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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

(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, 2002

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from      to      .

Commission file number: 1-11578

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            |  |                       
|Milpitas, California            |  | 95035                 
|(Address of principal office)   |  | (Zip Code)            

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and, (2) has been subject to
such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. o

Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes  o    No  x

The 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
June 30, 2002 as quoted on the Nasdaq Small-Cap Market was
approximately $3.3 million.

The number of outstanding shares of the registrants Common Stock as of
March 17, 2003 was 4,817,617.



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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II          
|                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                  | Item 6. Selected and Supplementary Financial Data                                            
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|                  | Item 14. Controls and Procedures                                                             
|PART IV          
|                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 3.34     
|EXHIBIT 3.35     
|EXHIBIT 3.36     
|EXHIBIT 3.37     
|EXHIBIT 3.38     
|EXHIBIT 3.39     
|EXHIBIT 3.40     
|EXHIBIT 3.41     
|EXHIBIT 3.42     
|EXHIBIT 3.43     
|EXHIBIT 3.44     
|EXHIBIT 3.45     
|EXHIBIT 3.46     
|EXHIBIT 3.47     
|EXHIBIT 3.48     
|EXHIBIT 3.49     
|EXHIBIT 3.50     
|EXHIBIT 3.51     
|EXHIBIT 3.52     
|EXHIBIT 10.58    
|EXHIBIT 10.59    
|EXHIBIT 10.60    
|EXHIBIT 10.61    
|EXHIBIT 10.62    
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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DISC, INC.
FORM 10-K
INDEX

|         |  |                                                                                       |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                       |  | Page
|         |  |                                                                                       |  |     
|PART I   |  |                                                                                       |  |      | 1  | 
|Item 1.  |  | Business                                                                              |  |      | 1  | 
|Item 2.  |  | Properties                                                                            |  |      | 13 | 
|Item 3.  |  | Legal Proceedings                                                                     |  |      | 13 | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |      | 14 | 
|PART II  |  |                                                                                       |  |      | 15 | 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 15 | 
|Item 6.  |  | Selected and Supplementary Financial Data                                             |  |      | 16 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 18 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 26 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  |      | 26 | 
|Item 9.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  |  |      | 26 | 
|PART III |  |                                                                                       |  |      | 27 | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |      | 27 | 
|Item 11. |  | Executive Compensation                                                                |  |      | 28 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |      | 32 | 
|Item 13. |  | Certain Relationships and Related Transactions                                        |  |      | 33 | 
|Item 14. |  | Controls and Procedures                                                               |  |      | 34 | 
|PART IV  |  |                                                                                       |  |      | 35 | 
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |      | 35 | 





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PART I

Introductory Note

This Annual Report on Form 10-K 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
our estimates, plans and beliefs that (i) costs of sales per product unit will
decrease; (ii) research and development expenses will remain relatively
constant; (iii) sales and marketing expenses will increase; (iv) general
and administrative expenses will remain relatively constant;
(v) we will seek additional financing from investors;
(vi) we will significantly increase sales; (vii) we will continue to incur net losses; (viii) our selling
efforts to large system integrators and OEMs will increase; and (ix) we will
expand our current network of resellers. For this purpose, any statements
contained in this Annual Report on Form 10-K 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 of 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
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 that
increase the uncertainty inherent in the forward-looking statements (see Risk
Factors that May Affect Future Operating Results 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, 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 rewritable 5.25 inch, Magneto-Optical (MO)
disks, 120-millimeter Digital Versatile Discs (DVD), and Compact Discs (CD)
technologies.

Products

We spent most of 2002 continuing to redefine 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 our nearline storage
systems





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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, we refocused our product lines and sales and
marketing efforts. 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 total cost of hard disk RAID (Redundant Array
of Independent Drives). In addition to offering cost-effective nearline
storage devices, we have spent a considerable amount of our resources designing
and delivering network-attached storage (NAS) servers to enable seamless
connectivity of our storage devices.

Our products, which add storage capacity to networks for a fraction of the
total cost of RAID, are based upon reliable and industry proven storage
technologies. The underlying technologies are DVD-RAM/ROM/R and 5.25-inch
MO-Rewritable/write once. With a shelf life exceeding 30 years, random access
reading and writing, our 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 enterprise 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 as 3.5
cents.

The second class of product that we offer is the NSM Series, an automated
library system built around DVD and CD technology. The NSM Series scales in
capacity from 40 GB of storage to 6.5 TB of storage and gives our customers an
entry-level storage solution that was not previously available. The NSM Series
product line is based on a modular technology that allows the same options and
upgrades to be used throughout the NSM-Series product line. The NSM Series
offers some of the most cost-effective storage in the industry with an end-user
cost per megabyte of less than a penny.

The third class of products that we offer is our DISCSTOR/nas product line
of network-attached storage 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
environment and allows users to add multi-terabyte storage solutions to their
networks with an unprecedented level of simplicity.

Please
see Note 11 to the Notes to Consolidated Financial Statements included in this
report on Form 10-K for a description of revenues attributable to our domestic
and foreign sales for 2002, 2001 and 2000. For a description of the risks
attendant to our foreign operations, please see the section of this report
entitled, Risk Factors that May Affect Future Operating Results and the
heading Because we are dependent on international sales for a substantial
amount of our net revenues, we face the risks of international business and
associated currency fluctuations, which might adversely affect our operating
results. In addition, please see Note 11 to the Notes to
Consolidated Financial
Statements included in this report for a description of revenues attributable
to similar products and services sold in 2002, 2001 and 2000.

Marketing and Sales

Over the last year we continued to make investments in sales and
marketing. We have continued to strengthen our sales organization by adding
sales professionals that are focused on selling solutions for data

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storage. The sales force is focused on growing our channel of storage
VARs and providing them with better data storage solutions to offer their
customers.

In addition, our acquisition of NSM Storage GmbH, a German limited
liability company in July 2001 has given us a presence in the international
market, has broadened our product range with DVD automation technology and has
strengthened our engineering and development staffs.

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

Our sales offices are located in Northern California; Hauppauge, New York;
Boston, Massachusetts; Washington, DC; Dallas, Texas; Phoenix, Arizona;
Minneapolis, Minnesota; Tampa, Florida; Croydon, England; and Bingen, Germany.
Our sales staff currently consists of 16 professional salespersons.

Competition

We are currently selling nearline storage solutions for networks. While
there are few direct competitors, there are many indirect competitors. The
competitors include the top vendors that design, manufacture and market
enterprise-level storage products. These companies are EMC, Network Appliance,
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 products or require us to reduce our 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 we do, 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. As
end-users need to increase their pool of available storage, our products are
one of the most cost-effective alternatives.

The principal market requirements for our products are large storage
capacity, low cost per megabyte, reliability, compact physical size, permanence
and longevity of data 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, our
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 Risk Factors that May Affect Future Operating Results under
the heading Competition in the Computer Information Storage Market May Lead to
Reduced Market Share, Declining Prices and Reduced Profits.

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Business Combination

On July 30, 2001 we acquired all of the outstanding shares of NSM Storage
GmbH, a German limited liability company (NSM). Under the terms of the
acquisition, we issued 965,210 shares of our common stock and paid $10,000 in
cash. We also agreed to severance payments of $75,000 to each of the two
managing directors and principal shareholders of NSM. The acquisition was
accounted for under the purchase method of accounting.

Manufacturing and Components

Our manufacturing operations both in the U.S. and Germany consist of final
system assembly and product test activities. The majority of the parts and
subassemblies in our libraries are standard, off-the-shelf components or are
fabricated to our 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. If we cannot secure components
from our single-source suppliers and if we are unable to develop alternative
sources of supply as required in the future, our operations will be materially
adversely affected.

Research and Development

We have focused our research and development programs to provide software
storage solutions for our automated library systems. 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 eighteen 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 $2,447,000, $2,001,000 and $1,158,000 on research and
development for the years ended December 31, 2002, 2001 and 2000, 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 sales 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, 2002 was approximately $716,000 as compared to
a backlog of approximately $486,000 at December 31, 2001. We include in
backlog only those orders for products and services that are believed to be
firm and that are due to be shipped or performed 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

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actual revenues for 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 own U.S. and German 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 depends in part on our
ownership of them. However, we believe that the improvement of our existing
products, reliance upon trade secrets and copyrights and reliance 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, local and German 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 future harm to our business based on the nature of our
operations and the effect 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, 2003, we employed 91 people on a full-time basis,
including 15 employees in administration and accounting, 19 employees in
marketing and sales, 18 employees in engineering, 27 employees in
manufacturing, 1 employee in quality assurance and 11 employees in customer
support. Approximately 45 employees were in international locations. 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. We have not experienced any work
stoppages. Some of our employees in our location in Germany are covered by a
collective bargaining agreement or employment agreements.

Customers

Compaq Computer Corporation and Incom GmbH, two customers, accounted for
23% and 10%, respectively, of our total revenue in 2002. Compaq Computer
Corporation and Ingram Micro Inc., two OEM customers, accounted for 31% and
14%, respectively, of our total revenue in 2001. Compaq Computer Corporation
and Commvault Systems Inc., two OEM customers, accounted for 14% and 13%,
respectively, of our total revenue in 2000.

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

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Risk Factors that May Affect Future Operating Results

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

We will need additional funding to continue our operations.

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

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

We have experienced significant operating losses since our inception, and
as of December 31, 2002 had an accumulated deficit of $42,620,000. We expect
to continue to incur net losses for the foreseeable future, and our ability to
sustain our operations and continue as a going concern will
depend on our ability to significantly increase or even maintain sales or raise
significant additional debt or equity financing. There can be no assurance
that we will be able to increase sales or that additional financing will be
available on acceptable terms, or at all. Further, if we issue equity
securities, shareholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of our
existing securities. Even if we are able to increase sales, we may incur net
losses for the foreseeable future based on anticipated spending levels. Even if
we do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis.

Recent terrorist and military activities could adversely affect our business.

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

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

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



| |  |  | the size and timing of significant customer orders;                       
| | - |  | --------------------------------------------------------------------------
|
| |  |  | shifts in product or distribution channel mix;                            
|
| |  |  | increased competition and pricing pressure;                               
|
| |  |  | timing of new product announcements and releases by us or our competitors;

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| |  |  | 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;         
|
| |  |  | changes in economic conditions; and                            
|
| |  |  | personnel changes.                                             

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

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

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

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

Historically, we have operated with little order backlog and, due to the
nature of our business, do not anticipate that we will have significant backlog
in the future. Consequently, a large portion of our quarterly revenue 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 and if we are unable to obtain adequate
supplies, our sales and operating results could be significantly adversely
affected.

We do not possess proprietary optical disk, high-density disk or other
storage technologies and, consequently, we depend on a limited number of
third-party manufacturers to supply us with the devices that we incorporate
into our products. In some cases, these manufacturers are sole-source
providers of the device

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



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

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

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

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

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

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

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

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

Our stock price may be extremely volatile.

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



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

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

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

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

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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.

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

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

While we are not currently engaged in any intellectual property litigation
or proceedings, we may become so involved in the future. An adverse
outcome in litigation could subject us to significant liabilities to third
parties, require us to license technology from others or require us to cease
marketing or using certain products, any of which

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could negatively affect our business, financial condition and operating
results. If we are required to seek licenses under patents or proprietary
rights of others, we may not be able to acquire these licenses on acceptable
terms, if at all. In addition, the cost of responding to an intellectual
property infringement claim, in terms of legal fees and expenses and the
diversion of management resources, whether or not the claim is valid, could
harm our business, financial condition and operating results.

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

As of December 31, 2002, our executive officers, directors and principal
shareholders beneficially owned approximately 91% of our outstanding common
stock and preferred stock, on an as-if-converted basis. In particular, our
largest shareholder beneficially owns approximately 90% of our outstanding
common stock, preferred stock and warrants, 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 largest shareholder or other officers,
directors and principal shareholders. For example, our largest shareholder
could delay or prevent an acquisition or merger even if the transaction would
benefit other shareholders.

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

The market for our products depends on economic conditions affecting the
broader information technology and related markets. Downturns in these markets
may cause our customers to delay or cancel information technology projects,
reduce their information technology budgets or reduce or cancel orders for our
products. In this environment, customers may experience financial difficulty,
cease operations or fail to budget for the purchase of our products. This, in
turn, may lead to longer sales cycles, delays in payment and collection, and
price pressures, causing us to realize lower revenues and margins. A prolonged
economic downturn would also increase our exposure to credit risk on trade
receivables. In particular, capital spending in the information technology
sector generally has decreased in the past 12 months, and many of our customers
and potential customers have experienced declines in their revenues and
operations. If capital spending in our markets continues to decline or does not
increase, it may be necessary for us to gain significant market share from our
competitors in order to achieve our financial goals and achieve profitability.

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

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

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

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

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

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

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

Our future success depends in large part on our ability to retain certain
key executives and other personnel, some of whom have been instrumental in
establishing and maintaining strategic relationships with key suppliers and
customers. Our future growth and success will depend in large part on our
ability to hire, motivate and retain highly qualified management, technical,
operations and sales and marketing personnel. Competition for such personnel
is intense in the high-technology industry, particularly in the San Francisco
Bay area. We may not be able to retain our existing personnel or attract
additional qualified personnel in the future. In addition, companies in our
industry whose employees accept positions with competitors frequently claim
that their competitors have engaged in unfair hiring practices. We may receive
such claims in the future as we seek to hire qualified personnel, and such
claims could result in litigation. Regardless of the merits of these claims,
we could incur substantial costs in defending ourselves against these claims.

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

The trading of our common stock on the NASDAQ Small Cap Market System is
conditioned upon our meeting shareholders equity, net income, market
capitalization and stock price tests. If we fail any of these tests, our
common stock may be delisted from trading on the NASDAQ Small Cap Market
System, it would be much more difficult to purchase or sell our stock or obtain
accurate quotations as to our stock price. In addition, low-priced stocks are
subject to additional risks including additional state regulatory requirements
and the potential loss of effective trading markets.




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.
We believe that, if necessary, additional space will be available in the area
for our operations. In addition, we lease approximately 16,000 square feet in
Bingen, Germany, which is occupied by our German subsidiary. The lease expires
on December 31, 2003, but we believe that the lease can be renewed at
satisfactory terms and that the facility will be sufficient to support
operations for the foreseeable future.




Item 3. Legal Proceedings.

We are not party to any material legal proceedings.

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

We held our Annual Meeting of Shareholders on November 21, 2002. Matters
voted upon at the meeting, and the number of shares cast for, against or
withheld were as follows:



| | 1. |  | To elect the following directors.
| | -- |  | ---------------------------------

|                        |  |     |            |         |  |                  |        |  |  |                 |           | 
|----------------------- |  | --- | ---------- | ------- |  | ---------------- | ------ |  |  | --------------- | --------- | 
|                        |  |     |            |         |  |                  |        |  |  | ABSTENTIONS AND
|NAME                    |  | FOR |            | AGAINST |  | SHARES NOT VOTED
|                        |  |     |            |         |  |                 
|Robert W. Riland III    |  |     | 23,906,222 |         |  |                  | 11,958 |  |  |                 | 1,363,343 | 
|Frank T. Connors        |  |     | 23,896,572 |         |  |                  | 21,608 |  |  |                 | 1,363,343 | 
|Michael D. Kaufman      |  |     | 23,907,572 |         |  |                  | 10,608 |  |  |                 | 1,363,343 | 
|F. Rigdon Currie        |  |     | 23,906,572 |         |  |                  | 11,608 |  |  |                 | 1,363,343 | 
|Arch J. McGill          |  |     | 23,906,572 |         |  |                  | 11,608 |  |  |                 | 1,363,343 | 
|Michael A. McManus, Jr. |  |     | 23,907,572 |         |  |                  | 10,608 |  |  |                 | 1,363,343 | 



| | 2. |  | To increase the number of shares of common stock reserved
for issuance under the 2001 Stock Plan to 1,280,700.
| | -- |  | --------------------------------------------------------------------------------------------------------------

|           |  |         |        |                  |  |  |           | 
|---------- |  | ------- | ------ | ---------------- |  |  | --------- | 
|           |  |         |        | ABSTENTIONS AND 
|FOR        |  | AGAINST |        | SHARES NOT VOTED
|           |  |         |        |                 
|22,327,369 |  |         | 45,143 |                  |  |  | 2,909,011 | 



| | 3. |  | To appoint Pricewaterhouse Coopers LLP as independent
auditors for the fiscal year ending December 31, 2002.
| | -- |  | ------------------------------------------------------------------------------------------------------------

|           |  |         |        |                  |  |  |           | 
|---------- |  | ------- | ------ | ---------------- |  |  | --------- | 
|           |  |         |        | ABSTENTIONS AND 
|FOR        |  | AGAINST |        | SHARES NOT VOTED
|           |  |         |        |                 
|23,894,230 |  |         | 18,750 |                  |  |  | 1,368,543 | 

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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.

|                                 |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                                 |  | 2002 |       | 2001
|                                 |  |      |       |     
|                                 |  | High |       | Low  |  | High |       | Low
|                                 |  |      |       |      |  |      |       |    
|First quarter ended March 31     |  | $    | 1.940 |      |  | $    | 1.010 |     |  | $ | 3.375 |  |  | $ | 2.125 | 
|Second quarter ended June 30     |  |      | 2.250 |      |  |      | 0.630 |     |  |   | 2.420 |  |  |   | 1.760 | 
|Third quarter ended September 30 |  |      | 1.100 |      |  |      | 0.740 |     |  |   | 2.290 |  |  |   | 1.300 | 
|Fourth quarter ended December 31 |  |      | 1.100 |      |  |      | 0.350 |     |  |   | 1.680 |  |  |   | 0.980 | 

The closing price of our common stock on March 14, 2003, as reported by
the NASDAQ Small Cap Market System was $1.03. As of March 17, 2003, 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 October 16, 2002 (the
record date for our 2002 annual meeting), we had over 800 shareholders, and we
believe that we presently have over 800 shareholders. We have never paid cash
dividends and have no present plans to pay dividends. Please see Liquidity
and Capital Resources in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 7 of the 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 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.

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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.

|                                                                                           |  |                                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                           |  | Year Ended December 31,                 
|                                                                                           |  |                                         
|                                                                                           |  | 2002                                     |        | 2001 |  | 2000 |        | 1999 |  | 1998
|Consolidated Statement of Operations (1)                                                   |  |                                          |        |      |  |      |        |      |  |     
|                                                                                           |  | (In thousands, except per share amounts)
|Net sales                                                                                  |  | $                                        | 12,938 |      |  | $    | 12,150 |      |  | $    | 6,821  |   |  | $ | 9,746  |   |  | $ | 9,145  |  
|Loss from operations                                                                       |  |                                          | (6,672 | )    |  |      | (5,193 | )    |  |      | (3,825 | ) |  |   | (1,934 | ) |  |   | (2,110 | )
|Net loss attributable to common
shareholders before cumulative effect
of accounting change |  | $                                        | (8,854 | )    |  | $    | (6,922 | )    |  | $    | (5,578 | ) |  | $ | (2,593 | ) |  | $ | (2,667 | )
|Net loss attributable to common
shareholders                                               |  |                                          | (8,854 | )    |  |      | (6,922 | )    |  |      | (6,264 | ) |  |   | (2,593 | ) |  |   | (2,667 | )
|Basic and diluted net loss attributable
to common shareholders per share                   |  | $                                        | (1.84  | )    |  | $    | (1.62  | )    |  | $    | (1.65  | ) |  | $ | (0.70  | ) |  | $ | (0.76  | )
|Weighted average common shares for
basic and diluted net loss per share
calculation        |  |                                          | 4,818  |      |  |      | 4,269  |      |  |      | 3,803  |   |  |   | 3,700  |   |  |   | 3,515  |  
|                                                                                           |  |                                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  

|                                    |  |                 |        |      |  |      |        |      |  |      |       |  |  |   |       |  |  |   |       | 
|----------------------------------- |  | --------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                    |  | At December 31,
|                                    |  |                
|                                    |  | 2002            |        | 2001 |  | 2000 |        | 1999 |  | 1998
|Consolidated Balance Sheet data (1) |  |                 |        |      |  |      |        |      |  |     
|Working capital (deficit)           |  | $               | (601   | )    |  | $    | (291   | )    |  | $    | 1,664 |  |  | $ | 1,600 |  |  | $ | 1,611 | 
|Total assets                        |  |                 | 10,781 |      |  |      | 13,491 |      |  |      | 3,885 |  |  |   | 4,848 |  |  |   | 4,970 | 
|Long-term obligation                |  |                 | 1,813  |      |  |      | 2,765  |      |  |      |      |  |  |   |      |  |  |   |      | 
|Shareholders equity                |  |                 | 2,737  |      |  |      | 3,987  |      |  |      | 2,096 |  |  |   | 2,069 |  |  |   | 2,041 | 

(1) We
acquired NSM GmbH Storage on July 30, 2001 in a transaction
accounted for as a purchase. The Consolidated Statement of Operations and
Consolidated Balance Sheet data includes the operations of NSM GmbH Storage
subsequent to July 29, 2001.

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SUPPLEMENTARY QUARTERLY FINANCIAL DATA

|                                                   |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ---------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Fiscal 2002 Quarter Ended               
|                                                   |  |                                         
|                                                   |  | Mar. 31                                  |        | June 30 |  | Sep. 30 |        | Dec. 31
|                                                   |  |                                          |        |         |  |         |        |        
|                                                   |  | (In thousands, except per share amounts)
|Net sales                                          |  | $                                        | 2,653  |         |  | $       | 3,174  |         |  | $ | 2,750  |   |  | $ | 4,361  |  
|Gross profit                                       |  |                                          | 418    |         |  |         | 638    |         |  |   | 382    |   |  |   | 1,019  |  
|Income (loss) from operations                      |  |                                          | (1,848 | )       |  |         | (1,837 | )       |  |   | (1,767 | ) |  |   | (1,220 | )
|Net income (loss)                                  |  |                                          | (1,911 | )       |  |         | (1,782 | )       |  |   | (1,494 | ) |  |   | (1,179 | )
|Net income (loss) available to common shareholders |  |                                          | (2,406 | )       |  |         | (2,613 | )       |  |   | (2,148 | ) |  |   | (1,687 | )
|Basic and diluted earnings (loss) per share        |  |                                          | (0.50  | )       |  |         | (0.54  | )       |  |   | (0.45  | ) |  |   | (0.35  | )
|Weighted average common shares, basic and diluted  |  |                                          | 4,818  |         |  |         | 4,818  |         |  |   | 4,818  |   |  |   | 4,818  |  

|                                                   |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ---------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Fiscal 2001 Quarter Ended               
|                                                   |  |                                         
|                                                   |  | Mar. 31                                  |        | June 30 |  | Sep. 30 |        | Dec. 31
|                                                   |  |                                          |        |         |  |         |        |        
|                                                   |  | (In thousands, except per share amounts)
|Net sales                                          |  | $                                        | 1,562  |         |  | $       | 2,513  |         |  | $ | 3,739  |   |  | $ | 4,336  |  
|Gross profit                                       |  |                                          | 158    |         |  |         | 426    |         |  |   | 921    |   |  |   | 1,029  |  
|Income (loss) from operations                      |  |                                          | (1,244 | )       |  |         | (1,131 | )       |  |   | (1,030 | ) |  |   | (1,788 | )
|Net income (loss)                                  |  |                                          | (1,267 | )       |  |         | (1,161 | )       |  |   | (1,106 | ) |  |   | (1,764 | )
|Net income (loss) available to common shareholders |  |                                          | (1,733 | )       |  |         | (1,509 | )       |  |   | (1,713 | ) |  |   | (1,967 | )
|Basic and diluted earnings (loss) per share        |  |                                          | (0.45  | )       |  |         | (0.39  | )       |  |   | (0.38  | ) |  |   | (0.41  | )
|Weighted average common shares, basic and diluted  |  |                                          | 3,844  |         |  |         | 3,846  |         |  |   | 4,548  |   |  |   | 4,814  |  

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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
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 our estimates, plans and beliefs that (i) costs of sales per
product unit will decrease; (ii) research and development expenses will remain
relatively constant; (iii) sales and marketing expenses will increase; (iv)
general and administrative expenses will remain relatively constant;
(v) we will seek additional financing from investors;
(vi) we will significantly increase sales; (vii) we will continue to incur net losses; (viii) our selling efforts to large system integrators and OEMs will increase; and
(ix) we will expand our current network of resellers. For this purpose, any
statements contained in this Annual Report on Form 10-K 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
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 that
increase the uncertainty inherent in the forward-looking statements (see Risk
Factors that May Affect Future Operating Results in Item 1. and Item 7. In
light of the significant uncertainties inherent in the forward-looking
information included in this Annual Report on Form 10-K, 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.

The following commentary should be read in conjunction with the
consolidated financial statements and related footnotes that appear beginning
on page 36.

Overview

We develop and market a family of computer nearline storage systems that
use 5.25 inch rewritable, magneto optical disks, DVD and CD-ROM disks.

In July 2001, we acquired NSM Storage GmbH for 965,210 shares of common
stock and $10,000 in cash. We also agreed to severance payments of $75,000 to
each of the two Managing Directors and principal shareholders of NSM and had
acquisition related costs of approximately $408,000. The acquisition was
accounted for under the purchase method of accounting, and as a result our
historical results of operations do not include the results of operations of
NSM prior to July 30, 2001. The excess amount of the purchase price
over the fair market value of the identified nets assets acquired was
accounted for as goodwill. Goodwill is not
amortized but is tested for impairment annually.

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As a result of the acquisition of NSM, at December 31, 2002, we have
goodwill and intangible assets of $4,591,000, net of associated amortization of
$1,079,000. Goodwill is not being amortized. Other intangible assets are
being amortized on a straight-line basis over their estimated useful lives of a
four to six year period. Such intangible assets are evaluated for impairment
when events or circumstances indicate that the carrying amount of the assets
may not be recoverable through the estimated undiscounted future cash flows
resulting from the use of the assets. At December 31, 2002, we do not consider
goodwill and other intangible assets to be impaired.

The
purchase price was allocated as set forth in Note 4 to the
consolidated financial
statements. The Income Approach, which includes an analysis of the markets,
cash flows and risks associated with achieving such cash flows, was the primary
method used in valuing the identified intangibles acquired. Expected cash flows
were discounted at the Companys weighted average cost of capital adjusted
upward to reflect additional inherent risks. Because the in-process research
and development had not reached the stage of technological feasibility at the
acquisition date and had no alternative future use, the amount allocated of $
242,000 was immediately charged to operations. The amounts allocated to core
technology, developed technology, trade name and patents are being amortized
over an estimated useful life of four to six years.

Because of the significance of the acquisition of NSM, we do not believe
the analysis of our historical financial conditions and results of operations
set forth below are indicative, nor should they be relied upon as an indicator,
of our future performance.

Results of Operations

Net Sales. We had net sales of $12,938,000 in 2002, $12,150,000 in 2001
and $6,821,000 in 2000. The increase in sales in 2002 as compared to 2001 is
primarily due to the increased sales from our acquisition of NSM in July 2001
and an increase in service revenue. This increase was offset by a slow down by
the Federal Government in information technology spending and the overall
weakness in the storage industry. Approximately 45% of the increase in 2001 as
compared to 2000 was due to our acquisition of NSM. In addition in 2001 as
compared to 2000, we had higher unit sales and a higher sales price per unit
which resulted from sales of units with a larger number of media slots. These
increases resulted in increases in media sales and service revenue. The general
sales cycles for distribution of our products are similar to those of most
businesses selling products designed for use as part of large 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. Because our products
are part of large systems, the sales cycles for our products vary significantly
and are difficult to predict for any particular transaction. The long and often
unpredictable sales cycles of our products complicate forecasting for
operational planning and may cause net sales and operating results to vary
significantly.

Cost of Sales. Cost of sales, as a percentage of sales, was approximately
81% in 2002, 79% in 2001 and 85% in 2000. The slight increase in cost of sales
as a percentage of sales in 2002 as compared to 2001 is primarily due to
product mix as service revenue which has a lower margin then our other products
has increased as a percentage of net sales. The decrease in cost of sales as a
percentage of sales in 2001 is primarily due to the increase in revenue as
manufacturing costs are relatively fixed. 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. However, even with product sale increases, cost of sales per unit of
product may

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not decrease significantly or at all because the magnitude of the
sales increase was not sufficient or because manufacturing, materials or other
costs may increase independently.

Research and Development Expenses. Research and development expenses
consist primarily of personnel and related costs. Research and development
expenses were $2,447,000 in 2002, $2,001,000 in 2001 and $1,158,000 in 2000.
Expenses increased in 2002 as compared to 2001 primarily due to a full years
cost of personnel added as a result of our acquisition in July 2001. The
increase in expenses in 2001 as compared to 2000 is primarily due to an
increase in headcount due to our acquisition of NSM. We believe that research
and development expenses will remain relatively constant in dollar amounts
during 2003 as compared to 2002.

Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of salaries and related costs for sales and marketing personnel,
sales commissions, trade shows and other marketing activities. Marketing and
sales expenses were $4,189,000 in 2002, $3,745,000 in 2001 and $2,665,000 in
2000. Expenses increased in 2002 as compared to 2001 primarily due to the cost
of personnel added as a result of our acquisition in July 2001. The increase
in 2001 was primarily due to the full years expense of headcount hired
throughout fiscal 2000 and the increase in headcount as a result of the
acquisition of NSM. We believe that marketing and sales expenses will increase
moderately in dollar amounts in 2003 as compared to 2002 due to increased sales
commissions from the anticipated increase in sales.

General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs and legal and accounting
services. General and administrative expenses were $1,731,000 in 2002,
$1,422,000 in 2001 and $1,048,000 in 2000. General and administrative expenses
were increased moderately during 2002 due to the increase in headcount as a
result of our acquisition in July 2001. The increase in 2001 was primarily due
to an increase in headcount as a result of the acquisition of NSM and an
increase in professional fees. We believe that general and administrative
expenses will remain relatively constant in dollar amounts during 2003 as
compared to 2002, although the Company is still in the process of assessing the
costs associating with the implementation of the requirements of the
Sarbanes-Oxley Act that will take effect in 2003.

Amortization. Amortization consists of the amortization of acquired
intangible assets. In 2001, the acquisition of NSM generated approximately
$3,376,000 in identified intangibles, which is currently being amortized over
periods ranging from four to six years (see Note 4 of Notes to Consolidated
Financial Statements). Amortization expense was $762,000 in 2002 and $317,000
in 2001. We expect amortization expense to be approximately $760,000 in 2003.
Amortization could be affected by other acquisitions or impairment of existing
identified intangible assets in future periods.

Interest expense. Interest expense was $291,000, $198,000 and $113,000 in
2002, 2001 and 2000, respectively. The increase in 2002 is primarily due to a
full years interest expense on the debt assumed upon the acquisition of NSM in
July 2001. The increase in 2001 is primarily due to the interest on the debt
assumed from our acquisition of NSM. Interest expense in 2003 is expected to
increase moderately due to an expected increase in borrowings from our
factoring agreement.

Other income and expense.Other income and expense was $341,000 in 2002
and is primarily comprised of a gain of $300,000 related debt extinguishments
as discussed in Note 6 of Notes to Consolidated Financial Statements.

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Liquidity and Capital Resources

Net cash used in operating activities was $4,760,000 in 2002, compared to
$3,830,000 used in 2001. Net cash used by operating activities in 2002 and 2001
primarily reflects a loss of $6,366,000 and $5,298,000 respectively, partially
offset by depreciation and amortization of $1,127,000 in 2002 and $971,000 in
2001.

Net cash used in investing activities was $106,000 during 2002, compared
to $889,000 in 2001. Net cash used in 2002 consisted primarily of purchases of
hardware and office furniture. Net cash in 2001 consisted primarily of
purchases of hardware, office furniture and leasehold improvements and the
direct costs of the acquisition of NSM Storage.

Net cash provided by financing activities was $4,398,000 in 2002, compared
to $5,481,000 provided in 2001. Net cash provided in 2002 consisted primarily
of $5,375,000 of net proceeds from the issuance of preferred stock offset by
the repayment of $977,000 of bank debt. Net cash provided in 2001 consisted
primarily of $5,150,000 of net proceeds from the issuance of preferred stock.

We have a factoring agreement that allows us to borrow the lesser of
$1,500,000 or 85% of eligible receivables. At December 31, 2002, we were not
in compliance with the tangible net assets covenant of the agreement. We have
requested a waiver of the non-compliance and although a written waiver has not
been received, borrowings have continued under the agreement. In addition, at
December 31, 2002, DISC GmbH has revolving lines of credit totaling $242,000
and terms loans totaling $1,723,000. In January 2003, we reached agreement with
the bank whereby the terms loans for DISC GmbH were restructured and the loans
will be repaid as described in the table below.

We have
incurred substantial losses from operations, negative cash flow from
operating activities and have a working capital deficit. In the past,
we have obtained investor funding and credit facilities to maintain
operations. In order for us to sustain operations and meet our
obligations going forward, we plan to seek additional financing from
investors and to significantly increase sales. We anticipate that we
will continue to incur net losses for the foreseeable future. These
factors raise substantial doubt about our ability to continue as a
going concern. Subsequent to December 31, 2002 and through
March 28, 2003, we have supported our operations with $860,000
in funding from investors and cash generated from sales of our
products. The ability to sustain
our operations will depend on our ability to significantly increase sales or
raise significant additional equity or debt financing on terms acceptable to
us. There is no assurance that any of these conditions will be achieved. In
particular, we expect to require increasing amounts of cash to finance our
efforts to increase sales, which we plan to achieve by increasing selling
efforts to large system integrators and OEMs, by hiring additional sales and
sales support staff and by making evaluation units available. In addition, we
intend to expand our current network of resellers. We may require cash to
finance purchases of inventory to satisfy anticipated increased sales as our
products achieve market acceptance. In addition, we expect that the continued
integration of our acquisition of NSM and the support of its operations will
require cash as well. If we incur greater expenditures than we anticipate in
these or other matters, and we cannot raise funds at acceptable terms or at
all, we may not be able to develop or enhance our products, take advantage of
other opportunities or respond to competitive pressures or unanticipated
requirements.

We have operating lease commitments for our facilities in Milpitas,
(California) Bingen, (Germany) and various sales offices as described in the
table below. In addition, although we have not committed to make any material
capital expenditures as of December 31, 2002, our budget for capital equipment
expenditures for 2003 is approximately $826,000. 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. We also have

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principal and interest payments due related to the debt assumed in our
acquisition of NSM Storage GmbH as described in the table below.

Details of our contractual obligations and commitments as of December 31,
2002, are as follows:

|                                   |  |       |           |      |  |      |           |      |  |      |         |       |  |   |         |  |  |   |         |  |  |          |         | 
|---------------------------------- |  | ----- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | ----- |  | - | ------- |  |  | - | ------- |  |  | -------- | ------- | 
|Contractual                        |  |       |           |      |  |      |           |      |  |      |         |       |  |   |         |  |  |   |         |  |  | 2007 and
|Obligations                        |  | Total |           | 2003 |  | 2004 |           | 2005 |  | 2006 |         | after
|                                   |  |       |           |      |  |      |           |      |  |      |         |      
|Line of Credit                     |  | $     | 819,000   |      |  | $    | 819,000   |      |  | $    |        |       |  | $ |        |  |  | $ |        |  |  | $        |        | 
|Term Loans                         |  |       | 1,723,000 |      |  |      | 243,000   |      |  |      | 256,000 |       |  |   | 269,000 |  |  |   | 280,000 |  |  |          | 675,000 | 
|Operating Leases                   |  |       | 1,924,000 |      |  |      | 768,000   |      |  |      | 636,000 |       |  |   | 520,000 |  |  |   |        |  |  |          |        | 
|                                   |  |       |           |      |  |      |           |      |  |      |         |       |  |   |         |  |  |  
|Total
Contractual Cash Obligations |  | $     | 4,466,000 |      |  | $    | 1,830,000 |      |  | $    | 892,000 |       |  | $ | 789,000 |  |  | $ | 280,000 |  |  | $        | 675,000 | 
|                                   |  |       |           |      |  |      |           |      |  |      |         |       |  |   |         |  |  |  

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.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies
which we believe are the most critical to aid in understanding our financial
results include the following:

Revenue Recognition

We generally recognize revenue upon the shipment of our product to the
customer provided that we have received a signed purchase order, the price is
fixed, title has passed to the customer and collection of the resulting
receivable is probable. We enter into contracts to sell our products and
services, and, while the majority of our sales agreements contain standard
terms, there are agreements that contain multiple elements or non-standard
terms and conditions. As a result, significant contract interpretation is
sometimes required to determine the appropriate accounting, including how the
price should be allocated among the deliverable elements if there are multiple
deliverables, whether undelivered elements are essential to the functionality
of delivered elements, and when to recognize revenue. We recognize revenue for
delivered elements only when the following criteria is satisfied: undelivered
elements are not essential to the functionality of delivered elements,
uncertainties regarding customer acceptance are resolved, no significant
obligations remain, other then the normal warranty obligation, and the fair
value of each undelivered element is known. Changes in the allocation of the
sales price between deliverables might impact the timing of revenue
recognition, but would not change the total revenue recognized on the contract.
Provisions for returns, allowances and warranty are recorded at the time
revenue is recognized based on the Companys historical experience. Service
revenue is recognized ratably over the length of the service contract.

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Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customers credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision
for estimated credit losses based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Since our accounts receivable are
concentrated in a relatively small number of customers, a significant change in
the financial position of one of these customers could have a material adverse
effect on the collectability of our accounts receivable and our future
operating results.

Inventories

We value our inventory at the lower of the actual cost to purchase and/or
manufacture the inventory or the estimated net realizable value of the
inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our historical
usage for the preceding twenty-four months and estimated forecast requirements
for the next twelve months. Our industry is characterized by rapid
technological change, frequent new product development and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Additionally, our estimates of future product
demand may prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if our inventory were determined to be overvalued, we would be required
to recognize such costs in our cost of sales at the time of such determination.
Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory.

Warranty

Our warranty reserve is established based on our best estimate of our
obligation for anticipated claims, based on historical experience, of the
amounts necessary to repair or replace our product during the warranty period,
which is generally one year, except for products sold in Europe where the
statutory requirement is two years. While we believe that our warranty reserve
is adequate and the judgment applied is appropriate, such amounts estimated to
repair of replace our product could differ materially from what will actually
transpire in the future and this would adversely affect our gross margins.

Determining functional currencies for the purpose of consolidation.

In preparing our consolidated financial statements, we are required to
translate the financial statements of our foreign subsidiary from the currency
in which they keep their accounting records, the German Mark for fiscal 2001
and the Euro for periods subsequent to December 31, 2001, into United States
dollars. This process results in exchange gains or losses which, under the
relevant accounting guidance are either included within the statement of
operations or as a separate part of our shareholders equity under the caption
 accumulated other comprehensive loss.

Under the relevant accounting guidance the treatment of these translation
gains or losses is dependent upon managements determination of the functional
currency of our subsidiary. The functional currency is based on management
judgment and involves consideration of all economic facts and circumstances
affecting the subsidiary. Generally, the currency in which the subsidiary
transacts the majority of its transactions would be considered the functional
currency.

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If the subsidiarys functional currency is deemed to be the local
currency, then any gain or loss associated with the translation of the
subsidiarys financial statements is included in accumulated other
comprehensive income or loss on the balance sheet.

Based on our assessment of the factors discussed above, we determined that
the subsidiarys local currency to be the functional currency. Accordingly, we
had accumulated other comprehensive loss of $295,000 which is included within
our balance sheet at December 31, 2002. To the extent that DISC GmbH has
assets or liabilities denominated in currencies other than the Euro, its
functional currency, foreign exchange gains and losses are recognized in the
income statement.

The magnitude of these gains or losses is dependent upon movements in the
exchange rate of the Euro against the United States dollar. Any future
translation gains or losses could be significantly higher than those noted in
2002.

Income Taxes

As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $16.2 million as of December 31, 2002, due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward and tax
credits, before they expire. The valuation allowance is based on our estimates
of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in future periods we
may need to establish an additional valuation allowance which could materially
impact our financial position and results of operations.

Recent Accounting Pronouncements

In June
2001, the Financial Accounting Standards Board (FASB)
issued statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect that the adoption of SFAS 143
will have a significant effect on our financial position or results of
operations.

In
November 2002, the FASB issued
FASB Interpretation No. 45 (FIN45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity

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has issued, including a reconciliation of changes in the entitys product
warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company believes that the adoption of this standard will have no material
impact on its financial statements.

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

In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also requires that
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company believes that
the adoption of this standard will have no material impact on its financial
statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2000. The
Company believes that the adoption of this standard will have no material
impact on its financial statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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

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

International sales are made mostly from our German subsidiary and are
typically denominated in the Euro. Our German subsidiary also incurs most of
its expenses in the local currency. Accordingly, our foreign subsidiary uses
their local currency as their functional currency.

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

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




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 15(a)(1) for a listing of financial
statements provided in the section titled Financial Statements.




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

None.

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PART III




Item 10. Directors and Executive Officers of the Registrant.

Robert W. Riland III, 39, became our President and Chief Executive Officer
in March 2002. Mr. Riland was appointed to the Board of Directors and named
Chairman of the Board of Directors in September 2002. Mr. Riland 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.

Frank T. Connors, 68, 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, 61, 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 Concerto Software, Inc., 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, 72, became member of our Board of Directors in December
1988. From February 1988 until he retired in 1998, Mr. Currie was a Limited
Partner of MK Global Ventures II and MK GVD FUND. Mr. Currie still has a
financial interest in MK Global II and MK GVD FUND. Mr. Currie serves on the
Board of Directors of Acacia Research, Inc. a company that provides products
for the media technology and life science sectors.

Arch J. Mcgill, 70, 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., 59, became a member of our Board of 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, 46, 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.

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Robert Cellucci, 60, 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.

Wilfried Beckmann, 42, joined the Company as the Managing Director of DISC
GmbH upon our acquisition of NSM Storage GmbH in July 2001. From 1993 to 1998
Mr. Beckmann was the Chief Financial Officer of NSM Storage and became the
Managing Director of NSM Storage in 1999.

Horst Schellong, 52, joined the Company as the Vice President of
Engineering of DISC GmbH upon our acquisition of NSM Storage GmbH in July 2001.
In March 2002, he became Vice President of Engineering of world wide
engineering operations. From 1995 to June 2001 Mr. Schellong was Vice President
of Engineering of NSM Storage GmbH.

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 2002, our officers,
directors and greater than ten percent beneficial owners complied with all
applicable Section 16(a) filing requirements, except for the
Forms 5 required for the Stock Option Grant for our Vice President of
Operations, Robert Cellucci and certain purchases of preferred stock
as described further in item 13 on page 33.




Item 11. Executive Compensation.

Summary Compensation
Table

The following Summary Compensation Table
shows compensation paid by us for services rendered during fiscal years 2002,
2001 and 2000 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 2002.

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|                            |                                                     |      |                     |               |              |            |         |              |  |  |            |         |           |  |        |        |    
|--------------------------- | --------------------------------------------------- | ---- | ------------------- | ------------- | ------------ | ---------- | ------- | ------------ |  |  | ---------- | ------- | --------- |  | ------ | ------ | ---
|                            |                                                     |      |                     |               |              |            |         |              |  |  | Long-Term  |         |           |  |       
|                            |                                                     |      | Annual Compensation |               | Compensation |            |         |              | 
|                            |                                                     |      |                     |               |              |            |         |              | 
|                            |                                                     |      |                     |               |              |            |         |              |  |  | Securities |         |           |  |       
|                            |                                                     |      |                     |               |              |            |         |              |  |  | Underlying |         | All Other
|Name and Principal Position |                                                     | Year |                     | Salary($) (1) |              | Options(2) |         | Compensation
|                            |                                                     |      |                     |               |              |            |         |             
|Robert W. Riland III (5)    |                                                     |      | 2002                |               |              |            | 217,000 |              |  |  | 235,000    |         |           |  | 2,000  | (3)   
|                            | President and Chief Executive Officer               |      |                     | 2001          |              |            |         | 196,000      |  |  |            |        |           |  |        | 1,000  | (3)
|                            |                                                     |      | 2000                |               |              |            | 143,000 |              |  |  | 240,000    |         |           |  | 1,000  | (3)   
|Henry Madrid                |                                                     |      | 2002                |               |              |            | 156,000 |              |  |  | 100,000    |         |           |  | 2,000  | (3)   
|                            | Vice President, Finance and Chief Financial Officer |      |                     | 2001          |              |            |         | 137,000      |  |  |            |        |           |  |        | 1,000  | (3)
|                            |                                                     |      | 2000                |               |              |            | 126,000 |              |  |  | 100,000    |         |           |  | 1,000  | (3)   
|Robert Cellucci             |                                                     |      | 2002                |               |              |            | 147,000 |              |  |  | 50,000     |         |           |  | 2,000  | (3)   
|                            | Vice President, Operations                          |      |                     | 2001          |              |            |         | 132,000      |  |  |            |        |           |  |        | 1,000  | (3)
|                            |                                                     |      | 2000                |               |              |            | 122,000 |              |  |  | 35,000     |         |           |  | 1,000  | (3)   
|Wilfried Beckman (6)        |                                                     |      | 2002                |               |              |            | 110,000 |              |  |  |           |         |           |  | 16,000 | (4)   
|                            | Managing Director of DISC GmbH                      |      |                     | 2001          |              |            |         | 42,000       |  |  |            | 150,000 |           |  |        | 14,000 | (4)
|                            |                                                     |      | 2000                |               |              |            |        |              |  |  |           |         |           |  |       |       
|Horst Schellong (7)         |                                                     |      | 2002                |               |              |            | 115,000 |              |  |  |           |         |           |  | 10,000 | (4)   
|                            | Vice President of Engineering                       |      |                     | 2001          |              |            |         | 40,000       |  |  |            | 150,000 |           |  |        | 7,000  | (4)
|                            |                                                     |      | 2000                |               |              |            |        |              |  |  |           |         |           |  |       |       



---

|(1) |  | Includes a $10,000 bonus for Mr. Madrid and Mr. Cellucci and $7,500
for Mr. Schellong in 2002. No other bonuses were paid during 2002, 2001
and 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) |  | The amounts shown represent car allowance and insurance premiums paid
by us.                                                                                                                                                                     
|   
|(5) |  | Mr. Riland joined us in March 2000, and became President and Chief
Executive Officer in March 2002. Prior to March 2002, Mr. Riland served
as Vice President, Sales and Marketing.                                                               
|   
|(6) |  | Mr. Beckman joined the Company as the Managing Director of DISC GmbH
upon our acquisition of NSM Storage GmbH in July 2001.                                                                                                                      
|   
|(7) |  | Mr. Schellong joined the Company as the Vice President of Engineering
of DISC GmbH upon our acquisition of NSM Storage GmbH in July 2001. In
March 2002, he became Vice President of Engineering of world wide
engineering operations.           

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Option Grants in Last Fiscal Year

The following table sets forth certain information with respect to stock
options granted to our Chief Executive Officer and our four other most highly
compensated executive officers during the fiscal year ended December 31, 2002.
We have never granted any stock appreciation rights. All options grants were
made under the 2001 stock plan.

|                         |  |                   |         |              |  |                |    |            |  |    |      |                        |  |                              |          |                            |  |   |         |  |  |   |         | 
|------------------------ |  | ----------------- | ------- | ------------ |  | -------------- | -- | ---------- |  | -- | ---- | ---------------------- |  | ---------------------------- | -------- | -------------------------- |  | - | ------- |  |  | - | ------- | 
|                         |  | Individual Grants |         |              |  |                |    |            |  |   
|                         |  |                   |         |              |  |                |    |            |  |   
|                         |  |                   |         |              |  | % of Total     |    |            |  |    |      |                        |  |                              |          | Potential Realizable Value
|                         |  | Number of         |         | Options      |  |                |    |            |  |    |      |                        |  | At Assumed Annual Rates     
|                         |  | Securities        |         | Granted to   |  |                |    |            |  |    |      |                        |  | of Stock Price Appreciation}
|                         |  | Underlying        |         | Employees In |  | Exercise Price |    |            |  |    |      | For Option Term ($)(5)
|                         |  | Options           |         | Fiscal Year  |  | Per Share      |    | Expiration |  |   
|Name                     |  | Granted (1)       |         | (%)(3)       |  | ($)(4)         |    | Date       |  | 5% |      | 10%                   
|                         |  |                   |         |              |  |                |    |            |  |    |      |                       
|Robert W. Riland III (1) |  |                   | 235,000 |              |  |                | 29 | %          |  |    | 0.80 |                        |  |                              | 11/21/12 |                            |  | $ | 118,000 |  |  | $ | 300,000 | 
|Henry Madrid (1)         |  |                   | 100,000 |              |  |                | 12 | %          |  |    | 0.80 |                        |  |                              | 11/21/12 |                            |  | $ | 50,000  |  |  | $ | 127,000 | 
|Robert Cellucci (2)      |  |                   | 50,000  |              |  |                | 6  | %          |  |    | 1.33 |                        |  |                              | 6/05/12  |                            |  | $ | 45,000  |  |  | $ | 106,000 | 
|Wilfried
Beckman         |  |                   |        |              |  |                |   |            |  |    |     |                        |  |                              |         |                            |  |   |        |  |  |   |        | 
|Horst
Schellong          |  |                   |        |              |  |                |   |            |  |    |     |                        |  |                              |         |                            |  |   |        |  |  |   |        | 



---

|(1) |  | This option was granted on November 21, 2002 and vests
one-forty-eighth of the shares at the end of each month thereafter,
subject to the employees continued employment with our company.                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This option was granted on June 5, 2002 and vests one-forty-eighth of
the shares at the end of each month thereafter, subject to the
employees continued employment with our company.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) |  | Based on a total of 812,500 options granted to all employees in the
fiscal year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) |  | The exercise price per share is equal to the closing price of our
common stock on the market trading day on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) |  | Potential gains are net of the exercise price but before taxes
associated with the exercise. The 5% and 10% assumed annual rates of
compounded stock appreciation based upon the deemed fair market value
are mandated by the rules of the SEC and do not represent our estimate
or projection of the future common stock price. Actual gains, if any,
on stock option exercises are dependent on our future financial
performance, overall market conditions and the option holders continued
employment through the vesting period. There can be no assurance that
the amounts reflected in this table will be achieved.

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 2002 and the value of unexercised in-the-money options held
by the named executive officers as December 31, 2002.

|                     |  |             |   |          |  |             |   |                      |  |                          |         |                      |  |  |         |  |  |   |       |  |  |   |        | 
|-------------------- |  | ----------- | - | -------- |  | ----------- | - | -------------------- |  | ------------------------ | ------- | -------------------- |  |  | ------- |  |  | - | ----- |  |  | - | ------ | 
|                     |  |             |   |          |  |             |   |                      |  | Number of Securities     |         |                      |  |  |         |  |  |  
|                     |  |             |   |          |  |             |   |                      |  | Underlying               |         | Value of Unexercised
|                     |  |             |   |          |  |             |   |                      |  | Unexercised Options      |         | In-The-Money Options
|                     |  | Shares      |   |          |  |             |   | at December 31, 2002 |  | at December 31, 2002 (1)
|                     |  | Acquired On |   | Value    |  |             |   |                     
|Name                 |  | Exercise    |   | Realized |  | Exercisable |   | Unexercisable        |  | Exercisable              |         | Unexercisable       
|                     |  |             |   |          |  |             |   |                      |  |                          |         |                     
|Robert W. Riland III |  |             |  |          |  |             |  |                      |  |                          | 147,396 |                      |  |  | 327,604 |  |  |   |      |  |  | $ | 16,000 | 
|Henry Madrid         |  |             |  |          |  |             |  |                      |  |                          | 104,166 |                      |  |  | 145,834 |  |  | $ | 6,000 |  |  | $ | 7,000  | 

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|                 |  |             |   |          |  |             |   |                      |  |                          |        |                      |  |  |         |  |  |   |       |  |  |  |   | 
|---------------- |  | ----------- | - | -------- |  | ----------- | - | -------------------- |  | ------------------------ | ------ | -------------------- |  |  | ------- |  |  | - | ----- |  |  |  | - | 
|                 |  |             |   |          |  |             |   |                      |  | Number of Securities     |        |                      |  |  |         |  |  |  
|                 |  |             |   |          |  |             |   |                      |  | Underlying               |        | Value of Unexercised
|                 |  |             |   |          |  |             |   |                      |  | Unexercised Options      |        | In-The-Money Options
|                 |  | Shares      |   |          |  |             |   | at December 31, 2002 |  | at December 31, 2002 (1)
|                 |  | Acquired On |   | Value    |  |             |   |                     
|Name             |  | Exercise    |   | Realized |  | Exercisable |   | Unexercisable        |  | Exercisable              |        | Unexercisable       
|                 |  |             |   |          |  |             |   |                      |  |                          |        |                     
|Robert Cellucci  |  |             |  |          |  |             |  |                      |  |                          | 74,479 |                      |  |  | 60,521  |  |  | $ | 4,000 |  |  |  |  | 
|
|Wilfried Beckman |  |             |  |          |  |             |  |                      |  |                          | 50,000 |                      |  |  | 100,000 |  |  |   |      |  |  |  |  | 
|Horst Schellong  |  |             |  |          |  |             |  |                      |  |                          | 50,000 |                      |  |  | 100,000 |  |  |   |      |  |  |  |  | 



---

|(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 31, 2002 on the NASDAQ Small Cap Market System was $
0.87.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity Compensation Plan Information

The following chart gives aggregate information regarding grants under all
of our equity compensation plans as of December 31, 2002.

|                                                          |       |                     |                      |                     |                      |             |                         |      |                       |  |                         |         | 
|--------------------------------------------------------- | ----- | ------------------- | -------------------- | ------------------- | -------------------- | ----------- | ----------------------- | ---- | --------------------- |  | ----------------------- | ------- | 
|                                                          |       |                     |                      |                     |                      |             |                         |      |                       |  | Number of securities   
|                                                          |       |                     |                      |                     |                      |             |                         |      |                       |  | remaining available for
|                                                          |       |                     | Number of securities |                     |                      |             |                         |      | future issuance under
|                                                          |       |                     | to be issued upon    |                     | Weighted-average     |             | equity compensation    
|                                                          |       |                     | exercise of          |                     | exercise price of    |             | plans (excluding       
|                                                          |       |                     | outstanding options, |                     | outstanding options, |             | securities reflected in
|Plan category                                             |       | warrants and rights |                      | warrants and rights |                      | 1st column)
|                                                          |       |                     |                      |                     |                      |            
|Equity compensation
plans approved by
securityholders (1) |       |                     | 2,970,988            |                     |                      | $           | 1.78                    |      |                       |  | 713,110                 |        
|Equity compensation
plans not approved by
securityholders |       |                     |                     |                     |                      |             |                        |      |                       |  |                        |        
|                                                          | Total |                     |                      | 2,970,988           |                      |             | $                       | 1.78 |                       |  |                         | 713,110 | 



---

|(1) |  | Represents options granted under our (i) 1990 Stock Option Plan, which was
approved by securityholders in 1991, (ii) 2001 Stock Option Plan, which was
approved by securityholders in 2001 and (iii) Non-Employee Option Plan, which
was approved by securityholders in 1995. The 1990 Stock Option Plan expired on
October 21, 2001. The remaining options to purchase shares available for grant
under the 1990 Stock Option Plan were transferred into the 2001 Stock Option
Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Compensation of Directors

Pursuant to 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 our Common Stock during each year
of service as a director commencing with fiscal year 1995.

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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 2002. 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 2002, 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 our
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 December 31, 2002, as to (i) all
directors, (ii) the named executive officers identified in the Summary
Compensation Table located in Item 11, (iii) all directors and executive
officers as a group, and (iv) each person known to us to be the beneficial
owner of more than 5% of any class of our voting securities.

Each share of 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 WW
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 December 31, 2002. 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.

|                                                               |  |                      |            |                  |  |  |      |  
|-------------------------------------------------------------- |  | -------------------- | ---------- | ---------------- |  |  | ---- | -
|                                                               |  | Amount and Nature of |            |                  |  | 
|Name and Address of Beneficial Owner                           |  | Beneficial Ownership |            | Percent of Class
|                                                               |  |                      |            |                 
|MK Global Ventures                                            |  |                      | 769,558    | (1)              |  |  | 2.4  | %
|MK Global Ventures II                                         |  |                      | 749,859    | (2)              |  |  | 2.4  | %
|MK GVD Fund                                                   |  |                      | 26,995,765 | (3)              |  |  | 85.3 | %
|Michael D. Kaufman                                            |  |                      | 28,580,182 | (4)(7)           |  |  | 90.1 | %
|Robert W. Riland III                                         |  |                      | 197,396    | (5)              |  |  | *    |  
|Frank T. Connors                                             |  |                      | 147,558    | (6)              |  |  | *    |  
|F. Rigdon Currie                                             |  |                      | 65,000     | (7)              |  |  | *    |  
|Arch J. McGill                                               |  |                      | 65,000     | (7)              |  |  | *    |  
|Michael A. McManus, Jr.                                      |  |                      | 77,500     | (7)              |  |  | *    |  
|Wilfried Beckman                                             |  |                      | 116,400    | (8)              |  |  | *    |  
|Robert Cellucci                                              |  |                      | 74,479     | (9)              |  |  | *    |  
|Henry Madrid                                                 |  |                      | 134,827    | (10)             |  |  | *    |  
|Horst Schellong                                                |  |                      | 116,400    | (11)             |  |  | *    |  
|Directors and Executive Officers as a group (ten (10) persons) |  |                      | 29,574,742 | (12)             |  |  | 91.2 | %

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---

|*    |  | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    |  | 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.                                                                                                       
|    
|(3)  |  | MK GVD Fund beneficially owns 595,049 shares of Common Stock and
21,932,456 shares of Series D through WW 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 4,468,260 shares of
Common Stock exercisable on December 31, 2002 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 147,396 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                   
|    
|(6)  |  | Includes 90,000 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                    
|    
|(7)  |  | Includes 65,000 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                    
|    
|(8)  |  | Includes 50,000 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                    
|    
|(9)  |  | Includes 74,479 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                    
|    
|(10) |  | Includes 104,166 shares of Common Stock issuable upon exercise of stock
options exercisable on December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                   
|    
|(11) |  | Includes 50,000 shares of Common Stock issuable upon exercise of stock
options exercisable on February 28, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                                                                    
|    
|(12) |  | Includes 776,041 shares of Common Stock issuable upon exercise of stock
options and warrants for 4,468,260 shares of Common Stock exercisable on
December 31, 2002 or within 60 days thereafter.                                                                                                                                                                                                                                 




Item 13. Certain Relationships and Related Transactions.

During the twelve months ended December 31, 2002, the Company sold and MK
GVD Fund, the principal shareholder, purchased 637,452 shares of convertible
preferred stock and warrants under a formula set out in a March 1996 agreement
for aggregate proceeds of $5,375,000. The warrants allow the holder to
purchase 1,593,611 shares of common stock for exercise prices ranging from
$0.80-$2.03. Under the agreement the number of shares of preferred stock was
determined based on the lower of 85% of the closing bid price or the average
closing price of the Companys Common Stock for the five trading days ended
three days prior to the issuance date, but not to exceed $2.50 per share as
converted into common stock.

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The fair
value of the warrants issued during the twelve months ended
December 31, 2002, $1,553,000 was determined using a Black Scholes option
pricing model with the following assumptions: volatility of ranging
from 142%-145%; risk free
interest rates ranging from 2.50% to 4.94%; expected life of five years and no
dividend yield. The fair value of the warrants is recorded in shareholders
equity.

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




Item 14. Controls and Procedures.

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

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PART IV




Item 15. 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
consolidated financial statements as set forth under Item 8 of this Annual Report
on Form 10-K are presented herein at the pages noted.

|                                                                                            |  |              |    | 
|------------------------------------------------------------------------------------------- |  | ------------ | -- | 
|                                                                                            |  | Page Numbers
|                                                                                            |  |             
|Report of Independent Accountants                                                           |  |              | 59 | 
|Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001                   |  |              | 36 | 
|Consolidated Statements of Operations For the Three Years Ended December
31, 2002           |  |              | 37 | 
|Consolidated Statements of Shareholders Equity For the Three Years Ended
December 31, 2002 |  |              | 38 | 
|Consolidated Statements of Cash Flows For the Three Years Ended December
31, 2002           |  |              | 41 | 
|Notes to Consolidated Financial Statements                                                  |  |              | 42 | 

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 consolidated financial statements or notes to the consolidated financial statements.

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:

On March 12, 2002, we filed a report on Form 8-K announcing the
appointment of Robert W. Riland, III to the position of President and CEO.

On September 17, 2002, we filed Report on Form 8-K announcing the
appointment of Robert W. Riland III to succeed J. Richard Ellis as a member of
Board of Directors and Chairman.

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CONSOLIDATED FINANCIAL STATEMENTS

DISC, INC.
CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                |                            |            |              |           |      |            |             |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ---------- | ------------ | --------- | ---- | ---------- | ----------- | --------- | 
|                                                   |                                                                                                                                |                            |            | December 31,
|                                                   |                                                                                                                                |                            |            |             
|                                                   |                                                                                                                                |                            |            | 2002         |           | 2001
|                                                   |                                                                                                                                |                            |            |              |           |     
|Assets:                                            |                                                                                                                                |                            |            |              |           |      |            |            
|Cash                                               |                                                                                                                                | $                          | 461,000    |              |           | $    | 879,000    |            
|Accounts receivable, net                           |                                                                                                                                |                            | 2,483,000  |              |           |      | 2,318,000  |            
|Inventories                                        |                                                                                                                                |                            | 2,391,000  |              |           |      | 2,941,000  |            
|Prepaid expenses and deposits                      |                                                                                                                                |                            | 295,000    |              |           |      | 310,000    |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | Total current assets       |            |              | 5,630,000 |      |            |             | 6,448,000 | 
|Property and equipment, net                        |                                                                                                                                |                            | 514,000    |              |           |      | 771,000    |            
|Goodwill                                           |                                                                                                                                |                            | 2,294,000  |              |           |      | 3,182,000  |            
|Other intangible assets, net                       |                                                                                                                                |                            | 2,297,000  |              |           |      | 3,059,000  |            
|Other assets                                       |                                                                                                                                |                            | 46,000     |              |           |      | 31,000     |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | $                          | 10,781,000 |              |           | $    | 13,491,000 |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|Liabilities and Shareholders Equity:              |                                                                                                                                |                            |            |              |           |      |            |            
|Accounts payable                                   |                                                                                                                                | $                          | 3,058,000  |              |           | $    | 3,022,000  |            
|Borrowings, current portion                        |                                                                                                                                |                            | 1,062,000  |              |           |      | 1,763,000  |            
|Deferred revenues, current portion                 |                                                                                                                                |                            | 465,000    |              |           |      | 249,000    |            
|Accrued warranty                                   |                                                                                                                                |                            | 241,000    |              |           |      | 295,000    |            
|Accrued expenses and other liabilities             |                                                                                                                                |                            | 1,405,000  |              |           |      | 1,410,000  |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | Total current liabilities  |            |              | 6,231,000 |      |            |             | 6,739,000 | 
|Deferred revenues and other liabilities, long-term |                                                                                                                                |                            | 333,000    |              |           |      | 192,000    |            
|Term loans, net of current portion                 |                                                                                                                                |                            | 1,480,000  |              |           |      | 1,422,000  |            
|Deferred tax liability                             |                                                                                                                                |                            |           |              |           |      | 1,151,000  |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | Total liabilities          |            |              | 8,044,000 |      |            |             | 9,504,000 | 
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|Commitments and contingencies (Note 12)            |                                                                                                                                |                            |            |              |           |      |            |            
|Shareholders equity:                              |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   | Convertible Preferred Stock; no par value,
10,000,000 shares authorized; 6,122,687 and
5,485,235 shares issued and outstanding |                            |            | 27,941,000   |           |      |            | 23,552,000  |          
|                                                   | Common Stock; no par value, 40,000,000 shares
authorized; 4,817,617 and 4,817,617 shares
issued and outstanding                |                            |            | 17,711,000   |           |      |            | 16,725,000  |          
|                                                   | Accumulated deficit                                                                                                            |                            |            | (42,620,000  | )         |      |            | (36,254,000 | )        
|                                                   | Accumulated other comprehensive loss                                                                                           |                            |            | (295,000     | )         |      |            | (36,000     | )        
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | Total shareholders equity |            |              | 2,737,000 |      |            |             | 3,987,000 | 
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            
|                                                   |                                                                                                                                | $                          | 10,781,000 |              |           | $    | 13,491,000 |            
|                                                   |                                                                                                                                |                            |            |              |           |      |            |            

See accompanying notes to consolidated financial statements.

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DISC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |           |            | 
|----------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ---------- | ----------------------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | 
|                                                                                                                                    |                                                |                          |            | Year Ended December 31,
|                                                                                                                                    |                                                |                          |            |                        
|                                                                                                                                    |                                                |                          |            | 2002                    |            | 2001 |            | 2000      
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |           
|                                                                                                                                    | Net sales                                      |                          | $          | 12,938,000              |            |      | $          | 12,150,000 |            |   | $          | 6,821,000 |           
|Costs and expenses:                                                                                                                 |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|                                                                                                                                    | Cost of sales                                  |                          |            | 10,481,000              |            |      |            | 9,616,000  |            |   |            | 5,775,000 |           
|                                                                                                                                    | Research and development                       |                          |            | 2,447,000               |            |      |            | 2,001,000  |            |   |            | 1,158,000 |           
|                                                                                                                                    | Marketing and sales                            |                          |            | 4,189,000               |            |      |            | 3,745,000  |            |   |            | 2,665,000 |           
|                                                                                                                                    | General and administrative                     |                          |            | 1,731,000               |            |      |            | 1,422,000  |            |   |            | 1,048,000 |           
|                                                                                                                                    | Intangible asset amortization                  |                          |            | 762,000                 |            |      |            | 317,000    |            |   |            |          |           
|                                                                                                                                    | Charge for in process research and development |                          |            |                        |            |      |            | 242,000    |            |   |            |          |           
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|                                                                                                                                    |                                                | Total costs and expenses |            |                         | 19,610,000 |      |            |            | 17,343,000 |   |            |           | 10,646,000 | 
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|Loss from operations                                                                                                                |                                                |                          | (6,672,000 | )                       |            |      | (5,193,000 | )          |            |   | (3,825,000 | )        
|Interest and other expense, net                                                                                                     |                                                |                          | (291,000   | )                       |            |      | (198,000   | )          |            |   | (113,000   | )        
|Other income                                                                                                                        |                                                |                          | 341,000    |                         |            |      |           |            |            |   |           |          
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|Net loss before income taxes                                                                                                        |                                                |                          | (6,622,000 | )                       |            |      | (5,391,000 | )          |            |   | (3,938,000 | )        
|Income tax benefit                                                                                                                  |                                                |                          | 256,000    |                         |            |      | 93,000     |            |            |   |           |          
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|Net loss                                                                                                                            |                                                |                          | (6,366,000 | )                       |            |      | (5,298,000 | )          |            |   | (3,938,000 | )        
|Deemed preferred stock dividend                                                                                                     |                                                |                          | (2,488,000 | )                       |            |      | (1,624,000 | )          |            |   | (1,640,000 | )        
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|Net loss attributable to common shareholders
before cumulative effect of change in accounting
principle                             |                                                |                          | (8,854,000 | )                       |            |      | (6,922,000 | )          |            |   | (5,578,000 | )        
|Cumulative effect of change in accounting
principle                                                                                 |                                                |                          |           |                         |            |      |           |            |            |   | (686,000   | )        
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |          
|Net loss attributable to common shareholders                                                                                        |                                                | $                        | (8,854,000 | )                       |            | $    | (6,922,000 | )          |            | $ | (6,264,000 | )        
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |           |           
|Basic and diluted net loss attributable to
common shareholders per share before
cumulative effect of change in accounting
principle |                                                | $                        | (1.84      | )                       |            | $    | (1.62      | )          |            | $ | (1.47      | )        
|Cumulative effect of change in accounting
principle                                                                                 |                                                |                          |           |                         |            |      |           |            |            |   | (0.18      | )        
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |           |           
|Basic and diluted net loss attributable to
common shareholders per share                                                            |                                                | $                        | (1.84      | )                       |            | $    | (1.62      | )          |            | $ | (1.65      | )        
|                                                                                                                                    |                                                |                          |            |                         |            |      |            |            |            |   |            |           |           
|Weighted average common shares for basic and
diluted net loss per share calculation                                                 |                                                |                          | 4,818,000  |                         |            |      | 4,269,000  |            |            |   | 3,803,000  |          

See accompanying notes to consolidated financial statements.

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DISC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS

|                                              |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |           | 
|--------------------------------------------- | -------------------------------------------------------------- |  | --------------------------- |  | ------------ |  | ----------- | ------ | ------------- | - | ---------- | --------- |  |  | ------ |  | ------ |  | --------- | - | ---- | - | ---------- | ------- |  | - | ----------- | - |  |  | ------- | - |  | - | ---------- | --------- | 
|                                              |                                                                |  | Convertible Preferred Stock |  | Common Stock |  |             |        | Accumulated   |   |            |           | 
|                                              |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  | Other  |  |           |   |      |  
|                                              |                                                                |  |                             |  |              |  | Accumulated |        | Comprehensive |   |            |           | 
|                                              |                                                                |  |                             |  |              |  | Shares      |        | Amount        |   |            |           |  |  | Shares |  | Amount |  | Deficit   |   | Loss |   | Total     
|                                              |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |           
|Balance at December 31, 1999                  |                                                                |  |                             |  |              |  | 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                  |                                                                |  |                             |  |              |  | 5,141,573   |        |               |   | 19,277,000 |           |  |  |        |  |        |  | 3,841,053 |   |      |   | 13,775,000 |         |  |   | (30,956,000 | ) |  |  |        |   |  |   | 2,096,000  |          
|Exercise of Common Stock
Options              |                                                                |  |                             |  |              |  |            |        |               |   |           |           |  |  |        |  |        |  | 11,354    |   |      |   | 8,000      |         |  |   |            |   |  |  |        |   |  |   | 8,000      |          
|Issuance of Common Stock to
acquire DISC GmbH |                                                                |  |                             |  |              |  |            |        |               |   |           |           |  |  |        |  |        |  | 965,210   |   |      |   | 2,067,000  |         |  |   |            |   |  |  |        |   |  |   | 2,067,000  |          
|Issuance of Series BB                         |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|                                              | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 71,038 |               |   |            | 1,066,000 |  |  |        |  |        |  |           |  |      |   |            | 234,000 |  |   |             |  |  |  |         |  |  |   |            | 1,300,000 | 
|Issuance of Series CC                         |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|                                              | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 70,988 |               |   |            | 1,000,000 |  |  |        |  |        |  |           |  |      |   |            | 150,000 |  |   |             |  |  |  |         |  |  |   |            | 1,150,000 | 
|Issuance of Series DD                         |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|                                              | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 60,000 |               |   |            | 984,000   |  |  |        |  |        |  |           |  |      |   |            | 216,000 |  |   |             |  |  |  |         |  |  |   |            | 1,200,000 | 
|Issuance of Series EE                         |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|                                              | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 90,090 |               |   |            | 820,000   |  |  |        |  |        |  |           |  |      |   |            | 180,000 |  |   |             |  |  |  |         |  |  |   |            | 1,000,000 | 
|Issuance of Series FF                         |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|                                              | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 51,546 |               |   |            | 405,000   |  |  |        |  |        |  |           |  |      |   |            | 95,000  |  |   |             |  |  |  |         |   |  |   |            | 500,000   | 
|Net loss for the period                       |                                                                |  |                             |  |              |  |            |        |               |   |           |           |  |  |        |  |        |  |          |   |      |   |           |         |  |   | (5,298,000  | ) |  |  |        |   |  |   | (5,298,000 | )        
|Foreign currency
translation adjustment       |                                                                |  |                             |  |              |  |            |        |               |   |           |           |  |  |        |  |        |  |          |   |      |   |           |         |  |   |            |   |  |  | (36,000 | ) |  |   | (36,000    | )        
|                                              |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          
|Comprehensive loss                            |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  | $ | (5,334,000 | )        
|                                              |                                                                |  |                             |  |              |  |             |        |               |   |            |           |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |  |         |   |  |   |            |          

38--



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##### Table of Contents



|                                                                                     |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |           | 
|------------------------------------------------------------------------------------ | -------------------------------------------------------------- |  | --------------------------- |  | ------------ |  | ----------- | ------- | ------------- | - | ---------- | --------- |  |  | ------ |  | ------ |  | --------- | - | ---- |  | ---------- | ------- |  |  | ----------- | - |  |  | ------- | - |  |  | --------- | --------- | 
|                                                                                     |                                                                |  | Convertible Preferred Stock |  | Common Stock |  |             |         | Accumulated   |   |            |           | 
|                                                                                     |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  | Other  |  |           |   |      | 
|                                                                                     |                                                                |  |                             |  |              |  | Accumulated |         | Comprehensive |   |            |           | 
|                                                                                     |                                                                |  |                             |  |              |  | Shares      |         | Amount        |   |            |           |  |  | Shares |  | Amount |  | Deficit   |   | Loss |  | Total     
|                                                                                     |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |           
|Allocation of discount on
Preferred Stock                                            |                                                                |  |                             |  |              |  |            |         |               |   | (1,624,000 | )         |  |  |        |  |        |  |          |   |      |  |           |         |  |  | 1,624,000   |   |  |  |        |   |  |  |          |          
|Deemed Preferred Stock
dividend                                                      |                                                                |  |                             |  |              |  |            |         |               |   | 1,624,000  |           |  |  |        |  |        |  |          |   |      |  |           |         |  |  | (1,624,000  | ) |  |  |        |   |  |  |          |          
|                                                                                     |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|Balance at December 31, 2001                                                         |                                                                |  |                             |  |              |  | 5,485,235   |         |               | $ | 23,552,000 |           |  |  |        |  |        |  | 4,817,617 |   |      |  | 16,725,000 |         |  |  | (36,254,000 | ) |  |  | (36,000 | ) |  |  | 3,987,000 |          
|Issuance of Series GG                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 2,252   |               |   |            | 20,000    |  |  |        |  |        |  |           |  |      |  |            | 5,000   |  |  |             |  |  |  |         |  |  |  |           | 25,000    | 
|Issuance of Series HH                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 16,260  |               |   |            | 162,000   |  |  |        |  |        |  |           |  |      |  |            | 38,000  |  |  |             |  |  |  |         |  |  |  |           | 200,000   | 
|Issuance of Series II
Convertible Preferred Stock
and Warrants for Common
Stock, net |                                                                |  |                             |  |              |  | 6,667       |         |               |   | 82,000     |           |  |  |        |  |        |  |          |   |      |  | 18,000     |         |  |  |            |   |  |  |        |   |  |  | 100,000   |          
|Issuance of Series JJ
Convertible Preferred Stock
and Warrants for Common
Stock, net |                                                                |  |                             |  |              |  | 24,138      |         |               |   | 284,000    |           |  |  |        |  |        |  |          |   |      |  | 66,000     |         |  |  |            |   |  |  |        |   |  |  | 350,000   |          
|Issuance of Series KK                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 14,706  |               |   |            | 162,000   |  |  |        |  |        |  |           |  |      |  |            | 38,000  |  |  |             |  |  |  |         |  |  |  |           | 200,000   | 
|Issuance of Series LL                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 11,765  |               |   |            | 147,000   |  |  |        |  |        |  |           |  |      |  |            | 33,000  |  |  |             |  |  |  |         |  |  |  |           | 180,000   | 
|Issuance of Series CC                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 5,864   |               |   |            | 77,000    |  |  |        |  |        |  |           |  |      |  |            | 18,000  |  |  |             |  |  |  |         |  |  |  |           | 95,000    | 
|Issuance of Series W
Convertible Preferred Stock
and Warrants for Common
Stock, net  |                                                                |  |                             |  |              |  | 10,067      |         |               |   | 121,000    |           |  |  |        |  |        |  |          |   |      |  | 29,000     |         |  |  |            |   |  |  |        |   |  |  | 150,000   |          
|Issuance of Series MM                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 28,846  |               |   |            | 246,000   |  |  |        |  |        |  |           |  |      |  |            | 54,000  |  |  |             |  |  |  |         |  |  |  |           | 300,000   | 
|Issuance of Series NN                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 28,090  |               |   |            | 202,000   |  |  |        |  |        |  |           |  |      |  |            | 48,000  |  |  |             |  |  |  |         |  |  |  |           | 250,000   | 
|Issuance of Series OO                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 170,140 |               |   |            | 1,003,000 |  |  |        |  |        |  |           |  |      |  |            | 222,000 |  |  |             |  |  |  |         |  |  |  |           | 1,225,000 | 
|Issuance of Series PP                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 43,210  |               |   |            | 284,000   |  |  |        |  |        |  |           |  |      |  |            | 66,000  |  |  |             |  |  |  |         |  |  |  |           | 350,000   | 
|Issuance of Series QQ                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 26,667  |               |   |            | 164,000   |  |  |        |  |        |  |           |  |      |  |            | 36,000  |  |  |             |  |  |  |         |  |  |  |           | 200,000   | 
|Issuance of Series RR                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 12,821  |               |   |            | 82,000    |  |  |        |  |        |  |           |  |      |  |            | 18,000  |  |  |             |  |  |  |         |  |  |  |           | 100,000   | 
|Issuance of Series SS                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 44,118  |               |   |            | 246,000   |  |  |        |  |        |  |           |  |      |  |            | 54,000  |  |  |             |  |  |  |         |  |  |  |           | 300,000   | 
|Issuance of Series TT                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 13,699  |               |   |            | 82,000    |  |  |        |  |        |  |           |  |      |  |            | 18,000  |  |  |             |  |  |  |         |  |  |  |           | 100,000   | 
|Issuance of Series UU                                                                |                                                                |  |                             |  |              |  |             |         |               |   |            |           |  |  |        |  |        |  |           |   |      |  |            |         |  |  |             |   |  |  |         |   |  |  |           |          
|                                                                                     | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 27,533  |               |   |            | 164,000   |  |  |        |  |        |  |           |  |      |  |            | 36,000  |  |  |             |  |  |  |         |  |  |  |           | 200,000   | 

39--



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##### Table of Contents



|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |         | 
|----------------------------------------- | -------------------------------------------------------------- |  | --------------------------- |  | ------------ |  | ----------- | ------- | ------------- | - | ---------- | ------- |  |  | ------ |  | ------ |  | --------- | - | ---- | - | ---------- | ------- |  | - | ----------- | - |  | - | -------- | - |  | - | ---------- | ------- | 
|                                          |                                                                |  | Convertible Preferred Stock |  | Common Stock |  |             |         | Accumulated   |   |            |         | 
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  | Other  |  |           |   |      |  
|                                          |                                                                |  |                             |  |              |  | Accumulated |         | Comprehensive |   |            |         | 
|                                          |                                                                |  |                             |  |              |  | Shares      |         | Amount        |   |            |         |  |  | Shares |  | Amount |  | Deficit   |   | Loss |   | Total     
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |           
|Issuance of Series VV                     |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        
|                                          | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 46,875  |               |   |            | 246,000 |  |  |        |  |        |  |           |  |      |   |            | 54,000  |  |   |             |  |  |   |          |  |  |   |            | 300,000 | 
|Issuance of Series WW                     |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        
|                                          | Convertible Preferred Stock
and Warrants for Common
Stock, net |  |                             |  |              |  |             | 103,734 |               |   |            | 615,000 |  |  |        |  |        |  |           |  |      |   |            | 135,000 |  |   |             |  |  |   |          |   |  |   |            | 750,000 | 
|Net loss for the period                   |                                                                |  |                             |  |              |  |            |         |               |   |           |         |  |  |        |  |        |  |          |   |      |   |           |         |  |   | (6,366,000  | ) |  |   |         |   |  |   | (6,366,000 | )      
|Foreign currency
translation adjustment   |                                                                |  |                             |  |              |  |            |         |               |   |           |         |  |  |        |  |        |  |          |   |      |   |           |         |  |   |            |   |  |   | (259,000 | ) |  |   | (259,000   | )      
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        
|Comprehensive loss                        |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  | $ | (6,625,000 | )      
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        
|Allocation of discount on
Preferred Stock |                                                                |  |                             |  |              |  |            |         |               |   | (2,488,000 | )       |  |  |        |  |        |  |          |   |      |   |           |         |  |   | 2,488,000   |   |  |   |         |   |  |   |           |        
|Deemed Preferred Stock
dividend           |                                                                |  |                             |  |              |  |            |         |               |   | 2,488,000  |         |  |  |        |  |        |  |          |   |      |   |           |         |  |   | (2,488,000  | ) |  |   |         |   |  |   |           |        
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        
|Balance at December 31, 2002              |                                                                |  |                             |  |              |  | 6,122,687   |         |               | $ | 27,941,000 |         |  |  |        |  |        |  | 4,817,617 |   |      | $ | 17,711,000 |         |  | $ | (42,620,000 | ) |  | $ | (295,000 | ) |  | $ | 2,737,000  |        
|                                          |                                                                |  |                             |  |              |  |             |         |               |   |            |         |  |  |        |  |        |  |           |   |      |   |            |         |  |   |             |   |  |   |          |   |  |   |            |        

See accompanying notes to consolidated financial statements.

40--



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##### Table of Contents



DISC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |            |            |   |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------- | -------- | ----------------------- | ---------- | ---- | ------- | ---------- | ---------- | - | --------- | ---------- | ---------- | - |  |  |  | 
|                                                  |                                                                             |                                        |          | Year Ended December 31,
|                                                  |                                                                             |                                        |          |                        
|                                                  |                                                                             |                                        |          | 2002                    |            | 2001 |         | 2000       |            |   |           |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Cash flows from operating activities:             |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Net loss                                                                    |                                        | $        | (6,366,000              | )          |      | $       | (5,298,000 | )          |   | $         | (3,938,000 | )         
|                                                  | Adjustments to reconcile net loss to net
cash used in operating activities: |                                        |          |                         |            |      |         |            |            |   |           |            |           
|                                                  | Depreciation and amortization expense                                       |                                        |          | 1,127,000               |            |      |         | 971,000    |            |   |           | 270,000    |           
|                                                  | Provision for allowance for doubtful
accounts                               |                                        |          | 34,000                  |            |      |         | 26,000     |            |   |           |           |           
|                                                  | Provision for inventory reserve                                             |                                        |          | 110,000                 |            |      |         | 203,000    |            |   |           |           |           
|                                                  | Deferred taxes                                                              |                                        |          | 256,000                 |            |      |         |           |            |   |           |           |           
|                                                  | Gain on extinguishment of debt                                              |                                        |          | (300,000                | )          |      |         |           |            |   |           |           |           
|                                                  | Changes in assets and liabilities:                                          |                                        |          |                         |            |      |         |            |            |   |           |            |           
|                                                  |                                                                             | Accounts receivable                    |          |                         | (78,000    | )    |         |            | 160,000    |   |           |            | (107,000   | )
|                                                  |                                                                             | Inventories                            |          |                         | 681,000    |      |         |            | (676,000   | ) |           |            | (18,000    | )
|                                                  |                                                                             | Prepaid expenses and deposits          |          |                         | 24,000     |      |         |            | (133,000   | ) |           |            | 53,000     |  
|                                                  |                                                                             | Accounts payable                       |          |                         | (220,000   | )    |         |            | 502,000    |   |           |            | 133,000    |  
|                                                  |                                                                             | Accrued expenses and other liabilities |          |                         | (28,000    | )    |         |            | 415,000    |   |           |            | 42,000     |  
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  |                                                                             | Net cash used in operating activities  |          |                         | (4,760,000 | )    |         |            | (3,830,000 | ) |           |            | (3,565,000 | )
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Cash
flows from investing activities:             |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Purchase of property and equipment                                          |                                        |          | (97,000                 | )          |      |         | (429,000   | )          |   |           | (233,000   | )         
|                                                  | Acquisition of DISC GmbH, net of cash
acquired                              |                                        |          |                        |            |      |         | (429,000   | )          |   |           |           |           
|                                                  | Other assets                                                                |                                        |          | (9,000                  | )          |      |         | (31,000    | )          |   |           |           |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  |                                                                             | Net cash used in investing activities  |          |                         | (106,000   | )    |         |            | (889,000   | ) |           |            | (233,000   | )
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Cash flows from financing activities:             |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Borrowings (repayment), net                                                 |                                        |          | (977,000                | )          |      |         | 323,000    |            |   |           | (1,165,000 | )         
|                                                  | Proceeds from issuance of Common Stock                                      |                                        |          |                        |            |      |         | 8,000      |            |   |           | 95,000     |           
|                                                  | Proceeds from issuance of Preferred
Stock and Warrants for Common Stock     |                                        |          | 5,375,000               |            |      |         | 5,150,000  |            |   |           | 3,870,000  |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Net cash provided by financing activities                                   |                                        |          | 4,398,000               |            |      |         | 5,481,000  |            |   |           | 2,800,000  |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Effect of exchange rate change on cash            |                                                                             |                                        | 50,000   |                         |            |      | (11,000 | )          |            |   |          |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Net increase (decrease) in cash                   |                                                                             |                                        | (418,000 | )                       |            |      | 751,000 |            |            |   | (998,000  | )         
|Cash at beginning of the year                     |                                                                             |                                        | 879,000  |                         |            |      | 128,000 |            |            |   | 1,126,000 |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|Cash at end of the year                           |                                                                             | $                                      | 461,000  |                         |            | $    | 879,000 |            |            | $ | 128,000   |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |            |           
|Supplemental disclosure of cash flow
information: |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Interest paid                                                               |                                        | $        | 291,000                 |            |      | $       | 198,000    |            |   | $         | 113,000    |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |            |           
|Non-cash financing activities:                    |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |           
|                                                  | Issuance of common stock in DISC GmbH
acquisition                           |                                        | $        |                        |            |      | $       | 2,067,000  |            |   | $         |           |           
|                                                  |                                                                             |                                        |          |                         |            |      |         |            |            |   |           |            |           

See accompanying notes to consolidated financial statements.

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DISC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND ITS LIQUIDITY:

DISC, Inc. was incorporated under the laws of the State of California in
1986. The Company operates in one business segment, the computer mass storage
system business. DISC designs, manufactures, and markets 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.

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

The
Company has incurred substantial losses from operations, negative
cash flow from operating activities and has a working capital
deficit. In the past, the Company has obtained investor funding and credit
facilities to maintain operations. In order for the Company to
sustain its
operations and meet its obligations going forward, it plans to seek
additional financing from investors and to significantly increase
sales. In addition, the Company anticipates that it will incur net
losses for the foreseeable future. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Subsequent to
December 31, 2002 and through March 28, 2003, the Company
has
received funding of $860,000 from investors and generated cash from
sales of its products. The ability to sustain its operations will depend on the
Companys ability to significantly increase sales or raise significant
additional equity or debt financing. Additional financing may not be available
on acceptable terms, if at all, and the inability to obtain that financing
could adversely affect the continued operations of the Companys business. The
consolidated financial statements do not include any adjustment that might
result should the Company be unable to continue as a going concern.

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.

BASIS OF CONSOLIDATION

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

FOREIGN CURRENCY TRANSLATION

The functional currency of the Companys foreign subsidiaries is the local
currency. Accordingly, the assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. Dollars using the exchange rates in
effect at the balance sheet date. Income and expense items are translated at
average exchange rates for the period. Foreign currency translation
adjustments are included in other comprehensive

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loss as a separate component of shareholders equity. Foreign currency
transaction gains or losses were not material in any of the periods presented.

CERTAIN RISKS AND CONCENTRATIONS

At
December 31, 2002, substantially all of the Companys cash
in the United States was 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, 2002, two customers represented 10% and 23%, respectively, of
the accounts receivable balance. At December 31, 2001, one customer
represented 43% of the accounts receivable balance. The Company maintains an
allowance for doubtful accounts receivable based upon the collectibility of all
accounts receivable.

In 2002, two customers accounted for 23% and 10% of net sales,
respectively. In 2001, two customers accounted for 31% and 14% of net sales,
respectively. In 2000, two customers accounted for 14% and 13% of sales,
respectively.

FINANCIAL INSTRUMENTS

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

CASH

The Company considers all highly liquid investments with original
maturities of three months or less and money market funds to be cash
equivalents. Cash deposits may from time to time exceed federally insured
limits.

REVENUE RECOGNITION

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, title has passed to the customer and collection of the resulting receivable
is probable. The Company enters into contracts to sell our products and
services, and, while the majority of our sales agreements contain standard
terms, there are agreements that contain multiple elements or non-standard
terms and conditions. The Company recognizes revenue for delivered elements
only when the following criteria are satisfied: undelivered elements are not
essential to the functionality of delivered elements, uncertainties regarding
customer acceptance are resolved, no significant obligations remain, other than
the normal warranty obligation, and the fair value of each undelivered element
is known. Provisions for returns and allowances are recorded at the time
revenue is recognized based on the Companys historical experience. Service
revenue is recognized ratably over the term of the contract, generally one to
three years.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out method. Provision is made for excess and
obsolete inventories to reduce the carrying value to estimated net realizable
value.

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WARRANTY

Estimated warranty costs are recorded as an element of costs of sales when
revenue is recognized. Estimated warranty costs are based on our best estimate
of our obligation for anticipated claims, based on historical experience.

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.

GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets represent purchased intangible assets and the excess of
acquisition cost over the fair value of tangible and identified intangible net
assets of businesses acquired (goodwill). Purchased intangible assets include
developed technology, patents and trade names. Intangible assets are being
amortized using the straight-line method over estimated useful lives ranging
from four to six years.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Under
SFAS No. 141, all business combinations initiated after June 30, 2001 must be
accounted for using the purchase method. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if there are indicators such assets may
be impaired) for impairment. Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their estimated
useful lives (but with no maximum life). The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company is required to adopt SFAS No. 142 effective January 1, 2002. The
Company adopted these Statements and they did not have a material impact on the
Companys financial position or results of operations.

LONG LIVED ASSETS

Long-lived assets, such as goodwill, other intangibles and property and
equipment are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows resulting from the use of the
assets. When any such impairment exists, the related assets will be written
down to fair value. No impairments losses were incurred in the periods
presented.

STOCK COMPENSATION PLANS

The Company accounts for stock-based compensation arrangements for
employees 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

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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 SFAS No. 123, Accounting
for Stock-Based Compensation.

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 it is more likely than not that the benefit
cannot be realized.

COMPREHENSIVE LOSS

Comprehensive loss includes net losses and other comprehensive loss. Other
comprehensive loss includes accumulated translation adjustments. Total
comprehensive loss and the accumulated other comprehensive loss are presented
in the accompanying Consolidated Statement of Shareholders Equity and
Comprehensive Loss. Total accumulated other comprehensive loss is displayed as
a separate component of shareholders equity in the accompanying Consolidated
Balance Sheets.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company believes that the adoption of SFAS
143 will have no material impact on its financial statements.

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

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

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based

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employee compensation be displayed more prominently and in a tabular
format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ended after
December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company believes that
the adoption of this standard will have no material impact on its financial
statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2000. The Company believes that the adoption of this
standard will have no material impact on its financial statements.

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NOTE 3 - BALANCE SHEET DETAILS:

|                                 |                                                       |                                       |           |              |          |      |           |            |          |  
|-------------------------------- | ----------------------------------------------------- | ------------------------------------- | --------- | ------------ | -------- | ---- | --------- | ---------- | -------- | -
|                                 |                                                       |                                       |           | DECEMBER 31,
|                                 |                                                       |                                       |           |             
|                                 |                                                       |                                       |           | 2002         |          | 2001
|                                 |                                                       |                                       |           |              |          |     
|Accounts receivable, net:        |                                                       |                                       |           |              |          |      |           |           
|                                 | Trade accounts receivable                             |                                       | $         | 2,726,000    |          |      | $         | 2,593,000  |         
|                                 |                                                       | Less: Allowance for doubtful accounts |           |              | (243,000 | )    |           |            | (275,000 | )
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       | $                                     | 2,483,000 |              |          | $    | 2,318,000 |           
|                                 |                                                       |                                       |           |              |          |      |           |            |         
|Allowance for doubtful accounts: |                                                       |                                       |           |              |          |      |           |           
|                                 | Opening balance                                       |                                       | $         | 275,000      |          |      | $         | 181,000    |         
|                                 | Additions (charged to expense)                        |                                       |           | 34,000       |          |      |           | 26,000     |         
|                                 | Additions (due to acquisition of NSM Storage GmbH)    |                                       |           |             |          |      |           | 142,000    |         
|                                 | Deductions due to write-off of uncollectible accounts |                                       |           | (66,000      | )        |      |           | (74,000    | )       
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 | Closing balance                                       |                                       | $         | 243,000      |          |      | $         | 275,000    |         
|                                 |                                                       |                                       |           |              |          |      |           |            |         
|Inventories, net:                |                                                       |                                       |           |              |          |      |           |           
|                                 | Raw materials                                         |                                       | $         | 1,818,000    |          |      | $         | 2,119,000  |         
|                                 | Work-in-process                                       |                                       |           | 275,000      |          |      |           | 494,000    |         
|                                 | Finished goods                                        |                                       |           | 298,000      |          |      |           | 328,000    |         
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       | $                                     | 2,391,000 |              |          | $    | 2,941,000 |           
|                                 |                                                       |                                       |           |              |          |      |           |            |         
|Property and equipment:          |                                                       |                                       |           |              |          |      |           |           
|                                 | Computer and other equipment                          |                                       | $         | 1,989,000    |          |      | $         | 1,957,000  |         
|                                 | Tooling                                               |                                       |           | 463,000      |          |      |           | 240,000    |         
|                                 | Evaluation units                                      |                                       |           | 773,000      |          |      |           | 867,000    |         
|                                 | Leasehold improvements                                |                                       |           | 44,000       |          |      |           | 43,000     |         
|                                 | Furniture and fixtures                                |                                       |           | 45,000       |          |      |           | 118,000    |         
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       |                                       | 3,314,000 |              |          |      | 3,225,000 |           
|                                 | Less: Accumulated depreciation and amortization       |                                       |           | (2,800,000   | )        |      |           | (2,454,000 | )       
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       | $                                     | 514,000   |              |          | $    | 771,000   |           
|                                 |                                                       |                                       |           |              |          |      |           |            |         
|Other Intangible Assets:         |                                                       |                                       |           |              |          |      |           |           
|                                 | Developed Technology                                  |                                       | $         | 2,604,000    |          |      | $         | 2,604,000  |         
|                                 | Core Technology                                       |                                       |           | 72,000       |          |      |           | 72,000     |         
|                                 | Patents                                               |                                       |           | 471,000      |          |      |           | 471,000    |         
|                                 | Tradenames                                            |                                       |           | 229,000      |          |      |           | 229,000    |         
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       |                                       | 3,376,000 |              |          |      | 3,376,000 |           
|                                 | Less: Accumulated amortization                        |                                       |           | (1,079,000   | )        |      |           | (317,000   | )       
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 |                                                       | $                                     | 2,297,000 |              |          | $    | 3,059,000 |           
|                                 |                                                       |                                       |           |              |          |      |           |            |         
|Accrued Warranty:                |                                                       |                                       |           |              |          |      |           |           
|                                 | Opening balance                                       |                                       | $         | 295,000      |          |      | $         | 201,000    |         
|                                 | Additions (charged to cost of sales)                  |                                       |           | 46,000       |          |      |           | 135,000    |         
|                                 | Deductions due to warranty costs                      |                                       |           | (100,000     | )        |      |           | (41,000    | )       
|                                 |                                                       |                                       |           |              |          |      |           |           
|                                 | Closing balance                                       |                                       | $         | 241,000      |          |      | $         | 295,000    |         
|                                 |                                                       |                                       |           |              |          |      |           |            |         

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NOTE 4  ACQUISITION OF NSM STORAGE GmbH AND SUBSIDIARIES:

On July 30, 2001, we acquired all of the outstanding shares of NSM Storage
GmbH, a German Limited Liability Company, which was subsequently renamed to
DISC GmbH. We acquired DISC GmbH to expand our product offerings and increase
our customer base in Europe. As consideration for the acquired business, we
issued 965,210 shares of our common stock and paid $10,000 in cash. This
transaction has been accounted for under the purchase method of accounting.

The allocation of the purchase price is as follows:

|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |             |       | 
|-------------------------------------------------- | ------------------------------- | -------------------- | --------- | - | --------- | - | ---------- | - |  |  | --- | ----------- | ----- | 
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     | Useful life
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     | in years   
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |            
|Tangible net assets acquired (liabilities assumed) |                                 |                      |           |   |           | $ | (2,896,000 | ) |  |  | N/A |            
|                                                   | Identifiable intangible assets: |                      |           |   |           |   |            |   |  |  |     |             |      
|                                                   |                                 | Developed technology |           | $ | 2,604,000 |   |            |   |  |  |     |             | 4 - 5 | 
|                                                   |                                 | Core technology      |           |   | 72,000    |   |            |   |  |  |     |             | 5 - 6 | 
|                                                   |                                 | Patents              |           |   | 471,000   |   |            |   |  |  |     |             | 4 - 5 | 
|                                                   |                                 | Tradenames           |           |   | 229,000   |   |            |   |  |  |     |             | 4 - 5 | 
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |            
|Total identifiable intangible assets acquired      |                                 | $                    | 3,376,000 |   |           |   | 3,376,000  |   |  |  |     |            
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |            
|Less Deferred tax liability on intangibles         |                                 |                      |           |   |           |   | (381,000   | ) |  |  | N/A |            
|In Process R&D                                     |                                 |                      |           |   |           |   | 242,000    |   |  |  | N/A |            
|Goodwill                                           |                                 |                      |           |   |           |   | 2,294,000  |   |  |  | N/A |            
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |            
|Total consideration                                |                                 |                      |           |   |           | $ | 2,635,000  |   |  |  |     |            
|                                                   |                                 |                      |           |   |           |   |            |   |  |  |     |            

Total consideration paid is as follows:

|                            |  |   |           | 
|--------------------------- |  | - | --------- | 
|Shares issued               |  | $ | 2,067,000 | 
|Cash consideration          |  |   | 10,000    | 
|Severance payment           |  |   | 150,000   | 
|Direct costs of acquisition |  |   | 408,000   | 
|                            |  |   |           | 
|Total consideration         |  | $ | 2,635,000 | 
|                            |  |   |           | 

Amortization expense was $762,000 in 2002 and $317,000 in 2001.
Amortization could be affected by other acquisitions or impairment of existing
identified intangible assets in future periods.

In 2001, we recorded a charge of $242,000 for acquired in process research
and development resulting the acquisition of NSM Storage GmbH. This amount was
expensed because the acquired technology had not reached technological
feasibility and there was no assurance that the projects could be successfully
completed.

Had the acquisition of DISC GmbH occurred on January 1, 2000, unaudited
pro forma combined revenues would have been $14,504,000 and $14,330,000 for the
years ended December 31, 2001 and 2000, respectively. Unaudited pro forma net
loss attributable to common shareholders would have been $8,105,000 and
$7,326,000 or ($1.90) and ($1.54) per share attributable to common shareholders
for the year ended December 31, 2001 and 2000, respectively.

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The charge for in-process research and development of $242,000 related to
the NSM Storage GmbH acquisition has not been included in the unaudited pro
forma results above, because such charges are non-recurring and directly
related to the acquisition.

NOTE 5 - SHORT-TERM DEBT:

In December 2002, the Company renewed its factoring agreement with Summit
Financial Resources, L.P. (Summit) for an additional year. Receivables
purchased under this agreement are limited to the lesser of $1,500,000 or 85%
of eligible receivables and are collateralized by substantially all of the
assets of the Company. Interest under the agreement is prime rate plus 4% and
0.0825% of the amount of receivables purchased, with a minimum charge of $7,500
per month. At December 31, 2002 borrowings were $577,000 under this
agreement. At December 31, 2002, the Company was not in compliance with the net
tangible asset covenant of the agreement. The Company is having discussions
with Summit regarding this non-compliance and has requested a waiver of the
non-compliance. Although the Company has not received a waiver, borrowings have
continued under the agreement.

DISC GmbH has various revolving lines of credit totaling $242,000 at
interest rates of ranging from 4.5%-18% and such lines of credit were
fully utilized at December 31, 2002.

NOTE 6 - TERM LOANS

In January 2003 we reached agreement with DISC GmbHs German bank to
restructure our long-term debt. The four outstanding term loans were
consolidated into two loans and the restructured debt consists of the
following:

|                                                                                                                                                                                                                            |  |  |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---------- | 
|Term loan, principal payments due in
monthly installments of $24,000,
interest payable semi-annual at
4.85% per annum collateralized by
substantially all the assets of DISC
GmbH and a guaranty of its Parent
(DISC, Inc.) |  |  | $1,048,000 | 
|                                                                                                                                                                                                                            |  |  |            | 
|Term loan, principal payments due in
monthly installments of $27,000,
interest payable monthly at 5.25%
per annum collateralized by
substantially all the assets of DISC
GmbH and a guaranty of its Parent
(DISC Inc.)      |  |  | 675,000    | 
|                                                                                                                                                                                                                            |  |  |            | 
|                                                                                                                                                                                                                            |  |  | $1,723,000 | 
|                                                                                                                                                                                                                            |  |  |            | 

As restructured in January 2003. The annual maturities of long-term debt
are as follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|2003                     |  | $ | 243,000   | 
|2004                     |  |   | 256,000   | 
|2005                     |  |   | 269,000   | 
|2006                     |  |   | 280,000   | 
|2007 and after           |  |   | 675,000   | 
|                         |  |   |           | 
|                         |  |   | 1,723,000 | 
|Less: Short-term portion |  |   | 243,000   | 
|                         |  |   |           | 

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|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|Long-term debt, net of current portion |  | $ | 1,480,000 | 
|                                       |  |   |           | 

Under the terms of the loans, if the
bank believes that GmbH's financial condition has materially
deteriorated or is expected to materially deteriorate, the bank has
the right to accelerate payment of the loans.

In September 2002, DISC GmbH reached agreement with two banks with which it had
lines of credit and term loans whereby DISC GmbH agreed to pay a total of
$300,000 of their outstanding debt and the banks agreed to extinguish the
outstanding debt by an additional $300,000. The total extinguishments from the
two banks of $300,000 are included in other income.

NOTE 7 - CONVERTIBLE PREFERRED STOCK WITH RELATED PARTIES:

During the twelve months ended December 31, 2002, the Company sold and MK GVD
Fund, the principal shareholder, purchased 637,452 shares of convertible
preferred stock and warrants under a formula set out in a March 1996 agreement
for aggregate proceeds of $5,375,000. The warrants allow the holder to
purchase 1,593,611 shares of common stock for exercise prices ranging from
$0.80-$2.03. Under the agreement the number of shares of preferred stock was
determined based on the lower of 85% of the closing bid price or the average
closing price of the Companys Common Stock for the five trading days ended
three days prior to the issuance date, but not to exceed $2.50 per share as
converted into common stock.

Information with regard to the Companys Preferred Stock as of December
31, 2002 is summarized in the following table:

|       |    |                   |  |             |  |            |                   |             |               |               |              |           |                 |  |   |       |  |  |   |           | 
|------ | -- | ----------------- |  | ----------- |  | ---------- | ----------------- | ----------- | ------------- | ------------- | ------------ | --------- | --------------- |  | - | ----- |  |  | - | --------- | 
|       |    |                   |  |             |  |            |                   |             |               |               | Common Stock |           |                 |  |   |       |  |  |  
|       |    |                   |  |             |  |            | Shares Issued and |             | Issuable Upon |               | Liquidation  |           | Proceeds Net of
|Series |    | Shares Authorized |  | Outstanding |  | Conversion |                   | Preferences |               | Issuance Cost
|       |    |                   |  |             |  |            |                   |             |               |              
|       | 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 | 
|       | 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  |                   |  | 40,268      |  |            |                   | 40,268      |               |               |              | 402,680   |                 |  |   | 14.90 |  |  |   | 600,000   | 
|       | 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 | 
|       | BB |                   |  | 71,038      |  |            |                   | 71,038      |               |               |              | 710,380   |                 |  |   | 18.30 |  |  |   | 1,300,000 | 
|       | CC |                   |  | 76,852      |  |            |                   | 76,852      |               |               |              | 768,520   |                 |  |   | 16.20 |  |  |   | 1,245,000 | 
|       | DD |                   |  | 60,000      |  |            |                   | 60,000      |               |               |              | 600,000   |                 |  |   | 20.00 |  |  |   | 1,200,000 | 
|       | EE |                   |  | 90,090      |  |            |                   | 90,090      |               |               |              | 900,900   |                 |  |   | 11.10 |  |  |   | 1,000,000 | 
|       | FF |                   |  | 51,546      |  |            |                   | 51,546      |               |               |              | 515,460   |                 |  |   | 9.70  |  |  |   | 500,000   | 

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|             |    |                   |            |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |           | 
|------------ | -- | ----------------- | ---------- | ----------- |  | ---------- | ----------------- | ----------- | ------------- | ------------- | ------------ | --------- | --------------- |  |  | ----- |  | - | ---------- | --------- | 
|             |    |                   |            |             |  |            |                   |             |               |               | Common Stock |           |                 |  |  |       |  |   |           
|             |    |                   |            |             |  |            | Shares Issued and |             | Issuable Upon |               | Liquidation  |           | Proceeds Net of
|Series       |    | Shares Authorized |            | Outstanding |  | Conversion |                   | Preferences |               | Issuance Cost
|             |    |                   |            |             |  |            |                   |             |               |              
|             | GG |                   |            | 2,252       |  |            |                   | 2,252       |               |               |              | 22,520    |                 |  |  | 11.10 |  |   |            | 25,000    | 
|             | HH |                   |            | 16,260      |  |            |                   | 16,260      |               |               |              | 162,600   |                 |  |  | 12.30 |  |   |            | 200,000   | 
|             | II |                   |            | 6,667       |  |            |                   | 6,667       |               |               |              | 66,670    |                 |  |  | 15.00 |  |   |            | 100,000   | 
|             | JJ |                   |            | 24,138      |  |            |                   | 24,138      |               |               |              | 241,380   |                 |  |  | 14.50 |  |   |            | 350,000   | 
|             | KK |                   |            | 14,706      |  |            |                   | 14,706      |               |               |              | 147,060   |                 |  |  | 13.60 |  |   |            | 200,000   | 
|             | LL |                   |            | 11,765      |  |            |                   | 11,765      |               |               |              | 117,650   |                 |  |  | 15.30 |  |   |            | 180,000   | 
|             | MM |                   |            | 28,846      |  |            |                   | 28,846      |               |               |              | 288,460   |                 |  |  | 10.40 |  |   |            | 300,000   | 
|             | NN |                   |            | 28,090      |  |            |                   | 28,090      |               |               |              | 280,900   |                 |  |  | 8.90  |  |   |            | 250,000   | 
|             | OO |                   |            | 170,140     |  |            |                   | 170,140     |               |               |              | 1,701,400 |                 |  |  | 7.20  |  |   |            | 1,225,000 | 
|             | PP |                   |            | 43,210      |  |            |                   | 43,210      |               |               |              | 432,100   |                 |  |  | 8.10  |  |   |            | 350,000   | 
|             | QQ |                   |            | 26,667      |  |            |                   | 26,667      |               |               |              | 266,670   |                 |  |  | 7.50  |  |   |            | 200,000   | 
|             | RR |                   |            | 12,821      |  |            |                   | 12,821      |               |               |              | 128,210   |                 |  |  | 7.80  |  |   |            | 100,000   | 
|             | SS |                   |            | 44,118      |  |            |                   | 44,118      |               |               |              | 441,180   |                 |  |  | 6.80  |  |   |            | 300,000   | 
|             | TT |                   |            | 13,699      |  |            |                   | 13,699      |               |               |              | 136,990   |                 |  |  | 7.30  |  |   |            | 100,000   | 
|             | UU |                   |            | 27,533      |  |            |                   | 27,533      |               |               |              | 275,330   |                 |  |  | 7.26  |  |   |            | 200,000   | 
|             | VV |                   |            | 46,875      |  |            |                   | 46,875      |               |               |              | 468,750   |                 |  |  | 6.40  |  |   |            | 300,000   | 
|             | WW |                   |            | 103,734     |  |            |                   | 103,734     |               |               |              | 1,037,340 |                 |  |  | 7.23  |  |   |            | 750,000   | 
|             |    |                   |            |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          
|             |    |                   | 6,526,854  |             |  |            | 6,122,687         |             |               |               | 22,382,318   |           |                 |  |  |       |  | $ | 31,417,000 |          
|             |    |                   |            |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          
|Undesignated |    |                   | 3,473,146  |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          
|             |    |                   |            |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          
|Total        |    |                   | 10,000,000 |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          
|             |    |                   |            |             |  |            |                   |             |               |               |              |           |                 |  |  |       |  |   |            |          

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 whether or not declared by the
Board of Directors and amount to $1,117,000 as of December 31, 2002. The
holders of Series D through WW 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.

Shares of Series H through WW Preferred Stock were issued pursuant to an
agreement entered into in March 1996, as amended, with the Companys largest
shareholder, MK GVD Fund. Under the agreement the number of shares of Preferred
Stock was determined based on 85% of the lower of the average closing price of
the Companys Common Stock for the five trading days ended three days prior to
the issuance date or the closing bid price on the issuance date, but not to
exceed $2.50 per share as converted into Common Stock.

The Company issued Warrants in conjunction with the issuance of Preferred
Stock. The Warrants entitle the holders to purchase the Companys Common
Stock.

The fair value of the warrants issued during the twelve
months ended December 31, 2002, $1,553,000, was determined using
a Black Scholes option pricing model with the following assumptions:
volatility ranging from 142%-145%; risk free interest rates ranging
from 2.50% to 4.94%; expected life of five years and no dividend
yield. The fair value of the warrants is recorded in shareholders
equity.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. This beneficial conversion feature is
accounted for as a deemed dividend to the preferred shareholders and
increases the net loss attributable to common shareholders.Furthermore, the Company in its 2000
financial statements reported 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. Accordingly, the loss per share for the year ended
December 31, 2002 has been revised by $686,000 to reflect the
cumulative effect of this change in accounting method.

Holders of Preferred Stock received Warrants for the purchases of Common Stock
as follows:

|       |   |                           |  |                          |  |             |  |      |  |  |        |  | 
|------ | - | ------------------------- |  | ------------------------ |  | ----------- |  | ---- |  |  | ------ |  | 
|       |   | Common Stock Issuable     |  |                          |  |            
|Series |   | Upon Exercise of Warrants |  | Exercise Price Per Share |  | Date Issued
|       |   |                           |  |                          |  |            
|       | 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

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|       |    |                                 |  |                          |  |             |  |      |  |  |        |  |  | 
|------ | -- | ------------------------------- |  | ------------------------ |  | ----------- |  | ---- |  |  | ------ |  |  | 
|Series |    | Warrants Issued and Outstanding |  | Exercise Price Per Share |  | Date Issued
|       |    |                                 |  |                          |  |            
|       | 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 | 
|       | BB |                                 |  | 177,595                  |  |             |  | 2.29 |  |  | Mar 01 | 
|       | CC |                                 |  | 177,469                  |  |             |  | 2.03 |  |  | Jun 01 | 
|       | DD |                                 |  | 150,000                  |  |             |  | 2.50 |  |  | Aug 01 | 
|       | EE |                                 |  | 225,225                  |  |             |  | 1.39 |  |  | Sep 01 | 
|       | FF |                                 |  | 128,866                  |  |             |  | 1.21 |  |  | Dec 01 | 
|       | GG |                                 |  | 5,630                    |  |             |  | 1.39 |  |  | Mar 02 | 
|       | HH |                                 |  | 40,650                   |  |             |  | 1.54 |  |  | Mar 02 | 
|       | II |                                 |  | 16,666                   |  |             |  | 1.87 |  |  | Mar 02 | 
|       | JJ |                                 |  | 60,344                   |  |             |  | 1.81 |  |  | Mar 02 | 
|       | KK |                                 |  | 36,764                   |  |             |  | 1.70 |  |  | Mar 02 | 
|       | LL |                                 |  | 29,411                   |  |             |  | 1.91 |  |  | Apr 02 | 
|       | CC |                                 |  | 14,660                   |  |             |  | 2.03 |  |  | Apr 02 | 
|       | W  |                                 |  | 25,167                   |  |             |  | 1.86 |  |  | Apr 02 | 
|       | MM |                                 |  | 72,115                   |  |             |  | 1.30 |  |  | May 02 | 
|       | NN |                                 |  | 70,224                   |  |             |  | 1.11 |  |  | Jun 02 | 
|       | OO |                                 |  | 69,444                   |  |             |  | 0.90 |  |  | Jun 02 | 
|       | PP |                                 |  | 108,024                  |  |             |  | 1.01 |  |  | Jun 02 | 
|       | QQ |                                 |  | 66,666                   |  |             |  | 0.94 |  |  | Aug 02 | 
|       | RR |                                 |  | 32,051                   |  |             |  | 0.98 |  |  | Aug 02 | 
|       | SS |                                 |  | 110,294                  |  |             |  | 0.85 |  |  | Aug 02 | 
|       | OO |                                 |  | 355,902                  |  |             |  | 0.90 |  |  | Sep 02 | 
|       | TT |                                 |  | 34,246                   |  |             |  | 0.91 |  |  | Oct 02 | 
|       | UU |                                 |  | 68,831                   |  |             |  | 0.91 |  |  | Nov 02 | 
|       | VV |                                 |  | 117,187                  |  |             |  | 0.80 |  |  | Nov 02 | 
|       | WW |                                 |  | 259,335                  |  |             |  | 0.90 |  |  | Dec 02 | 
|       |    |                                 |  |                          |  |             |  |      |  |  |        |  |  | 
|       |    |                                 |  | 4,468,260                |  |             |  |      |  |  |        |  |  | 
|       |    |                                 |  |                          |  |             |  |      |  |  |        |  |  | 

All Warrants expire five years from the date of issuance.

NOTE 8 - STOCK OPTION PLANS:

At December 31, 2002, the Company had three stock-based compensation
plans, which are described below:

THE 1990 PLAN

Under the 1990 Stock Plan (the 1990 Plan), employees, consultants and
non-employee directors (prior to 1995) may be granted options to purchase 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. The Plan expired on October 21, 2001. The
remaining options to purchase shares available for grant as of that date
(197,500 options) were transferred into the 2001 Plan (as defined below).

THE 2001 PLAN

In 2001, the Board of Directors adopted and the shareholders approved the
2001 Stock Plan (the 2001 Plan). Upon adoption of the Plan, 400,000 shares of
common stock were reserved for issuance and

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197,500 options remaining available for grant under the expired 1990 Plan
were transferred into the 2001 Plan, resulting in a total of 597,500 options
available upon commencement of the Plan. In November 2002, shareholders
approved an increase of 500,000 shares in the number of shares reserved for
issuance under this plan and during 2002, 319,880 stock options granted under
the 1990 Plan were canceled or forfeited and transferred to the 2001 Plan,
bringing the number of shares of common stock reserved under the Plan to
1,417,300. Under this Plan, employees and consultants may be granted options
for shares of common stock, which generally 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.

At December 31, 2002, 663,110 shares were available for grant under the
2001 Plan.

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). Under the Non-Employee Option Plan, as amended in 2000, the Company has
reserved 250,000 shares of Common Stock for issuance. 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, 2002, 50,000 shares were available for grant under the
Non-Employee Option Plan.

Under the plans, the options will be granted at prices equal to the fair
market value on the date of grant and options granted under 1990 Plan and the
Non-Employee Plan expire five years from the date of grant and ten years from
the date of grant under the 2001 Plan.

The following table summarizes the combined activity of the 1990 Plan, the
2001 Plan, and the Non-Employee Option Plan for the years ended December 31,
2002, 2001 and 2000:

|                                                               |  |         |           |                |  |           |      |      |  |         |  |                |  |      |           |           |  |         |      |  |  |  |  |                |  |   |           |   |  |           |  |  |  |   |      | 
|-------------------------------------------------------------- |  | ------- | --------- | -------------- |  | --------- | ---- | ---- |  | ------- |  | -------------- |  | ---- | --------- | --------- |  | ------- | ---- |  |  |  |  | -------------- |  | - | --------- | - |  | --------- |  |  |  | - | ---- | 
|                                                               |  | 2002    |           |                |  |           |      | 2001 |  |         |  |                |  | 2000
|                                                               |  |         |           |                |  |           |      |      |  |         |  |                |  |     
|                                                               |  |         |           |                |  | Weighted- |      |      |  |         |  |                |  |      |           | Weighted- |  |         |      |  |  |  |  |                |  |   |           |   |  | Weighted-
|                                                               |  |         |           |                |  | Average   |      |      |  |         |  |                |  |      |           | Average   |  |         |      |  |  |  |  |                |  |   |           |   |  | Average  
|Fixed Options                                                  |  | Options |           | Exercise Price |  |           |      |      |  | Options |  | Exercise Price |  |      |           |           |  | Options |      |  |  |  |  | Exercise Price
|                                                               |  |         |           |                |  |           |      |      |  |         |  |                |  |      |           |           |  |         |      |  |  |  |  |               
|Outstanding at beginning of the year                           |  |         | 2,479,368 |                |  | $         | 2.03 |      |  |         |  |                |  |      | 1,720,452 |           |  | $       | 2.08 |  |  |  |  |                |  |   | 1,093,733 |   |  |           |  |  |  | $ | 0.80 | 
|Granted                                                        |  |         | 837,500   |                |  |           | 1.11 |      |  |         |  |                |  |      | 850,500   |           |  |         | 1.96 |  |  |  |  |                |  |   | 925,000   |   |  |           |  |  |  |   | 3.24 | 
|Exercised                                                      |  |         |          |                |  |           |     |      |  |         |  |                |  |      | (11,354   | )         |  |         | 0.70 |  |  |  |  |                |  |   | (125,857  | ) |  |           |  |  |  |   | 0.75 | 
|Forfeited/Cancelled                                            |  |         | (345,880  | )              |  |           | 1.91 |      |  |         |  |                |  |      | (80,230   | )         |  |         | 2.67 |  |  |  |  |                |  |   | (172,424  | ) |  |           |  |  |  |   | 1.19 | 
|                                                               |  |         |           |                |  |           |      |      |  |         |  |                |  |      |           |           |  |         |      |  |  |  |  |                |  |   |           |   |  |           |  |  |  |   |      | 
|Outstanding at end of the year                                 |  |         | 2,970,988 |                |  | $         | 1.78 |      |  |         |  |                |  |      | 2,479,368 |           |  | $       | 2.03 |  |  |  |  |                |  |   | 1,720,452 |   |  |           |  |  |  | $ | 2.08 | 
|                                                               |  |         |           |                |  |           |      |      |  |         |  |                |  |      |           |           |  |         |      |  |  |  |  |                |  |   |           |   |  |           |  |  |  |   |      | 
|Options exercisable at end of the
year                         |  |         | 1,485,389 |                |  |           |      |      |  |         |  |                |  |      | 986,488   |           |  |         |      |  |  |  |  |                |  |   | 619,354   |   |  |           |  |  |  |   |      | 
|Weighted-average fair value of
options granted during the year |  | $       | 1.11      |                |  |           |      |      |  |         |  |                |  | $    | 1.74      |           |  |         |      |  |  |  |  |                |  | $ | 2.91      |   |  |           |  |  |  |   |      | 

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The following table summarizes the combined information about options
outstanding under the 1990 Plan, the 2001 Plan, and Non-Employee Option Plan at
December 31, 2002:

|                         |                |             |                     |           |                     |       |                  |             |           |                |         |      |  |  |           |         |  |  |   |      | 
|------------------------ | -------------- | ----------- | ------------------- | --------- | ------------------- | ----- | ---------------- | ----------- | --------- | -------------- | ------- | ---- |  |  | --------- | ------- |  |  | - | ---- | 
|                         |                |             | Options Outstanding |           | Options Exercisable
|                         |                |             |                     |           |                    
|                         |                |             |                     |           |                     |       | Weighted-        |             |           |                |         |      |  |  |           |         |  |  |  
|                         |                |             |                     |           |                     |       | Average          |             |           |                |         |      |  |  |           |         |  |  |  
|                         |                |             |                     |           |                     |       | Remaining        |             | Weighted- |                |         |      |  |  | Weighted-
|                         |                |             | Number              |           | Contractual Life    |       | Average Exercise |             | Number    |                | Average
|Range of Exercise Prices |                | Outstanding |                     | (Years)   |                     | Price |                  | Exercisable |           | Exercise Price
|                         |                |             |                     |           |                     |       |                  |             |           |               
|                         | $0.47 to $0.75 |             |                     | 669,426   |                     |       |                  | 0.4         |           |                | $       | 0.74 |  |  |           | 669,426 |  |  | $ | 0.74 | 
|                         | $0.80 to $0.86 |             |                     | 374,000   |                     |       |                  | 4.9         |           |                | $       | 0.80 |  |  |           | 26,978  |  |  | $ | 0.84 | 
|                         | $1.00 to $2.06 |             |                     | 1,090,062 |                     |       |                  | 2.1         |           |                | $       | 1.13 |  |  |           | 317,057 |  |  | $ | 1.48 | 
|                         | $2.07 to $3.38 |             |                     | 812,500   |                     |       |                  | 2.8         |           |                | $       | 3.15 |  |  |           | 454,740 |  |  | $ | 3.15 | 
|                         | $4.75          |             |                     | 25,000    |                     |       |                  | 2.2         |           |                | $       | 4.75 |  |  |           | 17,188  |  |  | $ | 4.75 | 

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 three stock-based
compensation plans been determined consistent with SFAS 123, the Companys net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:

|                                                                                                                                 |  |             |  |   |            |      |  |      |            |      |  |   |            |   |  | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | - | ---------- | ---- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | 
|                                                                                                                                 |  |             |  |   |            | 2002 |  | 2001 |            | 2000
|                                                                                                                                 |  |             |  |   |            |      |  |      |            |     
|Net loss                                                                                                                         |  | As Reported |  | $ | (8,854,000 | )    |  | $    | (6,922,000 | )    |  | $ | (6,264,000 | )
|Additional
compensation expense, net of tax, that would have been included in
net loss if the fair value method had been applied |  |             |  |   | (832,000   | )    |  |      | (895,000   | )    |  | $ | (506,000   | )
|                                                                                                                                 |  |             |  |   |           
|Net
loss                                                                                                                         |  | Pro Forma   |  | $ | (9,686,000 | )    |  | $    | (7,817,000 | )    |  | $ | (6,770,000 | )
|Basic and diluted
net loss
attributable to
common shareholders
per share                                                         |  | As Reported |  | $ | (1.84      | )    |  | $    | (1.62      | )    |  | $ | (1.65      | )
|                                                                                                                                 |  | Pro Forma   |  | $ | (2.01      | )    |  | $    | (1.83      | )    |  | $ | (1.78      | )

The compensation cost calculated under SFAS 123 is based on options
granted from 1996 through 2002, and because additional option grants are
expected to be made each year, the above pro forma disclosures are not
representative of the pro forma effects of option grants on reported net income
for future years.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 133.9% for 2002, 154.6%
for 2001, and 157.7% for 2000; dividend yield of 0% for all years; risk-free
interest rates for the last day of the month in which the options were granted;
and expected lives of four years for the 1990 Plan and the 2001 Plan, and five
years for the Non-Employee Option Plan.

NOTE 9 - INCOME TAXES:

The components of the benefit for income taxes are as follows:

|         |         |  |              |   |      |  |   |   | 
|-------- | ------- |  | ------------ | - | ---- |  | - | - | 
|         |         |  | December 31,
|         |         |  | 2002         |   | 2001
|         |         |  |              |   |     
|Current: |         |  |              |   |      |  |   |  
|         | Federal |  | $            |  |      |  | $ |  | 
|         | State   |  |              |  |      |  |   |  | 
|         | Foreign |  |              |  |      |  |   |  | 
|         |         |  |              |   |      |  |   |  
|         |         |  |             |   |      |  |  |  
|Deferred |         |  |              |   |      |  |   |  
|         | Federal |  |              |  |      |  |   |  | 

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|                               |         |   |              |          |      |   |         |         |  
|------------------------------ | ------- | - | ------------ | -------- | ---- | - | ------- | ------- | -
|                               |         |   | December 31,
|                               |         |   | 2002         |          | 2001
|                               |         |   |              |          |     
|                               | State   |   |              |         |      |   |         |        |  
|                               | Foreign |   |              | (256,000 | )    |   |         | (93,000 | )
|                               |         |   |              |          |      |   |         |        
|Total benefit for income taxes |         | $ | (256,000     | )        |      | $ | (93,000 | )      
|                               |         |   |              |          |      |   |         |         |  

Net loss
before income taxes consists of the following:

|              |  |              |            |      |  |      |            |   |  |   |            |  
|------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|              |  | December 31,
|              |  |             
|              |  | 2002         |            | 2001 |  | 2000
|              |  |              |            |      |  |     
|Domestic      |  | $            | 4,954,000  |      |  | $    | 4,473,000  |   |  | $ | (3,938,000 | )
|International |  | $            | 1,668,000  |      |  | $    | 918,000    |   |  |   |           |  
|              |  |              |            |      |  |      |            |   |  |   |            |  
|              |  | $            | (6,622,000 | )    |  | $    | (5,391,000 | ) |  | $ | (3,938,000 | )
|              |  |              |            |      |  |      |            |   |  |   |            |  

Deferred tax assets (liabilities) consist of the following:

|                           |                                 |   |              |            |   |  |  |  |      |   |             |            |  
|-------------------------- | ------------------------------- | - | ------------ | ---------- | - |  |  |  | ---- | - | ----------- | ---------- | -
|                           |                                 |   | December 31,
|                           |                                 |   | 2002         |            |   |  |  |  | 2001
|                           |                                 |   |              |            |   |  |  |  |     
|Deferred Tax Assets        |                                 |   |              |            |   |  |  |  |      |   |             |           
|                           | Net Operating Loss Carryforward |   | $            | 15,275,000 |   |  |  |  |      |   | $           | 12,707,000 |  
|                           | Research and Development Credit |   |              | 1,324,000  |   |  |  |  |      |   |             | 1,223,000  |  
|                           | Reserves and Other              |   |              | 491,000    |   |  |  |  |      |   |             | 480,000    |  
|                           | Depreciation & Amortization     |   |              |           |   |  |  |  |      |   |             | 68,000     |  
|                           |                                 |   |              |            |   |  |  |  |      |   |             |           
|                           |                                 |   | 17,090,000   |            |   |  |  |  |      |   | 14,478,000  |           
|Deferred Tax Liability     |                                 |   |              |            |   |  |  |  |      |   |             |           
|                           | Purchased Intangible Assets     |   |              | (864,000   | ) |  |  |  |      |   |             | (1,176,000 | )
|                           | Depreciation and Amortization   |   |              | (32,000    | ) |  |  |  |      |   |             |           |  
|                           |                                 |   |              |            |   |  |  |  |      |   |             |           
|                           | Gross Deferred Tax Asset        |   |              | 16,194,000 |   |  |  |  |      |   |             | 13,302,000 |  
|Valuation Allowance        |                                 |   | (16,194,000  | )          |   |  |  |  |      |   | (14,453,000 | )         
|                           |                                 |   |              |            |   |  |  |  |      |   |             |           
|Net Deferred Tax Liability |                                 | $ |             |            |   |  |  |  |      | $ | (1,151,000  | )         
|                           |                                 |   |              |            |   |  |  |  |      |   |             |           

Reconciliation of the statutory federal income tax to the Companys
effective tax:

|                                         |  |              |            |      |  |      |            |   |  |   |            |  
|---------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2002         |            | 2001 |  | 2000
|                                         |  |              |            |      |  |     
|Tax Benefit at Federal Statutory Rate    |  | $            | (2,251,000 | )    |  | $    | (1,622,000 | ) |  | $ | (1,339,000 | )
|Non Recognition of tax benefit and other |  |              | 1,995,000  |      |  |      | 1,529,000  |   |  |   | 1,339,000  |  
|                                         |  |              |            |      |  |      |            |   |  |   |            |  
|Tax Benefits                             |  | $            | (256,000   | )    |  | $    | (93,000    | ) |  | $ |           |  
|                                         |  |              |            |      |  |      |            |   |  |   |            |  

As of December 31, 2002, the Company had net operating loss carryforwards
of approximately $37,881,000, $8,813,000 and $5,003,000 available to reduce its
future federal, state and foreign taxable income, respectively. The Federal
and State net operating losses carryforwards will expire in various periods
between 2003 and 2022. The Company also has federal and state research and
development tax credit carryforwards of approximately $979,000 and $523,000,
respectively. The federal research and development tax credit carryforwards
will begin to expire in 2007. The California research and development credit
and foreign net operating losses can be carried forward indefinitely.

Under current tax rules, 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.

NOTE 10 - NET LOSS PER SHARE:

Options and warrants to purchase shares, and Convertible Preferred Stock
outstanding totaling 29,821,566 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.

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NOTE 11- OPERATING SEGMENTS:

The Company operates in one industry segment, the computer mass storage
industry.

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

|              |  |      |            |      |  |      |            |  |  |   |           | 
|------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | --------- | 
|              |  | 2002 |            | 2001 |  | 2000
|              |  |      |            |      |  |     
|North America |  | $    | 8,512,000  |      |  | $    | 8,996,000  |  |  | $ | 6,436,000 | 
|Europe        |  |      | 3,827,000  |      |  |      | 2,219,000  |  |  |   | 199,000   | 
|Asia          |  |      | 212,000    |      |  |      | 421,000    |  |  |   | 16,000    | 
|Other         |  |      | 387,000    |      |  |      | 514,000    |  |  |   | 170,000   | 
|              |  |      |            |      |  |      |            |  |  |   |           | 
|              |  | $    | 12,938,000 |      |  | $    | 12,150,000 |  |  | $ | 6,821,000 | 
|              |  |      |            |      |  |      |            |  |  |   |           | 

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

|                |  |      |            |      |  |      |            |  |  |   |           | 
|--------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | --------- | 
|                |  | 2002 |            | 2001 |  | 2000
|                |  |      |            |      |  |     
|Storage devices |  | $    | 10,121,000 |      |  | $    | 9,485,000  |  |  | $ | 5,920,000 | 
|Service         |  |      | 1,565,000  |      |  |      | 799,000    |  |  |   | 166,000   | 
|Media           |  |      | 1,252,000  |      |  |      | 1,866,000  |  |  |   | 735,000   | 
|                |  |      |            |      |  |      |            |  |  |   |           | 
|                |  | $    | 12,938,000 |      |  | $    | 12,150,000 |  |  | $ | 6,821,000 | 
|                |  |      |            |      |  |      |            |  |  |   |           | 

The
costs of service are included in several components of total cost of
sales and it would be impractical to calculate the total cost of
service.

Long
lived
assets information is based on the geographical location of the
assets. The following table presents long lived assets information for
geographic areas:

|              |  |      |           |      |  |   |           | 
|------------- |  | ---- | --------- | ---- |  | - | --------- | 
|              |  | 2002 |           | 2001
|              |  |      |           |     
|              |  |      |           |      |  |   |           | 
|United States |  | $    | 297,000   |      |  | $ | 497,000   | 
|Germany       |  |      | 4,854,000 |      |  |   | 6,546,000 | 
|              |  |      |           |      |  |   |           | 
|              |  | $    | 5,151,000 |      |  | $ | 7,043,000 | 
|              |  |      |           |      |  |   |           | 

NOTE 12 - COMMITMENTS AND CONTINGENCIES:

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

In November 1999, DISC Storage GmbH entered into a facility lease
agreement with the former owner of NSM Jukebox GmbH, which commenced on
November 1, 1999 and requires monthly payments through December 31, 2003.

In 1998, NSM Storage, Inc., a U.S. subsidiary of DISC GmbH, entered into a
seven-year non-cancellable operating lease agreement, expiring in August 2005,
for its facilities in Atlanta, Georgia. During February 2000, NSM Storage,
Inc. relocated from Atlanta to New York and entered into a noncancelable
sublease to rent its Atlanta facility, which also expires in August 2005.

At December 31, 2002, the Company has an accrued loss of $228,000 included
in Accrued expenses and other liabilities on the balance sheet. This accrual is
an estimate of the total loss that management

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anticipates realizing over the term of the Atlanta lease. The accrual
represents the excess of lease payments over the expected sublease income over
the remaining lease term.

The total minimum rental commitments at December 31, 2002, excluding
insurance, normal maintenance and certain property taxes, are payable as
follows:

|            |  |                 |         |                 |  |   |          |  
|----------- |  | --------------- | ------- | --------------- |  | - | -------- | -
|            |  | Operating Lease |         |                 |  |  
|Fiscal Year |  | Commitments     |         | Sublease Income
|            |  |                 |         |                
|2003        |  | $               | 768,000 |                 |  | $ | (110,000 | )
|2004        |  | $               | 636,000 |                 |  | $ | (70,000  | )
|2005        |  | $               | 520,000 |                 |  | $ |         |  

Total rental expenses under operating leases, including month-to-month
rentals, were $732,000, $623,000 and $219,000 for the years ended December 31,
2002, 2001 and 2000, 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 13  EMPLOYEE BENEFIT PLANS:

Defined Contribution Plan

The Company sponsors the DISC, Inc. 401(k) Retirement Plan (the 401(k)
Plan). The 401(k) Plan provides for tax deferred automatic salary deductions.
Under the terms of the 401(k) Plan, U.S. employees over the age of 21 are
eligible to participate. The Company is permitted to make contributions to the
401(k) Plan as determined by the Board of Directors. No Company contributions
were made to the 401(k) Plan in 2002, 2001 or 2000.

Defined Benefit Plan

DISC GmbH sponsors a pension plan with defined benefits (the Benefit
Plan). The Benefit Plan provides benefits without contributions to certain
employees based on the greater of a formula recognizing career earnings or a
formula recognizing length of service and final average earnings. Benefit
provisions are subject to collective bargaining. The pension obligation was
assumed as part of the acquisition of DISC GmbH.

|                             |                                         |      |                    |         |   |  |   |         |  
|---------------------------- | --------------------------------------- | ---- | ------------------ | ------- | - |  | - | ------- | -
|                             |                                         |      | As of December 31,
|                             |                                         |      |                   
|Funded Status:               |                                         | 2002 |                    | 2001   
|                             |                                         |      |                    |        
|Change in Benefit Obligation |                                         |      |                    |         |   |  |   |        
|                             | Benefit obligation at beginning of year |      | $                  | 118,000 |   |  | $ | 113,000 |  
|                             | Service Cost                            |      |                    | 7,000   |   |  |   | 2,000   |  
|                             | Interest Cost                           |      |                    | 7,000   |   |  |   | 3,000   |  
|                             | Actuarial (gain)/loss                   |      |                    | (12,000 | ) |  |   | (1,000  | )
|                             | Benefits paid                           |      |                    | (2,000  | ) |  |   | (1,000  | )
|                             | Foreign Currency translation adjustment |      |                    | 21,000  |   |  |   | 2,000   |  
|                             |                                         |      |                    |         |   |  |   |        

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|               |                                   |      |                    |         |  |  |   |         | 
|-------------- | --------------------------------- | ---- | ------------------ | ------- |  |  | - | ------- | 
|               |                                   |      | As of December 31,
|               |                                   |      |                   
|Funded Status: |                                   | 2002 |                    | 2001   
|               |                                   |      |                    |        
|               | Benefit obligation at end of year |      | $                  | 139,000 |  |  | $ | 118,000 | 
|               |                                   |      |                    |         |  |  |   |        

Benefit obligation at end of year of $139,000 and $118,000, equals the
amount of accrued pension costs recorded on the balance sheet at December 31,
2002 and 2001, respectively.

|                 |  |                    |      |      |  |  |      |  
|---------------- |  | ------------------ | ---- | ---- |  |  | ---- | -
|                 |  | As of December 31,
|                 |  |                   
|                 |  | 2002               |      | 2001
|Assumptions      |  |                    |      |     
|Discount rate    |  |                    | 6.00 | %    |  |  | 6.00 | %
|Salary increase  |  |                    | 0    |      |  |  | 0    |  
|Pension increase |  |                    | 2.00 | %    |  |  | 2.00 | %

|                                        |  |                    |        |      |  |   |       | 
|--------------------------------------- |  | ------------------ | ------ | ---- |  | - | ----- | 
|                                        |  | As of December 31,
|                                        |  |                   
|                                        |  | 2002               |        | 2001
|Components of net periodic pension cost |  |                    |        |     
|Service cost                            |  | $                  | 7,000  |      |  | $ | 3,000 | 
|Interest cost                           |  |                    | 7,000  |      |  |   | 3,000 | 
|                                        |  |                    |        |      |  |   |       | 
|Net periodic pension costs              |  | $                  | 14,000 |      |  | $ | 6,000 | 
|                                        |  |                    |        |      |  |   |       | 

Experienced gains and losses, as well as the effects of changes in
actuarial assumptions and plan provisions, are amortized over the average
future service period of employees.

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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 15(a)(1) on page 35 present fairly, in all material respects, the
financial position of DISC, Inc. and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 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 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.

These consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred substantial
losses from operations, negative cash flows from operations and has a working
capital deficit. In the past, the Company has relied on funds
received from investors to sustain operations and meet obligations as they
become due. Continued funding from investors is uncertain. These factors raise substantial doubt about the Companys ability
to continue as a going concern. Managements plans are outlined in Note 1. The
consolidated financial statements do not include any adjustment that might
result should the Company be unable to continue as a going concern.

As discussed in Note 7, a
cumulative effect of a change in accounting method has been recorded
relating to the accounting for a beneficial conversion feature
associated with issuances of preferred stock.

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
March 19, 2003
except for note 1 as to
which the date is March 28, 2003

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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 thirty-first day of March 2003.

|                       |  |  |            |                                      
|---------------------- |  |  | ---------- | -------------------------------------
|                       |  |  | DISC, Inc.
|                      
|Dated: March 31 , 2003 |  |  | By:        | /s/ ROBERT W. RILAND III             
|                       |  |  |            |                                      
|                       |  |  |            | Robert W. Riland III                 
|                       |  |  |            | President and Chief Executive Officer
|                       |  |  |            | (Principal Executive Officer)        

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.

|                                                      |  |                                                                               |  |               
|----------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                             |  | Title                                                                         |  | Date          
|                                                      |  |                                                                               |  |               
|                                                     
|                                                      |  | President, Chief Executive Officer and Director
(Principal Executive Officer) |  | March 31, 2003
|/s/ Robert W. Riland III
(Robert W. Riland III)       |  |                                                                              
|                                                      |  |                                                                               |  |               
|                                                      |  | Vice President and Chief Financial Officer
(Principal Financial Officer)      |  | March 31, 2003
|/s/ Henry Madrid
(Henry Madrid)                       |  |                                                                              
|                                                      |  |                                                                               |  |               
|                                                      |  | Director                                                                      |  | March 31, 2003
|/s/ Frank T. Connors
(Frank T. Connors)               |  |                                                                               |  |               
|                                                      |  |                                                                               |  |               
|                                                      |  | Director                                                                      |  | March 31, 2003
|/s/ F. Rigdon Currie
(F. Rigdon Currie)               |  |                                                                               |  |               
|                                                      |  |                                                                               |  |               
|                                                      |  | Director                                                                      |  | March 31, 2003
|/s/ Michael D. Kaufman
(Michael D. Kaufman)           |  |                                                                               |  |               
|                                                      |  |                                                                               |  |               
|                                                      |  | Director                                                                      |  | March 31, 2003
|/s/ Arch J. McGill
(Arch J. McGill)                   |  |                                                                               |  |               
|                                                      |  |                                                                               |  |               
|                                                      |  | Director                                                                      |  | March 31, 2003
|/s/ Michael A. McManus, Jr.
(Michael A. McManus, Jr.) |  |                                                                               |  |               

60



---



##### Table of Contents



Certification of Principal Executive Officer

I, Robert W. Riland III, certify that:



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

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

61



---



##### Table of Contents





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



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



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

|                      |  |     |  |                                      
|--------------------- |  | --- |  | -------------------------------------
|Dated: March 31, 2003 |  | By: |  | /s/ ROBERT W. RILAND III             
|                      |  |     |  |                                      
|                      |  |     |  | Robert W. Riland III                 
|                      |  |     |  | President and Chief Executive Officer
|                      |  |     |  | (Principal Executive Officer)        

62



---



##### Table of Contents



Certification of Principal Financial Officer

I, Henry Madrid, certify that:



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

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



| | 5. |  | The registrants other certifying officer and I have disclosed, based on our most
| | -- |  | ---------------------------------------------------------------------------------

63



---



##### Table of Contents





| |  |  | recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent function):
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|

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



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



|                      |  |     |                                                                                                                                  
|--------------------- |  | --- | ---------------------------------------------------------------------------------------------------------------------------------
|Dated: March 31, 2003 |  | By: | /s/ HENRY MADRID

Henry Madrid
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

64



---



##### Table of Contents






INDEX TO EXHIBITS

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

|        |  |                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                    
|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 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).                        



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                        
|Number  |  | Description                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                        
|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 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, incorporated herein by this reference to
Exhibit 3.25 to the Companys Annual Report on Form 10-K for the year ended December 31, 2000
(the 2000 Form 10-K).                           



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                
|3.26    |  | Certificate of Determination of Preferences of Series Y Preferred Stock, as filed with the
California Secretary of State on December 28, 2000, incorporated herein by this reference to
Exhibit 3.26 to the 2000 Form 10-K.                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                
|3.27    |  | Certificate of Determination of Preferences of Series Z Preferred Stock, as filed with the
California Secretary of State on December 28, 2000, incorporated herein by this reference to
Exhibit 3.27 to the 2000 Form 10-K.                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                
|3.28    |  | Certificate of Determination of Preferences of Series AA Preferred Stock, as filed with the
California Secretary of State on January 9, 2001, incorporated herein by this reference to
Exhibit 3.28 to the 2000 Form 10-K.                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.29    |  | Certificate of Determination of Preferences of Series BB Preferred Stock, as filed with the
California Secretary of State on September 27, 2001,
incorporated herein by this reference to Exhibit 3.29 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2001 (the 2001 Form 10-K).
|        |  |                                                                                                                                                                                                                                                                                                                
|3.30    |  | Certificate of Determination of Preferences of Series CC Preferred Stock, as filed with the
California Secretary of State on September 27, 2001,
incorporated herein by this reference to Exhibit
3.30 to the 2001 Form 10-K.                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                
|3.31    |  | Certificate of Determination of Preferences of Series DD Preferred Stock, as filed with the
California Secretary of State on September 27, 2001,
incorporated herein by this reference to Exhibit
3.31 to the 2001 Form 10-K.                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                
|3.32    |  | Certificate of Determination of Preferences of Series EE Preferred Stock, as filed with the
California Secretary of State on September 27, 2001,
incorporated herein by this reference to Exhibit
3.32 to the 2001 Form 10-K.                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                
|3.33    |  | Certificate of Determination of Preferences of Series FF Preferred Stock, as filed with the
California Secretary of State on or about April 16, 2002,
incorporated herein by this reference to Exhibit
3.33 to the 2001 Form 10-K.                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                
|3.34*   |  | Certificate of Determination of Preferences of Series GG Preferred Stock, as filed with the
California Secretary of State on May 23, 2002.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.35*   |  | Certificate of Determination of Preferences of Series HH Preferred Stock, as filed with the
California Secretary of State on May 23, 2002.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.36*   |  | Certificate of Determination of Preferences of Series II Preferred Stock, as filed with the
California Secretary of State on May 23, 2002.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.37*   |  | Certificate of Determination of Preferences of Series JJ Preferred Stock, as filed with the
California Secretary of State on May 23, 2002.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.38*   |  | Certificate of Determination of Preferences of Series KK Preferred Stock, as filed with the
California Secretary of State on May 23, 2002.                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|3.39*   |  | Certificate of Determination of Preferences of Series LL Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.40*   |  | Certificate of Determination of Preferences of Series MM Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.41*   |  | Certificate of Determination of Preferences of Series NN Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.42*   |  | Certificate of Determination of Preferences of Series OO Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.43*   |  | Certificate of Determination of Preferences of Series PP Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.44*   |  | Certificate of Determination of Preferences of Series QQ Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.45*   |  | Certificate of Determination of Preferences of Series RR Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.46*   |  | Certificate of Determination of Preferences of Series SS Preferred Stock, as filed with the
California Secretary of State on November 5, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|3.47*   |  | Amended and Restated Certificate of Determination of Series W
Preferred Stock, as filed with the California Secretary of State on
December 13, 2002.                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                
|3.48*   |  | Amended and Restated Certificate of Determination of Series CC
Preferred Stock, as filed with the California Secretary of State on
December 13, 2002.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                
|3.49*   |  | Amended and Restated Certificate of Determination of Series TT
Preferred Stock, as filed with the California Secretary of State on
February 26, 2002.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                
|3.50*   |  | Amended and Restated Certificate of Determination of Series UU
Preferred Stock, as filed with the California Secretary of State on
February 26, 2002.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                
|3.51*   |  | Amended and Restated Certificate of Determination of Series VV
Preferred Stock, as filed with the California Secretary of State on
February 26, 2002.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                
|3.52*   |  | Amended and Restated Certificate of Determination of Series WW
Preferred Stock, as filed with the California Secretary of State on
February 26, 2002.                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                
|3.53    |  | 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.                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                
|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.                                                                                                                                                  



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                              
|Number  |  | Description                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                              
|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, 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   |  | Eleventh Amendment to Convertible Debenture Purchase Agreement, dated December 31, 1999,
incorporated herein by this reference to Exhibit 10.27 to the 2001 Form 10-K.                                                                                       



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                    
|10.28   |  | Twelfth Amendment to Convertible Debenture Purchase Agreement, dated March 31, 2000,
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, 2000.           
|        |  |                                                                                                                                                                                                                                                    
|10.29   |  | Thirteenth Amendment to Convertible Debenture Purchase Agreement, dated June 30, 2000,
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, 2000.          
|        |  |                                                                                                                                                                                                                                                    
|10.30   |  | Fourteenth Amendment to Convertible Debenture Purchase Agreement, dated September 30, 2000,
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, 2000.
|        |  |                                                                                                                                                                                                                                                    
|10.31   |  | Fifteenth Amendment to Convertible Debenture Purchase Agreement, dated December 31, 2000,
incorporated herein by this reference to Exhibit
10.31 to the 2001 Form 10-K.                                                                            
|        |  |                                                                                                                                                                                                                                                    
|10.32   |  | Sixteenth Amendment to Convertible Debenture Purchase Agreement, dated March 30, 2001,
incorporated herein by this reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q/A for the quarterly period ended March 31, 2001.       
|        |  |                                                                                                                                                                                                                                                    
|10.33   |  | Seventeenth Amendment to Convertible Debenture Purchase Agreement, dated June 29, 2001,
incorporated herein by this reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q/A for the quarterly period ended June 30, 2001.       
|        |  |                                                                                                                                                                                                                                                    
|10.34   |  | Eighteenth Amendment to Convertible Debenture Purchase Agreement, dated September 28, 2001,
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, 2001.
|        |  |                                                                                                                                                                                                                                                    
|10.35   |  | Factoring Agreement dated December 27, 2000 between the Company and SUMMIT Financial
Resources, L.P., incorporated herein by this reference to Exhibit 10.27 to the 2000 Form 10-K.                                                                
|        |  |                                                                                                                                                                                                                                                    
|10.36   |  | First Amendment, dated June 29, 2000, to Lease Agreement between the Company and Stanley R.
Deck and Ellen Deck, incorporated herein by this reference to Exhibit 10.28 to the 2000 Form
10-K.                                                     
|        |  |                                                                                                                                                                                                                                                    
|10.37   |  | Nineteenth Amendment to Convertible Debenture Purchase Agreement, dated December 31, 2001,
incorporated herein by this reference to Exhibit
10.37 to the 2001 Form 10-K.                                                                           
|        |  |                                                                                                                                                                                                                                                    
|10.38   |  | Twentieth Amendment to Convertible Debenture Purchase Agreement dated
March 6, 2002, incorporated herein by this reference to Exhibit
10.38 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002.          
|        |  |                                                                                                                                                                                                                                                    
|10.39   |  | Twenty-First Amendment to Convertible Debenture Purchase Agreement dated March 15, 2002, incorporated herein by this reference to Exhibit
10.39 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002.      
|        |  |                                                                                                                                                                                                                                                    
|10.40   |  | Twenty-Second Amendment to Convertible Debenture Purchase Agreement dated March 19, 2002, incorporated herein by this reference to Exhibit
10.40 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002.     
|        |  |                                                                                                                                                                                                                                                    
|10.41   |  | Twenty-Third Amendment to Convertible Debenture Purchase Agreement dated March 26, 2002, incorporated herein by this reference to Exhibit
10.41 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002.      
|        |  |                                                                                                                                                                                                                                                    
|10.42   |  | Twenty-Fourth Amendment to Convertible Debenture Purchase Agreement dated March 27, 2002, incorporated herein by this reference to Exhibit
10.42 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002.     
|        |  |                                                                                                                                                                                                                                                    
|10.43   |  | Twenty-Fifth Amendment to Convertible Debenture Purchase Agreement
dated April 4, 2002, incorporated herein by this reference to
Exhibit 10.43 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.        
|        |  |                                                                                                                                                                                                                                                    
|10.44   |  | Twenty-Sixth Amendment to Convertible Debenture Purchase Agreement dated April 12, 2002, incorporated herein by this reference to
Exhibit 10.44 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.       
|        |  |                                                                                                                                                                                                                                                    
|10.45   |  | Twenty-Seventh Amendment to Convertible Debenture Purchase Agreement dated April 24, 2002, incorporated herein by this reference to
Exhibit 10.45 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.     
|        |  |                                                                                                                                                                                                                                                    
|10.46   |  | Twenty-Eighth Amendment to Convertible Debenture Purchase Agreement dated April 26, 2002, incorporated herein by this reference to
Exhibit 10.46 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.      
|        |  |                                                                                                                                                                                                                                                    
|10.47   |  | Twenty-Ninth Amendment to Convertible Debenture Purchase Agreement dated May 3, 2002, incorporated herein by this reference to
Exhibit 10.47 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.          
|        |  |                                                                                                                                                                                                                                                    
|10.48   |  | Thirtieth Amendment to Convertible Debenture Purchase Agreement dated June 10, 2002, incorporated herein by this reference to
Exhibit 10.48 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.           
|        |  |                                                                                                                                                                                                                                                    
|10.49   |  | Thirty-First Amendment to Convertible Debenture Purchase Agreement dated June 27, 2002, incorporated herein by this reference to
Exhibit 10.49 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.        
|        |  |                                                                                                                                                                                                                                                    
|10.50   |  | Thirty-Second Amendment to Convertible Debenture Purchase Agreement dated June 28, 2002, incorporated herein by this reference to
Exhibit 10.50 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2002.       
|        |  |                                                                                                                                                                                                                                                    
|10.51   |  | Thirty-Third Amendment to Convertible Debenture Purchase Agreement dated August 1, 2002, incorporated herein by this reference to
Exhibit 10.51 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002.  
|        |  |                                                                                                                                                                                                                                                    
|10.52   |  | Thirty-Fourth Amendment to Convertible Debenture Purchase Agreement dated August 6, 2002, incorporated herein by this reference to
Exhibit 10.52 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002. 



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                        
|Number  |  | Description                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                        
|10.53   |  | Thirty-Fifth Amendment to Convertible Debenture Purchase Agreement dated August 19, 2002, incorporated herein by this reference to
Exhibit 10.53 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002.     
|        |  |                                                                                                                                                                                                                                                        
|10.54   |  | Thirty-Sixth Amendment to Convertible Debenture Purchase Agreement dated September 11, 2002, incorporated herein by this reference to
Exhibit 10.54 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002.  
|        |  |                                                                                                                                                                                                                                                        
|10.55   |  | Thirty-Seventh Amendment to Convertible Debenture Purchase Agreement dated September 20, 2002, incorporated herein by this reference to
Exhibit 10.55 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002.
|        |  |                                                                                                                                                                                                                                                        
|10.56   |  | Thirty-Eighth Amendment to Convertible Debenture Purchase Agreement dated September 27, 2002, incorporated herein by this reference to
Exhibit 10.56 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002. 
|        |  |                                                                                                                                                                                                                                                        
|10.57   |  | Thirty-Ninth Amendment to Convertible Debenture Purchase Agreement dated September 30, 2002, incorporated herein by this reference to
Exhibit 10.57 to the
Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002.  
|        |  |                                                                                                                                                                                                                                                        
|10.58*  |  | Fortieth Amendment to Convertible Debenture Purchase Agreement dated October 31, 2002.                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                        
|10.59*  |  | Forty-First Amendment to Convertible Debenture Purchase Agreement dated November 5, 2002.                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                        
|10.60*  |  | Forty-Second Amendment to Convertible Debenture Purchase Agreement dated November 14, 2002.                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                        
|10.61*  |  | Forty-Third Amendment to Convertible Debenture Purchase Agreement dated December 27, 2002.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                        
|10.62*  |  | Forty-Fourth Amendment to Convertible Debenture Purchase Agreement dated December 31, 2002.                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                        
|21.1    |  | List of Subsidiaries,
incorporated herein by this reference to Exhibit 21.1 to the 2001 Form 10-K.                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                        
|23.1*   |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                        
|99.1*   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                         



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| |  | Indicates management contract or compensatory plan or arrangement.              
|- |  | --------------------------------------------------------------------------------
| 
|* |  | Filed with this Annual Report on Form 10-K for the year ended December
31, 2002.