Let me start by saying this is a method used when using a plotter/cutter. There are much better methods being done by hand, in which you can achieve unlimited colors if you have the time and patience. This is a limited technique and is very easy to do if using a plotter/cutter.
Here is my equipment:
I'm using a Pro Wraith with a small tournament stamp on it.
I removed the stamp color, then removed the stamp gently with a sponge and acetone. This is all done within 30 seconds.
Now, I have a 2 color .GIF file I whipped up as an example:
I send the GIF to my plotter and end up with a 12"X12" cut piece:
Now, I am going to apply the transfer tape over the design, starting in the middle and carefully smoothing the tape out to the edges, to eliminate bubbles in the tape. After it has been snugly applied, I circle my hand around the design to ensure good adhesion to the vinyl....
OK, so I'm ready to apply my vinyl to the disc. Ensure the disc is completely dry and clean. I use a penmark through the vinyl and a pen mark on the disc to center the design on the disc. Use whatever method you're comfortable with. I place the sticky side on the disc and again start smoothing from the center SLOWLY out the the edges of the disc in a circular pattern.
Until you have the vinyl design completely smooth on the dome of the disc...
Unless your design goes all the way to the edge of the disc, smoothing the edges isn't as important as just making sure they get good coverage so your dye won't leak through.
After you're comfortable with the face of the disc, turn it over to complete the vinyl application
Now separate the vinyl from the tape on the corners and tighly fold them in the the underside of the disc. Then tighly fold the excess vinyl in, like you're wrapping a present. Now carefully peel off the trasfer tape, slow enough to catch any mistakes, as the tape may try to peel your small design features off with it. After your tape is removed it should look like this:
Now recheck your design and use your thumb to make any last adjustments, making sure to smooth out any areas that look bubbled, lifted, or just loose. Do not press too hard on the disc, and bending it will surely cause the vinyl to wrinkle, an undesirable attribute.
Remove the first portion of vinyl that you are going to dye. This will be the DARKEST part of your design. For me, I chose the center star to be the darkest.
Now you're ready to dye. Take your pan, I use a cast-iron skillet because of the heat properties. Once you choose a pan, never use that pan for cooking again. It's a permanent disc dying pan now. Don't ever let your wife fry chicken in it, or she might ask you why everything is purple.
Begin to heat your dye until you JUST start to see it beginning to steam. Overheating will cause disc warpage. After the dye steams up, remove heat and let cool for a couple minutes. This is what mine looked like as I removed it from heat. It isn't boiling, it isn't simmering, it's just evaporating.
Now, using flaps from your vinyl, lower the disc in your pan and gently release it so it floats on the water/dye. I actually lower and raise it about 10 times because I find this eliminates the bubbles that may form if you just lower it once.
Here's the technique part of it. After about 5 minutes I carefully remove the disc, rinse it, and remove the next portion of vinyl aroud the design that will be the second darkest. This can be the same color, or if you're clever, you've got another color waiting that works with your original color. Repeat this soak/rinse/remove process as many times as it takes to complete your design.
Now each time you soak, the first layer will either get a little darker, or just stay black, if that's what you chose.
After that process is complete, rinse the entire disc with COLD water as you remove the vinyl from the disc. If you pull the vinyl off, instead of trying to scrape or scratch it off, you'll be left with a LOT less vinyl adhesive left on the disc.
After removing the vinyl, rinse it very well, and be careful of dye on your fingertips, this can bleed in to your disc as you are cleaning it. Dry your hands and the disc off and look at your work.
Please note that this dye job was done on my lunch, so I was very time constricted. I used a simple pattern and only allowed about 2-3 minutes before each layer was removed. With a good amount of time and patience, I've made really nice multi-colored prize discs using this technique.
Please feel free to add content, tips, or concerns to this thread. I don't pretend to be an expert, but I have ruined a lot of discs to get to this point. There is still plenty to learn. I have other techniques for more complicated designs and colors, but those will have to wait until I have more time.
Good luck to everyone!