
of the Series N Preferred Stock; 1,320,755 shares of the Series O Preferred
Stock; 36,585 shares of the Series P Preferred Stock; 112,097 shares of the
Series Q Preferred Stock; 86,207 shares of the Series R Preferred Stock; 96,875
shares of the Series S Preferred Stock; 16,089 shares of the Series T Preferred
Stock; 38,961 shares of the Series U Preferred Stock; 66,038 shares of the
Series V Preferred Stock; 30,201 shares of the Series W Preferred Stock; 32,800
of the Series X Preferred Stock; 57,592 of the Series Y Preferred Stock; 39,906
of the Series Z Preferred Stock; and 60,774 of the Series AA Preferred Stock.
See the first paragraph of this Item 12 for a description of the conversion and
voting rights with respect to the different series of Preferred Stock.
Beneficial ownership also includes warrants for 2,603,240 shares of Common Stock
exercisable on March 15, 2001 or within 60 days thereafter.

(4) Includes Common Stock, Preferred Stock and warrants beneficially owned by MK
Global Ventures, MK Global Ventures II and MK GVD Fund, as separately described
in notes (1), (2) and (3) above. Mr. Kaufman is the managing general partner of
each of those funds.

(5) Includes 189,063 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(6) Includes 80,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(7) Includes 55,000 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(8) Includes 51,771 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(9) Includes 40,833 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(10) Includes 48,958 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(11) Includes 44,583 shares of Common Stock issuable upon exercise of stock
options exercisable on March 15, 2001 or within 60 days thereafter.

(12) Includes 670,208 shares of Common Stock issuable upon exercise of stock
options and warrants for 2,622,631 shares of Common Stock exercisable on March
15, 2001 or within 60 days thereafter.


                                       23
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

During the quarter ended March 31, 2000, we issued $820,000 in principal amount
of subordinated convertible debentures to MK GVD Fund. On March 31, 2000, these
debentures were converted into 32,800 shares of the Series X Preferred Stock,
each initially convertible into ten shares of common stock at a price of $2.50
per share, and warrants to purchase 82,000 shares of common stock at an exercise
price of $3.13 per share.

During the quarter ended June 30, 2000, we issued $1,100,000 in principal amount
of subordinated convertible debentures to MK GVD Fund. On June 30, 2000, these
debentures were converted into 57,592 shares of Series Y Preferred Stock, each
initially convertible into ten shares of common stock at a price of $1.91 per
share, and warrants to purchase 143,979 shares of common stock at an exercise
price of $2.39 per share.

During the quarter ended September 30, 2000, we issued $850,000 in principal
amount of subordinated convertible debentures to MK GVD Fund. On September 30,
2000, these debentures were converted into 39,906 shares of Series Z Preferred
Stock, each initially convertible into ten shares of common stock at a price of
$2.13 per share, and warrants to purchase 99,765 shares of common stock at an
exercise price of $2.66 per share.

During the quarter ended December 31, 2000, we issued $1,100,000 in principal
amount of subordinated convertible debentures to MK GVD Fund. On December 31,
2000, these debentures were converted into 60,774 shares of Series AA Preferred
Stock each initially convertible into ten shares of common stock at a price of
$1.81 per share, and warrants to purchase 151,933 shares of common stock at an
exercise price of $2.26 per share.

The above transactions were unanimously approved by our Board of Directors.
Michael D. Kaufman, a member of our Board of Directors, is the managing general
partner of MK GVD Fund, MK Global Ventures and MK Global Ventures II. F. Rigdon
Currie, a member of our Board of Directors, was, and continues to be, Special
Limited Partner of MK GVD Fund and MK Global Ventures II. However, we believe
that the terms and provisions of the above transactions were as fair to us as
they could have been if made with unaffiliated third parties.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this Form 10-K:

1.     Financial Statements.

Our financial statements as set forth under Item 8 of this Annual Report on Form
10-K are presented herein at the pages noted.

<TABLE>
<CAPTION>
                                                                    PAGE NUMBERS
                                                                    ------------
<S>                                                                 <C>
Report of Independent Accountants.................................       37
Balance Sheet at December 31, 2000 and December 31, 1999..........       24
Statement of Operations For the Three Years Ended December 31,
   2000...........................................................       25
Statement of Shareholders' Equity For the Three Years Ended
   December 31, 2000..............................................       26
Statement of Cash Flows For the Three Years Ended December 31,
   2000...........................................................       27
Notes to Financial Statements.....................................       28
</TABLE>

2.     Financial Statement Schedules.

Financial statement schedules have been omitted as the information required to
be set forth therein is not applicable or is readily available in the financial
statements or notes to the financial statements.


                                       24
<PAGE>

3.     Exhibits.


The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Form 10-K.

(b) Reports on Form 8-K:

No reports on Form 8-K were filed by us during the quarter ended December 31,
2000.


                                       25
<PAGE>

                              FINANCIAL STATEMENTS

                                   DISC, INC.
                                  BALANCE SHEET

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                      -----------------------------
                                                                          2000             1999
                                                                      ------------     ------------
                                                                       (Restated)       (Restated)
<S>                                                                   <C>              <C>
Assets

Cash .............................................................    $    128,000     $  1,126,000
Accounts receivable, net .........................................       1,784,000        1,677,000
Inventories ......................................................       1,465,000        1,447,000
Prepaids and deposits ............................................          76,000          129,000
                                                                      ------------     ------------
       Total current assets ......................................       3,453,000        4,379,000
Property and equipment, net ......................................         432,000          469,000
                                                                      ------------     ------------
                                                                      $  3,885,000     $  4,848,000
                                                                      ============     ============
Liabilities and Shareholders' Equity:
Accounts payable .................................................    $  1,159,000     $  1,026,000
Borrowings under credit line .....................................              --        1,165,000
Accrued expenses and other liabilities ...........................         630,000          588,000
                                                                      ------------     ------------
       Total current liabilities .................................       1,789,000        2,779,000
                                                                      ------------     ------------
Commitments and contingencies (Note 10)
Shareholders' equity:
   Convertible Preferred Stock; no par value, 10,000,000
     shares authorized; 5,141,573 and 4,950,501 shares
     issued and outstanding ......................................      19,277,000       16,132,000
   Common Stock and Common Stock Warrants; no par value,
     20,000,000 shares authorized; 3,841,053 and 3,711,592 shares
     issued and outstanding ......................................      13,775,000       12,955,000
   Accumulated deficit ...........................................     (30,956,000)     (27,018,000)
                                                                      ------------     ------------
       Total shareholders' equity ................................       2,096,000        2,069,000
                                                                      ------------     ------------
                                                                      $  3,885,000     $  4,848,000
                                                                      ============     ============
</TABLE>


See accompanying notes to financial statements.


                                       26
<PAGE>

                                   DISC, INC.
                             STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                             --------------------------------------------------
                                                                 2000               1999               1998
                                                             ------------       ------------       ------------
                                                              (Restated)         (Restated)         (Restated)
<S>                                                          <C>                <C>                <C>
Net sales .............................................      $  6,821,000       $  9,746,000       $  9,145,000
                                                             ------------       ------------       ------------
Costs and expenses:
   Cost of sales ......................................         5,775,000          7,315,000          6,924,000
   Research and development ...........................         1,158,000          1,111,000          1,290,000
   Marketing and sales ................................         2,665,000          2,169,000          2,011,000
   General and administrative .........................         1,048,000          1,085,000          1,030,000
                                                             ------------       ------------       ------------
       Total costs and expenses .......................        10,646,000         11,680,000         11,255,000
                                                             ------------       ------------       ------------
Loss from operations ..................................        (3,825,000)        (1,934,000)        (2,110,000)
Interest and other expense, net .......................          (113,000)          (125,000)          (125,000)
                                                             ------------       ------------       ------------
Net loss ..............................................      $ (3,938,000)      $ (2,059,000)      $ (2,235,000)

Deemed preferred stock dividend .......................        (1,640,000)          (534,000)          (432,000)
                                                             ------------       ------------       ------------
Net loss attributable to common shareholders
     before cumulative effect of accounting change ....         5,578,000          2,593,000          2,667,000
  Cumulative effect of accounting change on
     deemed dividend on preferred stock ...............          (686,000)              --                 --
                                                             ------------       ------------       ------------
Net loss attributable to common shareholders ..........      $ (6,264,000)      $ (2,593,000)      $ (2,667,000)
                                                             ============       ============       ============
Basic and diluted net loss per share

Net loss per share before cumulative effect of
  change in accounting principle ......................      $      (1.47)      $      (0.70)      $      (0.76)

Cumulative effect of accounting change ................      $      (0.18)      $       --         $       --
Net loss per share attributable to
  common shareholders .................................      $      (1.65)      $      (0.70)      $      (0.76)
Weighted average common shares for basic
   and diluted net loss per share calculation .........         3,803,000          3,700,000          3,515,000
</TABLE>


See accompanying notes to financial statements.


                                       27
<PAGE>

                                   DISC, INC.
                        STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   PREFERRED STOCK                COMMON STOCK
                                              --------------------------    -------------------------    ACCUMULATED
                                                 SHARES        AMOUNT         SHARES        AMOUNT         DEFICIT         TOTAL
                                              -----------   ------------    ----------   ------------   ------------   ------------
<S>                                           <C>           <C>            <C>           <C>            <C>            <C>
Balance at December 31, 1997 (restated) .....   3,395,304   $ 12,742,000     3,334,323   $ 11,053,000   $(22,724,000)  $  1,071,000
Conversion of Preferred Stock
   into Common Stock ........................    (248,611)    (1,000,000)      361,111      1,000,000             --             --
Issuance of Series O Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................   1,320,755      1,176,000            --        224,000             --      1,400,000
Issuance of Series P Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      36,585        249,000            --         51,000             --        300,000
Issuance of Series Q Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................     112,097        584,000            --        111,000             --        695,000
Issuance of Series R Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      86,207        420,000            --         80,000             --        500,000
Issuance of Series S Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      96,875        260,000            --         50,000             --        310,000
Net loss for the period .....................        --             --              --             --     (2,235,000)    (2,235,000)
Allocation of discount on Preferred stock ...                   (432,000)           --             --        432,000             --
Deemed preferred stock dividend .............                    432,000            --             --       (432,000)            --
                                              -----------   ------------    ----------   ------------   ------------   ------------
Balance at December 31, 1998 (restated) .....   4,799,212     14,431,000     3,695,434     12,569,000    (24,959,000)     2,041,000
Exercise of Common Stock
   Options ..................................        --             --          16,158         12,000             --         12,000
Issuance of Series T Convertible
   referred Stock and Warrants
   for Common Stock, net ....................      16,089        267,000            --         58,000             --        325,000
Issuance of Series U Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      38,961        492,000            --        108,000             --        600,000
Issuance of Series V Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      66,038        573,000            --        127,000             --        700,000
Issuance of Series W Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      30,201        369,000            --          81,000            --        450,000
Net loss for the period .....................        --             --              --             --     (2,059,000)    (2,059,000)
Allocation of discount on Preferred stock ...        --         (534,000)           --             --        534,000             --
Deemed preferred stock dividend .............        --          534,000            --             --       (534,000)            --
                                               ----------   ------------  ------------   ------------   ------------   ------------
Balance at December 31, 1999 (restated) .....   4,950,501     16,132,000     3,711,592     12,955,000    (27,018,000)     2,069,000
Exercise of Common Stock
   Options ..................................        --             --         129,461         95,000             --         95,000
Issuance of Series X Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      32,800        664,000            --        156,000             --        820,000
Issuance of Series Y Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      57,592        891,000            --        209,000             --      1,100,000
Issuance of Series Z Convertible
   Preferred Stock and Warrants
   for Common Stock, net ....................      39,906        688,000            --        162,000             --        850,000
Issuance of Series AA Convertible
   Preferred Stock and Warrants for
   Common Stock, net ........................      60,774        902,000            --        198,000             --      1,100,000
Net loss for the period .....................        --             --              --             --     (3,938,000)    (3,938,000)
Allocation of discount on Preferred stock ...        --       (1,640,000)           --             --      1,640,000             --
Cumulative catch up adjustment ..............        --         (686,000)           --             --        686,000             --
Deemed preferred stock dividend .............        --        2,326,000            --             --     (2,326,000)            --
                                               ----------   ------------  ------------   ------------   ------------   ------------
Balance at December 31, 2000 (restated) .....   5,141,573   $ 19,277,000     3,841,053   $ 13,775,000   $(30,956,000)  $  2,096,000
                                               ==========   ============  ============   ============   ============   ============
</TABLE>


See accompanying notes to financial statements.


                                       28
<PAGE>

                                   DISC, INC.
                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------
                                                             2000            1999            1998
                                                         -----------     -----------     -----------
<S>                                                      <C>             <C>             <C>
Cash flows from operating activities:

   Net loss .........................................    $(3,938,000)    $(2,059,000)    $(2,235,000)
   Adjustments to reconcile net loss to cash
     used in operating activities:
   Depreciation expense .............................        270,000         134,000         263,000
   Changes in assets and liabilities:
     Accounts receivable ............................       (107,000)        420,000        (329,000)
     Inventories ....................................        (18,000)         65,000         (47,000)
     Prepaids and deposits ..........................         53,000         (26,000)        (30,000)
     Accounts payable ...............................        133,000         254,000        (560,000)
     Accrued expenses and other liabilities .........         42,000          63,000         122,000
                                                         -----------     -----------     -----------
Net cash used in operating activities ...............     (3,565,000)     (1,149,000)     (2,816,000)
                                                         -----------     -----------     -----------
Cash used in investing activities for capital
   expenditures .....................................       (233,000)       (173,000)       (291,000)
                                                         -----------     -----------     -----------
Cash flows from financing activities:

   Borrowings under line of credit, net .............     (1,165,000)       (467,000)        294,000
   Proceeds from issuance of Common Stock ...........         95,000          12,000              --
   Proceeds from issuance of Preferred Stock
     and Warrants for Common Stock ..................      3,870,000       2,075,000       3,205,000
                                                         -----------     -----------     -----------
Cash provided by financing activities ...............      2,800,000       1,620,000       3,499,000
                                                         -----------     -----------     -----------
Net increase in cash ................................       (998,000)        298,000         392,000
Cash at beginning of the year .......................      1,126,000         828,000         436,000
                                                         -----------     -----------     -----------
Cash at end of the year .............................    $   128,000     $ 1,126,000     $   828,000
                                                         ===========     ===========     ===========
Supplemental disclosure of cash flow information:

   Interest paid ....................................    $   113,000     $   125,000     $   125,000
</TABLE>


See accompanying notes to financial statements.


                                       29
<PAGE>

                                   DISC, INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY:

DISC, INC. ("the Company") is engaged in the marketing, development and
manufacturing of optical disk storage units.

Subsequent to year end, the Company received a commitment from its largest
investor for additional equity financing of up to $3,900,000, if necessary,
through the issuance of Preferred Stock. That commitment was increased in July
2001 by approximately $1,000,000. The Company believes that this cash, together
with cash generated from operations, will be sufficient to meet its operating
requirements at least through the end of 2001, 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,
2001, will depend on the Company's ability to significantly increase sales or
raise significant additional equity or debt financing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES

The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

CERTAIN RISKS AND CONCENTRATIONS

At December 31, 2000, substantially all of the Company's cash and cash
equivalents were invested with one financial institution.

The Company performs ongoing credit evaluations of its customers' financial
condition and, generally requires no collateral from its customers. At December
31, 2000 two customers represented 15% and 11% respectively of the accounts
receivable balance. At December 31, 1999, two customers represented 29% and 11%,
respectively, of the accounts receivable balance. At December 31, 1998, no
customer represented 10% or more of the accounts receivable balance. The Company
maintains an allowance for doubtful accounts receivable based upon the
collectibility of all accounts receivable.

In 2000 two customers accounted for 14% and 13% of sales respectively. In 1999,
one customer accounted for 23% of net sales. No customer accounted for more than
10% of net sales in fiscal 1998.

FINANCIAL INSTRUMENTS

The carrying amount of the Company's financial instruments, including cash and
equivalents, accounts receivable and accounts payable approximate fair value due
to their short maturities.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents.

REVENUE RECOGNITION


                                       30
<PAGE>

The Company recognizes revenue upon the shipment of its products to the customer
provided that the Company has received a signed purchase order, the price is
fixed and collection of the resulting receivable is probable. Subsequent to the
sale of the products, the Company has no obligation to provide any modification
or customization upgrades, enhancements or any post contract customer support.
Provisions for returns and allowances are recorded at the time revenue is
recognized based on the Company's historical experience.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the
straight line method over the shorter of the estimated useful lives of the
assets, which range from three to five years, or the lease term of the
respective assets, if applicable.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

STOCK COMPENSATION PLANS

The Company accounts for stock-based compensation arrangements using the
intrinsic value method as prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations thereof. Compensation cost for stock grants is measured as the
excess, if any, of the market price of the Company's stock at the date of grant
over the stock exercise price. The Company's policy is to grant stock options
with an exercise price equal to the quoted market price of the Company's stock
on the date of grant. Accordingly, the Company does not have compensation cost
related to its stock compensation plans. In addition, the Company complies with
the disclosure provisions of Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").

In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion No. 25." FIN 44 clarifies, among other issues (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000. The adoption of FIN 44 did not have a material effect on the Company's
financial position or results of operations.

INCOME TAXES

The Company accounts for income taxes under the asset and liability approach,
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of timing differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.

COMPREHENSIVE INCOME (LOSS)

For the three years in the period ended December 31, 2000, there were no
elements of comprehensive income (loss), except for the net losses.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and


                                       31
<PAGE>

reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The Company will adopt SFAS 133 in the first
fiscal quarter of 2001 and does not expect the adoption to have a material
effect on its financial condition or results of operations.

NOTE 3 - BALANCE SHEET DETAILS:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------
                                                                2000            1999
                                                            -----------     -----------
<S>                                                         <C>             <C>
Accounts receivable:
   Trade accounts receivable ...........................    $ 1,965,000     $ 1,842,000
     Less: Allowance for doubtful account ..............       (181,000)       (165,000)
                                                            -----------     -----------
                                                            $ 1,784,000     $ 1,677,000
                                                            ===========     ===========
Inventories:
   Raw materials .......................................    $   812,000     $   824,000
   Work-in-process .....................................        574,000         546,000
   Finished goods ......................................         79,000          77,000
                                                            -----------     -----------
                                                            $ 1,465,000     $ 1,447,000
                                                            ===========     ===========
Property and equipment:
   Computer and other equipment ........................    $   705,000     $   596,000
   Tooling .............................................        160,000         136,000
   Evaluation units ....................................        655,000         555,000
   Leasehold improvements ..............................         23,000          23,000
   Furniture and fixtures ..............................         45,000          45,000
                                                            -----------     -----------
                                                            $ 1,588,000       1,355,000

   Less: Accumulated depreciation and amortization .....     (1,156,000)       (886,000)
                                                            -----------     -----------
                                                            $   432,000     $   469,000
                                                            ===========     ===========
</TABLE>

NOTE 4 - DEBT:

In December 2000, the Company's line of credit agreement expired and all
outstanding debt was repaid. Also in December 2000, the Company entered into a
one year factoring agreement with another financial institution. Receivables
purchased under this agreement are limited to the lesser of $1,500,000 or 85% of
eligible receivables and are secured by substantially all of the assets of the
Company. Interest under the agreement is prime rate plus 4% and .825% of the
amount of receivables purchased, with a minimum charge of $7,500 per month. This
agreement requires the Company to comply with certain financial covenants all of
which the Company was in compliance with at December 31, 2000. At December 31,
2000 there were no borrowings under this agreement.

NOTE 5 - CONVERTIBLE PREFERRED STOCK:

Information with regard to the Company's Preferred Stock as of December 31, 2000
is summarized in the following table:

<TABLE>
<CAPTION>
                                 SHARES     COMMON STOCK
                  SHARES       ISSUED AND   ISSUABLE UPON   LIQUIDATION      NET OF
     SERIES     AUTHORIZED     OUTSTANDING    CONVERSION    PREFERENCES   ISSUANCE COST
     ------     ----------     -----------  -------------   -----------   -------------
<S>             <C>            <C>          <C>             <C>           <C>
        C          372,296       372,296         372,296       $  5.00    $  1,861,000
        D          600,000       333,333         333,333          5.00       1,471,000
        E          500,000       375,000         375,000          4.00       1,480,000
        F          250,000       250,000         500,000          8.00       1,250,000
        G          110,000        97,500         975,000         20.00         950,000
        H           26,109        26,109         261,090         38.30       1,000,000
</TABLE>


                                       32
<PAGE>

<TABLE>
<S>             <C>            <C>          <C>             <C>           <C>
        I          167,065       167,065         167,065          4.19         700,000
        J          244,966       244,966         244,966          2.98         730,000
        K          235,110       235,110         235,110          3.19         750,000
        L          199,275       199,275         199,275          2.76         550,000
        M          179,372       179,372         179,372          2.23         400,000
        N          666,667       666,667         666,667          0.90         600,000
        O        1,320,755     1,320,755       1,320,755          1.06       1,400,000
        P           36,585        36,585         365,850          8.20         300,000
        Q          112,097       112,097       1,120,970          6.20         695,000
        R           86,207        86,207         862,070          5.80         500,000
        S           96,875        96,875         968,750          3.20         310,000
        T           16,089        16,089         160,891         20.20         325,000
        U           38,961        38,961         389,610         15.40         600,000
        V           66,038        66,038         660,377         10.60         700,000
        W           30,201        30,201         302,010         14.90         450,000
        X           32,800        32,800         328,000         25.00         820,000
        Y           57,592        57,592         575,920         19.10       1,100,000
        Z           39,906        39,906         399,061         21.30         850,000
       AA           60,774        60,774         607,740         18.10       1,100,000
                ----------     ---------    ------------                  ------------
                 5,545,740     5,141,573      12,571,178                  $ 20,892,000
Undesignated     4,454,260            --
                ----------     ---------                                  ------------
Total           10,000,000     5,141,573                                  $ 20,892,000
                ==========     =========                                  ============
</TABLE>


The holders of Series C Preferred Stock are entitled to receive $0.30 per share
per annum cumulative dividends prior to and in preference to Common
Shareholders. Such dividends are cumulative and payable when and if declared by
the Board of Directors. The holders of Series D through AA Preferred Stock are
entitled to receive, when and if declared by the Board of Directors, dividends
in the same amount per share as declared on the Company's Common Stock, with
each share of Preferred Stock being treated for this purpose as the number of
shares of Common Stock into which it is then convertible.

Each share of Preferred Stock has the number of votes equal to the number of
shares of Common Stock into which it is then convertible. The Company has
reserved sufficient shares of Common Stock to allow for the conversion of all
outstanding Preferred Stock.

The Series C through Series AA are convertible at either a 1 to 1 or 10 to 1
ratio depending on the shares convertible as set forth in the preceding table,
subject to certain stock split and stock dividend adjustments. Shares of Series
G through AA Preferred Stock were issued pursuant to an agreement entered into
in March 1996, as amended, with the Company's largest shareholder whereby the
Company sold and the shareholder purchased a number of convertible preferred
shares under a formula set out in the March 1996 agreement. Under such agreement
the number of shares of preferred stock was determined based on 85% of 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.

In the event of any liquidation, dissolution or winding up of the affairs of the
Company, the holders of the Series C through Series AA convertible preferred
stock will be entitled to receive in preference to the holders of the common
stock, an amount per share as set forth in the preceding table.

The Company issued Warrants in conjunction with the issuance of Preferred Stock.
The Warrants entitle the holders to purchase the Company's Common Stock
immediately upon issuance. The fair value of the warrants were determined using
a Black Scholes option pricing model with the following assumptions: volatility:
ranging from 80% to 144%; risk free interest rate: ranging from 4.62% to 6.1%;
expected life: 5 years and no dividend yield. The allocated fair value of the
warrants is recorded in shareholders equity.

<TABLE>
<CAPTION>
               WARRANTS ISSUED        EXERCISE PRICE           DATE
SERIES         AND OUTSTANDING          PER SHARE             ISSUED
------         ---------------        --------------         --------
<S>            <C>                    <C>                    <C>
   G               118,750                 2.50                Mar 96
   H                65,273                 4.85                Jun 96
   I                41,766                 5.24                Sep 96
   J                61,242                 3.73                Dec 96
   K                58,778                 3.98                Mar 97
   L                49,819                 3.45                Jun 97
</TABLE>


                                       33
<PAGE>

<TABLE>
<S>            <C>                    <C>                    <C>
   M                44,843                 2.78                Sep 97
   N               166,666                 1.13                Dec 97
   O               330,188                 1.33                Feb 98
   P                91,462                 0.82                Mar 98
   Q               280,242                 0.78                Jun 98
   R               215,517                 0.73                Sep 98
   S               242,187                 0.40                Dec 98
   T                40,222                 2.53                Mar 99
   U                97,402                 1.93                Jun 99
   V               165,094                 1.33                Sep 99
   W                75,503                 1.86                Dec 99
   X                82,000                 3.13                Mar 00
   Y               143,979                 2.39                Jun 00
   Z                99,765                 2.66                Sep 00
  AA               151,933                 2.26                Dec 00
                 ---------
                 2,622,631
                 =========
</TABLE>


All Warrants expire five years from the date of issuance.

NOTE 6 - STOCK OPTION PLAN:

At December 31, 2000, the Company had two stock-based compensation plans, which
are described below:

THE 1990 PLAN

Under the 1990 Stock Option Plan, as amended in 1999 (the "1990 Plan"),
employees, consultants and non-employee directors (prior to 1995) may be granted
options for up to 2,800,000 shares of common stock which vest over a four year
period from the date of grant. The options vest equally on a monthly basis
unless it is the employee's or consultant's first stock grant, in which case
vesting commences six months from the date of grant.

On November 9, 2000 our board of directors approved an increase of 1,200,000
shares in the number of shares of common stock reserved for issuance under the
1990 Plan. This increase has not yet been approved by our stockholders. Also on
November 9, 2000 the board of directors granted options to purchase 616,000
shares of common stock to all of our then current officers and employees. These
grants are contingent upon receiving stockholder approval of the increase in the
number of shares reserved for issuance under the 1990 Plan. Assuming the effect
of the increase in the number of shares reserved under the 1990 Plan and the
grant of options to our officers and employees, at December 31, 2000, 975,000
shares were available for grant under the 1990 Plan.

On May 19, 1998 the Company canceled options to purchase 952,850 shares of
Common Stock with exercise prices ranging from $1.03 to $6.38 previously granted
to employees. The Company reissued all such options at an exercise price of
$0.75, the fair market value of the stock on that date. The reissued options
vest over a four year period from the date of reissuance.

THE NON-EMPLOYEE OPTION PLAN

In 1995, the Board of Directors adopted and the shareholders approved the 1995
Stock Option Plan for Non-Employee Directors (the "Non-Employee Option Plan").
The Company has reserved 150,000 shares of Common Stock for issuance under this
Plan. Under the Non-Employee Option Plan, each newly-elected non-employee
director of the Company will be granted a non-statutory option to purchase
25,000 shares of the Company's Common Stock. This option vests over a three year
period. In addition, commencing in 1995, each non-employee director of the
Company will be granted a non-statutory option to purchase 5,000 shares of the
Company's Common Stock during each year of service as a director of the Company.
These options vest immediately upon grant and are immediately exercisable.

At December 31, 2000, 100,000 shares were available for grant under the
Non-Employee Option Plan.


                                       34
<PAGE>

On May 19, 1998, the Company canceled options to purchase 75,000 shares of
Common Stock with exercise prices ranging from $1.16 to $6.38 previously granted
to the non-employee directors. The Company reissued all such options at an
exercise price of $0.75, the fair market value of the stock on that date. The
reissued options vest immediately.

Under both plans, the options will be granted at prices equal to the fair market
value on the date of grant and expire five years from the date of grant.

The following table summarizes the combined activity of the 1990 Plan and the
Non-Employee Option Plan for the years ended December 31, 2000, 1999 and 1998:


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                     2000                         1999                          1998
                                         --------------------------   ---------------------------    --------------------------
                                                        WEIGHTED-                     WEIGHTED-                    WEIGHTED-
FIXED OPTIONS                              SHARES     AVE. EX PRICE     SHARES      AVE. EX PRICE     SHARES     AVE. EX PRICE
-------------                            ----------   -------------   ----------    -------------   ----------   --------------
<S>                                      <C>          <C>             <C>           <C>             <C>          <C>
Outstanding at beginning of year .......  1,093,733       $0.80        1,098,000        $ .76        1,011,500     $3.80
Granted ................................    925,000        3.24           89,000         1.61        1,162,850       .76
Exercised ..............................   (125,857)       0.75          (16,158)         .75
Forfeited/Canceled .....................   (172,424)       1.19          (77,109)        1.08       (1,076,350)     3.62
                                         ----------       -----       ----------        -----       ----------     -----
Outstanding at end of year .............  1,720,452       $2.08        1,093,733        $0.80        1,098,000     $0.76
                                         ==========       =====       ==========        =====       ==========     =====
Options exercisable at year-end ........    619,354                      483,915                       242,018
Weighted-average fair value of
    options granted during the year..... $     2.91                   $     1.52                    $     0.59
</TABLE>


The following table summarizes the combined information about options
outstanding under the 1990 Plan and Non-Employee Option Plan at December 31,
2000:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                   ------------------------------------------------     -----------------------------
                       NUMBER        WT-AVERAGE                            NUMBER         WT-AVERAGE
     RANGE OF      OUTSTANDING AT     REMAINING        WT-AVERAGE       EXERCISABLE AT     EXERCISE
  EXERCISE PRICE      12/31/00      CONTRACT LIFE    EXERCISE PRICE        12/31/00         PRICE
  --------------   --------------   -------------    --------------     ---------------   -----------
<S>                <C>              <C>              <C>                <C>               <C>
  $0.47 to $0.75      752,539            2.4             $0.74             523,340          $0.74
  $1.00 to $2.00       67,913            3.5             $1.48              42,535          $1.65
  $2.80 to $3.38      874,500            4.8             $3.20              48,698          $3.11
  $4.75                25,500            4.2             $4.75               5,181          $4.75
</TABLE>


The Company applies APB 25 and related Interpretations in accounting for its
stock option plans. Since all of the Company's stock options were granted at
fair market value at the date of grant, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's two
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                           2000            1999          1998
                                                        -----------    -----------    -----------
<S>                                      <C>            <C>            <C>            <C>
Net loss                                 As Reported    $(6,264,000)   $(2,593,000)   $(2,867,000)
                                         Pro Forma      $(6,770,000)   $(3,017,000)   $(3,081,000)
Basic and diluted net loss
  available to common stockholders'
  per share                              As Reported    $     (1.65)   $     (0.70)   $     (0.76)
                                         Pro Forma      $     (1.78)   $     (0.81)   $     (0.87)
</TABLE>


                                       36
<PAGE>

The compensation cost calculated under SFAS 123 is based on options granted from
1996 through 2000, and because additional option grants are expected to be made
each year, the above pro forma disclosures are not representative of the pro
forma effects of option grants on reported net income for future years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999, and 1998: expected volatility of
157.7% for 2000, 144.5% for 1999, and 112.9% for 1998; dividend yield of 0% for
all years; risk-free interest rates for the last day of the month in which the
options were granted; and expected lives of 4 years for the 1990 Option Plan and
5 years for the Non-Employee Option Plan.

NOTE 7 - INCOME TAXES:

No provisions for federal or state income taxes were recorded for the years
ended December 31, 2000, 1999, and 1998 as the Company incurred net operating
losses during these years.

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                               -------------------------------------------
                                                   2000           1999             1998
                                               -----------    ------------     -----------
<S>                                            <C>            <C>              <C>
Net operating loss carryforwards ..........    $ 9,513,000    $  8,910,000       8,240,000
Credit carryforwards ......................        970,000         967,000         941,000
Capitalized research and
   development expenses ...................        311,000         246,000
                                                                                   303,000

Reserves and other ........................        321,000         319,000         180,000
                                               -----------    ------------     -----------
Deferred tax assets .......................     11,115,000      10,442,000       9,664,000
Valuation allowance .......................    (11,115,000)    (10,442,000)     (9,664,000)
                                               -----------    ------------     -----------
                                               $        --    $         --     $        --
                                               ===========    ============     ===========
</TABLE>

Management believes that it is more likely than not that the deferred tax assets
will not be utilized. Accordingly, a full valuation allowance has been recorded.

At December 31, 2000, the Company had approximately $26,817,000 of federal and
$8,810,000 of state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2000. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50% as defined, over a three year period.

The benefit for income taxes differed from the amount determined by applying
U.S. statutory income tax rates to income before income taxes. A reconciliation
is summarized below:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                     ---------------------------------------
                                                        2000           1999          1998
                                                     -----------     ---------     ---------
<S>                                                  <C>             <C>           <C>
Tax benefit at statutory rate ...................    $(1,339,000)    $(701,000)    $(760,000)
Non-recognition of tax benefit and other ........      1,339,000       701,000       760,000
                                                     -----------     ---------     ---------
                                                     $        --     $      --     $      --
                                                     ===========     =========     =========
</TABLE>


NOTE 8 - NET LOSS PER SHARE


                                       37
<PAGE>

Options and Warrants to purchase shares, and Convertible Preferred Stock
outstanding totaling 16,764,661 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.

NOTE 9 - OPERATING SEGMENTS

The Company sells its products predominately in the United States. No other
geographic region accounted for more than 10% of net sales in fiscal 2000, 1999,
or 1998.

The Company has no long-lived assets outside the United States in any of the
years presented.

The following table presents external net sales of similar products and
services:

<TABLE>
<CAPTION>
                                             2000          1999          1998
                                          ----------    ----------    ----------
<S>                                       <C>            <C>          <C>
Storage devices and services .........    $6,086,000     8,622,000    $8,779,000
Media ................................       735,000     1,124,000       366,000
                                          ----------    ----------    ----------
                                          $6,821,000    $9,746,000    $9,145,000
                                          ==========    ==========    ==========
</TABLE>


NOTE 10 - COMMITMENTS AND CONTINGENCIES

The Company occupies its facility under a non-cancelable operating lease
agreement which expires on October 31, 2005. The lease requires the Company to
pay property taxes and insurance.

The total minimum rental commitments at December 31, 2000, excluding insurance,
normal maintenance and certain property taxes, are payable as follows:

<TABLE>
<CAPTION>
               FISCAL YEAR              OPERATING LEASE
               -----------              ---------------
<S>                                     <C>
                  2001                      $456,000
                  2002                       474,000
                  2003                       493,000
                  2004                       513,000
                  2005                       441,000
</TABLE>


Total rental expense under operating leases, including month-to-month rentals,
was $218,779, $159,000, and $181,000 for the years ended December 31, 2000, 1999
and 1998, respectively.

From time to time the Company is involved in litigation in the normal course of
business. Management believes that the outcome of matters to date will not have
a material effect on the Company's financial position, results of operations or
cash flows.

NOTE 11 -- RESTATEMENT

Under EITF Nos. 98-5 and 00-27 and related standards, if a company issues
convertible preferred stock with a beneficial conversion feature, then the value
of the beneficial conversion feature is accounted for as a deemed dividend. A
beneficial conversion feature is computed as the intrinsic value of the spread
between the quoted market price of common stock and the conversion price
multiplied by the number of common shares into which the preferred stock
converts. As described in Note 5, the Company has funded its operations through
the sales, in private placements, of preferred stock and warrants to its
principal investor. Management believes that these equity transactions were made
in the best interests of the Company. In determining whether there was a
beneficial conversion feature, management utilized an estimated fair value of
common stock which was lower than its quoted market price. Management believed
that the negotiated price of the stock was representative of the market price of
the stock in a private placement of that size. Management concluded that there
was no beneficial conversion feature associated with the issuance of convertible
preferred stock and warrants, and the Company did not record a deemed dividend.

Recently, the Company became aware that the SEC has insisted that the quoted
market price be used in calculating a beneficial conversion feature. As the
result of the SEC's position, the Company has restated its financial statements
to reflect a deemed


                                       38
<PAGE>

dividend as a charge to accumulated deficit and earnings per share. The
restatement did not affect the Company's assets, liabilities, revenues or
expenses as originally reported. In the restatement, the deemed dividend is
added to net loss to determine net loss attributable to common shareholders.

In addition to the restatement to use the quoted market price to measure the
beneficial conversion feature, the Company restated to report a cumulative
effect of accounting change as of October 1, 2000, representing the effect of
the change in accounting method from use of the stated conversion price to use
of the accounting conversion price in applying the intrinsic value method for
determining the beneficial conversion feature for all convertible preferred
stock issuances as required by EITF 00-27. The EITF required that the effect of
adopting the accounting conversion price be recorded in the fourth quarter of
2000. The loss per share for each period is revised to reflect the net loss
attributable to common shareholders, as presented below:

<TABLE>
<CAPTION>
                                                                                     Year Ended
                                                                        -----------------------------------
                                                                          2000         1999          1998
                                                                        -------       -------       -------
                                                                        (in thousands, except per share data)
<S>                                                                     <C>           <C>           <C>
Net loss, as originally reported                                        $(3,938)      $(2,059)      $(2,235)
Deemed dividend, including cumulative effect adjustment                  (2,326)         (534)         (432)
Net loss attributable to shareholders, as restated                      $(6,264)      $(2,593)      $(2,667)

Net loss per share, as originally reported                              $ (1.04)      $ (0.56)      $ (0.64)
Net loss attributable to common shareholder per share, as restated      $ (1.65)      $ (0.70)      $ (0.76)
</TABLE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of DISC, Inc.

In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 23 present fairly, in all material respects, the financial
position of DISC, Inc. at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 1, the ability of the Company to sustain its future
operations, will depend on its ability to significantly increase sales or raise
significant additional equity or debt financing.

As discussed in Note 11, the previously issued financial statements for the
years ended December 31, 2000, 1999 and 1998 have been restated to effect
changes in accounting for the beneficial conversion feature associated with
issuances of preferred stock.

PricewaterhouseCoopers LLP
San Jose, CA
February 9, 2001, except as to Notes 1 and 11, which are as of November 7, 2001.


                                       39
<PAGE>

                                INDEX TO EXHIBITS

These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER        DESCRIPTION
--------       -----------
<S>            <C>
   3.1         Amended and Restated Articles of Incorporation as filed with the
               California Secretary of State on December 15, 1992, incorporated
               herein by this reference to Exhibit 3.1 to the Company's
               Registration Statement on Form S-1, File No. 33-52144 (the "S-1
               Registration Statement").

   3.2         Certificate of Determination of Preferences of Series D Preferred
               Stock, as filed with the California Secretary of State on April
               15, 1994, incorporated herein by this reference to Exhibit 3.2 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1994, File No. 33-52144 (the "1994 Form 10-K").

   3.3         Certificate of Determination of Preferences of Series E Preferred
               Stock, as filed with the California Secretary of State on March
               30, 1995, incorporated herein by this reference to Exhibit 3.3 to
               the Company's 1994 Form 10-K.

   3.4         Certificate of Amendment to Amended and Restated Articles of
               Incorporation, as filed with the California Secretary of State on
               September 18, 1995, incorporated herein by this reference to
               Exhibit 3.4 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1995, File No. 33-52144 (the "1995 Form
               10-K").

   3.5         Certificate of Determination of Preferences of Series F Preferred
               Stock, as filed with the California Secretary of State on
               September 18, 1995, incorporated herein by this reference to
               Exhibit 3.5 to the Company's 1995 Form 10-K

   3.6         Certificate of Determination of Preferences of Series G Preferred
               Stock, as filed with the California Secretary of State on
               February 22, 1996, incorporated herein by this reference to
               Exhibit 3.6 to the Company's 1995 Form 10-K.

   3.7         Certificate of Amendment to Certificate of Determination of
               Preferences of Series G Preferred Stock, as filed with the
               California Secretary of State on April 1, 1996, incorporated
               herein by this reference to Exhibit 3.7 to the Company's 1995
               Form 10-K.

   3.8         Certificate of Determination of Preference of Series H Preferred
               Stock, as filed with the California Secretary of State on
               November 18, 1996, incorporated herein by this reference to
               Exhibit 3.8 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1996 (the "1996 Form 10-K").

   3.9         Certificate of Determination of Preferences of Series I Preferred
               Stock, as filed with the California Secretary of State on
               November 18, 1996, incorporated herein by this reference to
               Exhibit 3.9 to the Company's 1996 Form 10-K.

   3.10        Certificate of Amendment to Amended and Restated Articles of
               Incorporation, as filed with the California Secretary of State on
               April 14, 1997, incorporated herein by this reference to Exhibit
               3.10 to the Company's 1996 Form 10-K.

   3.11        Certificate of Determination of Preferences of Series J Preferred
               Stock, as filed with the California Secretary of State on April
               14, 1997, incorporated herein by this reference to Exhibit 3.11
</TABLE>


                                       40
<PAGE>

<TABLE>
<S>            <C>
               to the Company's 1996 Form 10-K.

   3.12        Certificate of Determination of Preferences of Series K Preferred
               Stock, as filed with the California Secretary of State on August
               15, 1997, incorporated herein by this reference to Exhibit 3.12
               to the Company's Annual Report on Form 10-K for the year ended
               December 31, 1997 (the "1997 Form 10-K").

   3.13        Certificate of Determination of Preferences of Series L Preferred
               Stock, as filed with the California Secretary of State on August
               15, 1997, incorporated herein by this reference to Exhibit 3.13
               to the Company's 1997 Form 10-K.

   3.14        Certificate of Determination of Preferences of Series M Preferred
               Stock, as filed with the California Secretary of State on January
               6, 1998, incorporated herein by this reference to Exhibit 3.14 to
               the Company's 1997 Form 10-K.

   3.15        Certificate of Determination of Preferences of Series N Preferred
               Stock, as filed with the California Secretary of State on January
               7, 1998, incorporated herein by this reference to Exhibit 3.15 to
               the Company's 1997 Form 10-K.

   3.16        Certificate of Determination of Preferences of Series O Preferred
               Stock, as filed with the California Secretary of State on March
               31, 1998, incorporated herein by this reference to Exhibit 3.1 to
               the Company's Quarterly Report on Form 10-Q for the quarterly
               period ended September 30, 1998 (the "1998 Third Quarter Form
               10-Q").

   3.17        Certificate of Determination of Preferences of Series P Preferred
               Stock, as filed with the California Secretary State on October 9,
               1998, incorporated herein by this reference to Exhibit 3.2 to the
               Company's 1998 Third Quarter Form 10-Q.

   3.18        Certificate of Determination of Preferences of Series Q Preferred
               Stock, as filed with the California Secretary of State on October
               9, 1998, incorporated herein by this reference to Exhibit 3.18 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1998 (the "1998 Form 10-K").

   3.19        Certificate of Determination of Preferences of Series R Preferred
               Stock, as filed with the California Secretary of State on January
               12, 1999, incorporated herein by this reference to Exhibit 3.19
               to the Company's 1998 Form 10-K.

   3.20        Certificate of Determination of Preferences of Series S Preferred
               Stock, as filed with the California Secretary of State on January
               12, 1999, incorporated herein by this reference to Exhibit 3.20
               to the Company's 1998 Form 10-K.

   3.21        Certificate of Determination of Preferences of Series T Preferred
</TABLE>


                                       41
<PAGE>

<TABLE>
<S>            <C>
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.21 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1999 (the "1999 Form 10-K).

   3.22        Certificate of Determination of Preferences of Series U Preferred
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.22 to the Company's 1999 Form 10-K.

   3.23        Certificate of Determination of Preferences of Series V Preferred
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.23 to the Company's 1999 Form 10-K.

   3.24        Certificate of Determination of Preferences of Series W Preferred
               Stock, as filed with the California Secretary of State on January
               26, 2000, incorporated herein by this reference to Exhibit 3.24
               to the Company's 1999 Form 10-K.

   3.25**      Certificate of Determination of Preferences of Series X Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.26**      Certificate of Determination of Preferences of Series Y Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.27**      Certificate of Determination of Preferences of Series Z Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.28**      Certificate of Determination of Preferences of Series AA
               Preferred Stock, as filed with the California Secretary of State
               on January 9, 2001.

   3.29        Bylaws, incorporated herein by this reference to Exhibit 3.3 to
               the S-1 Registration Statement.


  10.1+        DISC, Inc. 1990 Stock Option Plan, as amended (the "Plan"),
               incorporated by reference to Exhibit 10.1 to the S-1 Registration
               Statement.


  10.2+        Form of Stock Option Agreement for use with the Plan,
               incorporated herein by this reference to Exhibit 10.2 to the S-1
               Registration Statement.

  10.3+        Form of Stock Bonus Agreement for use with the Plan, incorporated
               herein by this reference to Exhibit 10.3 to the S-1 Registration
               Statement.
</TABLE>


                                       42
<PAGE>

<TABLE>
<S>            <C>
  10.4+        Form of Stock Purchase Agreement for use with the Plan,
               incorporated herein by this reference to Exhibit 10.4 to the S-1
               Registration Statement.

  10.5+        DISC, Inc. 1995 Stock Option Plan for Non-Employee Directors (the
               "Director Plan"), incorporated herein by this reference to
               Exhibit 10.5 to the Company's 1995 Form 10-K.


  10.6+        Form of Stock Option Agreement for use with the Director Plan,
               incorporated herein by this reference to Exhibit 10.6 to the
               Company's 1995 Form 10-K.

  10.7+        Form of Indemnification Agreement entered into by the Company and
               its executive officers and directors, incorporated by this
               reference to Exhibit 10.5 to the S-1 Registration Statement.

  10.8         Series D Preferred Stock Purchase Agreement dated April 14, 1994,
               incorporated herein by this reference to Exhibit 10.6 to the
               Company's 1994 Form 10-K.

  10.9         Series E Preferred Stock Purchase Agreement dated March 31, 1995,
               incorporated herein by this reference to Exhibit 10.7 to the
               Company's 1994 Form 10-K.

  10.10        Series F Preferred Stock Purchase Agreement dated September 29,
               1995, incorporated herein by this reference to Exhibit 10.10 to
               the Company's 1995 Form 10-K.

  10.11        Series G Preferred Stock Purchase Agreement dated March 29, 1996,
               incorporated herein by this reference to Exhibit 10.11 to the
               Company's 1995 Form 10-K.

  10.12        Convertible Debenture Purchase Agreement dated March 29, 1996,
               incorporated herein by this reference to Exhibit 10.12 to the
               Company's 1995 Form 10-K.

  10.13        Sublease dated October 19, 1994, between the Company and Dolch
               American Instruments, Inc., for property located in Milpitas,
               California, incorporated herein by this reference to Exhibit 10.8
               to the Company's 1994 Form 10-K.

  10.14        Loan and Security Agreement dated December 14, 1994 between the
               Company and CoastFed Business Credit Corporation, as amended to
               date, incorporated herein by this reference to Exhibit 10.14 to
               the Company's 1995 Form 10-K.

  10.15        First Amendment to Convertible Debenture Purchase Agreement,
               dated December 31, 1996, incorporated herein by this reference to
               Exhibit 10.15 to the Company's 1996 Form 10-K.

  10.16        Second Amendment to Convertible Debenture Purchase Agreement,
               dated April 11, 1997, incorporated herein by this reference to
               Exhibit 10.16 to the Company's 1996 Form 10-K.

  10.17        Third Amendment to Convertible Debenture Purchase Agreement,
</TABLE>


                                       43
<PAGE>

<TABLE>
<S>            <C>
               dated December 31, 1997, incorporated herein by this reference to
               Exhibit 10.17 to the Company's 1997 Form 10-K.

  10.18        Amendment No. 2 to Loan Documents, dated January 13, 1998,
               incorporated herein by this reference to Exhibit 10.18 to the
               Company's 1997 Form 10-K.

  10.19        Series O Preferred Stock Purchase Agreement dated February 20,
               1998, incorporated herein by this reference to Exhibit 10.1 to
               the Company's Quarterly Report on Form 10-Q for the quarterly
               period ended March 31, 1998 (the "1998 First Quarter Form 10-Q").

  10.20        Fourth Amendment to Convertible Debenture Purchase Agreement,
               dated March 27, 1998, incorporated herein by this reference to
               Exhibit 10.2 to the Company's 1998 First Quarter Form 10-Q.

  10.21        Fifth Amendment to Convertible Debenture Purchase Agreement,
               dated June 30, 1998, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended June 30, 1998.

  10.22        Sixth Amendment to Convertible Debenture Purchase Agreement,
               dated September 25, 1998, incorporated herein by this reference
               to Exhibit 10.2 to the Company's 1988 Third Quarter Form 10-Q.

  10.23        Seventh Amendment to Convertible Debenture Purchase Agreement,
               dated December 30, 1998, incorporated herein by this reference to
               Exhibit 10.23 to the Company's 1998 Form 10-K.

  10.24        Eighth Amendment to Convertible Debenture Purchase Agreement,
               dated March 31, 1999, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended March 31, 1999.

  10.25        Ninth Amendment to Convertible Debenture Purchase Agreement,
               dated June 30, 1999, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended June 30, 1999.

  10.26        Tenth Amendment to Convertible Debenture Purchase Agreement,
               dated September 30, 1999, incorporated herein by this reference
               to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
               for the quarterly period ended September 30, 1999.

  10.27**      Factoring Agreement dated December 27, 2000 between the Company
               and SUMMIT Financial Resources, L.P.

  10.28**      First Amendment, dated June 29, 2000, to Lease Agreement between
               the Company and Stanley R. Deck and Ellen Deck.
</TABLE>


                                       44
<PAGE>

<TABLE>
<S>            <C>
  23.1*        Consent of PricewaterhouseCoopers LLP.

  25           Power of Attorney (included on Signature Page).
</TABLE>


----------

+      Indicates management contract or compensatory plan or arrangement.

*      Filed with this Annual Report on Form 10-K for the year ended December
       31, 2000.

**     Previously filed with the Company's 2000 10-K as filed on April 2, 2001.


                                       45
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, this 13th day of November 2001.

                                     By:  /s/ J. RICHARD ELLIS
                                          --------------------------------------
                                          J. Richard Ellis
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

I, the undersigned director and officer of DISC, Inc., do hereby constitute and
appoint our true and lawful attorney and agent with power of substitution, to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney and agent, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments hereto, and we do hereby ratify and confirm all that said
attorney and agent, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


                                       46
<PAGE>

<TABLE>
<CAPTION>
               SIGNATURE                                       TITLE                                      DATE
               ---------                                       -----                                      ----
<S>                                           <C>                                                    <C>
/s/ J. RICHARD ELLIS                          President, Chief Executive Officer and                 November 13, 2001
-------------------------------------------   Chairman of the Board of Directors
           (J. Richard Ellis)                 (Principal Executive Officer)


/s/ HENRY MADRID                              Vice President of Finance and                          November 13, 2001
-------------------------------------------   Chief Financial Officer
             (Henry Madrid)                   (Principal Financial and Accounting Officer


/s/ FRANK T. CONNORS                          Director                                               November 13, 2001
-------------------------------------------
           (Frank T. Connors)


/s/ F. RIGDON CURRIE                          Director                                               November 13, 2001
-------------------------------------------
           (F. Rigdon Currie)


/s/ MICHAEL D. KAUFMAN                        Director                                               November 13, 2001
-------------------------------------------
          (Michael D. Kaufman)


/s/ ARCH J. MCGILL                            Director                                               November 13, 2001
-------------------------------------------
            (Arch J. McGill)


/s/ MICHAEL A. MCMANUS, JR.                   Director                                               November 13, 2001
-------------------------------------------
       (Michael A. McManus, Jr.)
</TABLE>


                                       47

<PAGE>

                                INDEX TO EXHIBITS

These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER        DESCRIPTION
--------       -----------
<S>            <C>
   3.1         Amended and Restated Articles of Incorporation as filed with the
               California Secretary of State on December 15, 1992, incorporated
               herein by this reference to Exhibit 3.1 to the Company's
               Registration Statement on Form S-1, File No. 33-52144 (the "S-1
               Registration Statement").

   3.2         Certificate of Determination of Preferences of Series D Preferred
               Stock, as filed with the California Secretary of State on April
               15, 1994, incorporated herein by this reference to Exhibit 3.2 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1994, File No. 33-52144 (the "1994 Form 10-K").

   3.3         Certificate of Determination of Preferences of Series E Preferred
               Stock, as filed with the California Secretary of State on March
               30, 1995, incorporated herein by this reference to Exhibit 3.3 to
               the Company's 1994 Form 10-K.

   3.4         Certificate of Amendment to Amended and Restated Articles of
               Incorporation, as filed with the California Secretary of State on
               September 18, 1995, incorporated herein by this reference to
               Exhibit 3.4 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1995, File No. 33-52144 (the "1995 Form
               10-K").

   3.5         Certificate of Determination of Preferences of Series F Preferred
               Stock, as filed with the California Secretary of State on
               September 18, 1995, incorporated herein by this reference to
               Exhibit 3.5 to the Company's 1995 Form 10-K

   3.6         Certificate of Determination of Preferences of Series G Preferred
               Stock, as filed with the California Secretary of State on
               February 22, 1996, incorporated herein by this reference to
               Exhibit 3.6 to the Company's 1995 Form 10-K.

   3.7         Certificate of Amendment to Certificate of Determination of
               Preferences of Series G Preferred Stock, as filed with the
               California Secretary of State on April 1, 1996, incorporated
               herein by this reference to Exhibit 3.7 to the Company's 1995
               Form 10-K.

   3.8         Certificate of Determination of Preference of Series H Preferred
               Stock, as filed with the California Secretary of State on
               November 18, 1996, incorporated herein by this reference to
               Exhibit 3.8 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1996 (the "1996 Form 10-K").

   3.9         Certificate of Determination of Preferences of Series I Preferred
               Stock, as filed with the California Secretary of State on
               November 18, 1996, incorporated herein by this reference to
               Exhibit 3.9 to the Company's 1996 Form 10-K.

   3.10        Certificate of Amendment to Amended and Restated Articles of
               Incorporation, as filed with the California Secretary of State on
               April 14, 1997, incorporated herein by this reference to Exhibit
               3.10 to the Company's 1996 Form 10-K.

   3.11        Certificate of Determination of Preferences of Series J Preferred
               Stock, as filed with the California Secretary of State on April
               14, 1997, incorporated herein by this reference to Exhibit 3.11
</TABLE>


                                       48
<PAGE>

<TABLE>
<S>            <C>
               to the Company's 1996 Form 10-K.

   3.12        Certificate of Determination of Preferences of Series K Preferred
               Stock, as filed with the California Secretary of State on August
               15, 1997, incorporated herein by this reference to Exhibit 3.12
               to the Company's Annual Report on Form 10-K for the year ended
               December 31, 1997 (the "1997 Form 10-K").

   3.13        Certificate of Determination of Preferences of Series L Preferred
               Stock, as filed with the California Secretary of State on August
               15, 1997, incorporated herein by this reference to Exhibit 3.13
               to the Company's 1997 Form 10-K.

   3.14        Certificate of Determination of Preferences of Series M Preferred
               Stock, as filed with the California Secretary of State on January
               6, 1998, incorporated herein by this reference to Exhibit 3.14 to
               the Company's 1997 Form 10-K.

   3.15        Certificate of Determination of Preferences of Series N Preferred
               Stock, as filed with the California Secretary of State on January
               7, 1998, incorporated herein by this reference to Exhibit 3.15 to
               the Company's 1997 Form 10-K.

   3.16        Certificate of Determination of Preferences of Series O Preferred
               Stock, as filed with the California Secretary of State on March
               31, 1998, incorporated herein by this reference to Exhibit 3.1 to
               the Company's Quarterly Report on Form 10-Q for the quarterly
               period ended September 30, 1998 (the "1998 Third Quarter Form
               10-Q").

   3.17        Certificate of Determination of Preferences of Series P Preferred
               Stock, as filed with the California Secretary State on October 9,
               1998, incorporated herein by this reference to Exhibit 3.2 to the
               Company's 1998 Third Quarter Form 10-Q.

   3.18        Certificate of Determination of Preferences of Series Q Preferred
               Stock, as filed with the California Secretary of State on October
               9, 1998, incorporated herein by this reference to Exhibit 3.18 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1998 (the "1998 Form 10-K").

   3.19        Certificate of Determination of Preferences of Series R Preferred
               Stock, as filed with the California Secretary of State on January
               12, 1999, incorporated herein by this reference to Exhibit 3.19
               to the Company's 1998 Form 10-K.

   3.20        Certificate of Determination of Preferences of Series S Preferred
               Stock, as filed with the California Secretary of State on January
               12, 1999, incorporated herein by this reference to Exhibit 3.20
               to the Company's 1998 Form 10-K.

   3.21        Certificate of Determination of Preferences of Series T Preferred
</TABLE>


                                       49
<PAGE>

<TABLE>
<S>            <C>
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.21 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1999 (the "1999 Form 10-K).

   3.22        Certificate of Determination of Preferences of Series U Preferred
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.22 to the Company's 1999 Form 10-K.

   3.23        Certificate of Determination of Preferences of Series V Preferred
               Stock, as filed with the California Secretary of State on
               December 31, 1999, incorporated herein by this reference to
               Exhibit 3.23 to the Company's 1999 Form 10-K.

   3.24        Certificate of Determination of Preferences of Series W Preferred
               Stock, as filed with the California Secretary of State on January
               26, 2000, incorporated herein by this reference to Exhibit 3.24
               to the Company's 1999 Form 10-K.

   3.25**      Certificate of Determination of Preferences of Series X Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.26**      Certificate of Determination of Preferences of Series Y Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.27**      Certificate of Determination of Preferences of Series Z Preferred
               Stock, as filed with the California Secretary of State on
               December 28, 2000.

   3.28**      Certificate of Determination of Preferences of Series AA
               Preferred Stock, as filed with the California Secretary of State
               on January 9, 2001.

   3.29        Bylaws, incorporated herein by this reference to Exhibit 3.3 to
               the S-1 Registration Statement.


  10.1+        DISC, Inc. 1990 Stock Option Plan, as amended (the "Plan"),
               incorporated by reference to Exhibit 10.1 to the S-1 Registration
               Statement.


  10.2+        Form of Stock Option Agreement for use with the Plan,
               incorporated herein by this reference to Exhibit 10.2 to the S-1
               Registration Statement.

  10.3+        Form of Stock Bonus Agreement for use with the Plan, incorporated
               herein by this reference to Exhibit 10.3 to the S-1 Registration
               Statement.
</TABLE>


                                       50
<PAGE>

<TABLE>
<S>            <C>
  10.4+        Form of Stock Purchase Agreement for use with the Plan,
               incorporated herein by this reference to Exhibit 10.4 to the S-1
               Registration Statement.

  10.5+        DISC, Inc. 1995 Stock Option Plan for Non-Employee Directors (the
               "Director Plan"), incorporated herein by this reference to
               Exhibit 10.5 to the Company's 1995 Form 10-K.


  10.6+        Form of Stock Option Agreement for use with the Director Plan,
               incorporated herein by this reference to Exhibit 10.6 to the
               Company's 1995 Form 10-K.

  10.7+        Form of Indemnification Agreement entered into by the Company and
               its executive officers and directors, incorporated by this
               reference to Exhibit 10.5 to the S-1 Registration Statement.

  10.8         Series D Preferred Stock Purchase Agreement dated April 14, 1994,
               incorporated herein by this reference to Exhibit 10.6 to the
               Company's 1994 Form 10-K.

  10.9         Series E Preferred Stock Purchase Agreement dated March 31, 1995,
               incorporated herein by this reference to Exhibit 10.7 to the
               Company's 1994 Form 10-K.

  10.10        Series F Preferred Stock Purchase Agreement dated September 29,
               1995, incorporated herein by this reference to Exhibit 10.10 to
               the Company's 1995 Form 10-K.

  10.11        Series G Preferred Stock Purchase Agreement dated March 29, 1996,
               incorporated herein by this reference to Exhibit 10.11 to the
               Company's 1995 Form 10-K.

  10.12        Convertible Debenture Purchase Agreement dated March 29, 1996,
               incorporated herein by this reference to Exhibit 10.12 to the
               Company's 1995 Form 10-K.

  10.13        Sublease dated October 19, 1994, between the Company and Dolch
               American Instruments, Inc., for property located in Milpitas,
               California, incorporated herein by this reference to Exhibit 10.8
               to the Company's 1994 Form 10-K.

  10.14        Loan and Security Agreement dated December 14, 1994 between the
               Company and CoastFed Business Credit Corporation, as amended to
               date, incorporated herein by this reference to Exhibit 10.14 to
               the Company's 1995 Form 10-K.

  10.15        First Amendment to Convertible Debenture Purchase Agreement,
               dated December 31, 1996, incorporated herein by this reference to
               Exhibit 10.15 to the Company's 1996 Form 10-K.

  10.16        Second Amendment to Convertible Debenture Purchase Agreement,
               dated April 11, 1997, incorporated herein by this reference to
               Exhibit 10.16 to the Company's 1996 Form 10-K.

  10.17        Third Amendment to Convertible Debenture Purchase Agreement,
</TABLE>


                                       51
<PAGE>

<TABLE>
<S>            <C>
               dated December 31, 1997, incorporated herein by this reference to
               Exhibit 10.17 to the Company's 1997 Form 10-K.

  10.18        Amendment No. 2 to Loan Documents, dated January 13, 1998,
               incorporated herein by this reference to Exhibit 10.18 to the
               Company's 1997 Form 10-K.

  10.19        Series O Preferred Stock Purchase Agreement dated February 20,
               1998, incorporated herein by this reference to Exhibit 10.1 to
               the Company's Quarterly Report on Form 10-Q for the quarterly
               period ended March 31, 1998 (the "1998 First Quarter Form 10-Q").

  10.20        Fourth Amendment to Convertible Debenture Purchase Agreement,
               dated March 27, 1998, incorporated herein by this reference to
               Exhibit 10.2 to the Company's 1998 First Quarter Form 10-Q.

  10.21        Fifth Amendment to Convertible Debenture Purchase Agreement,
               dated June 30, 1998, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended June 30, 1998.

  10.22        Sixth Amendment to Convertible Debenture Purchase Agreement,
               dated September 25, 1998, incorporated herein by this reference
               to Exhibit 10.2 to the Company's 1988 Third Quarter Form 10-Q.

  10.23        Seventh Amendment to Convertible Debenture Purchase Agreement,
               dated December 30, 1998, incorporated herein by this reference to
               Exhibit 10.23 to the Company's 1998 Form 10-K.

  10.24        Eighth Amendment to Convertible Debenture Purchase Agreement,
               dated March 31, 1999, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended March 31, 1999.

  10.25        Ninth Amendment to Convertible Debenture Purchase Agreement,
               dated June 30, 1999, incorporated herein by this reference to
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended June 30, 1999.

  10.26        Tenth Amendment to Convertible Debenture Purchase Agreement,
               dated September 30, 1999, incorporated herein by this reference
               to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
               for the quarterly period ended September 30, 1999.

  10.27**      Factoring Agreement dated December 27, 2000 between the Company
               and SUMMIT Financial Resources, L.P.

  10.28**      First Amendment, dated June 29, 2000, to Lease Agreement between
               the Company and Stanley R. Deck and Ellen Deck.
</TABLE>


                                       52
<PAGE>

<TABLE>
<S>            <C>
  23.1*        Consent of PricewaterhouseCoopers LLP.

  25           Power of Attorney (included on Signature Page).
</TABLE>


----------

+      Indicates management contract or compensatory plan or arrangement.

*      Filed with this Annual Report on Form 10-K for the year ended December
       31, 2000.

**     Previously filed with the Company's 2000 10-K as filed on April 2, 2001.

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