<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

                For The Quarterly Period Ended: August 31, 1998
                                                ---------------

           [ ]       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: 0-21367
                                   -------

                            DATA TRANSLATION, INC.
    -----------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

                Delaware                                    04-3332230
    ---------------------------------           --------------------------------
    (State or other jurisdiction of                     (I.R.S. Employer
     organization or incorporation)                   Identification Number)

                                 100 Locke Drive
                           Marlborough, Massachusetts
         -------------------------------------------------------------
                    (Address of principal executive offices)

                                      01752
         -------------------------------------------------------------
                                   (Zip code)

                                 (508) 481-3700
         -------------------------------------------------------------
              (Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

             Yes   X          No
                 -----           -----

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common Stock, par value $.01 per share               2,096,920  shares
--------------------------------------      ------------------------------------
               Class                         Outstanding at September 30, 1998
<PAGE>
 
                                                                    Page 2 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES



                                      INDEX
                                      -----

                                                                       Page No.
                                                                       --------
 Part I - Financial Information:
     Consolidated Balance Sheets as of August 31, 1998 and
         November 30, 1997 ................................................3

     Consolidated Statements of Operations for the Three and
         Nine Months Ended August 31, 1998 and 1997 .......................4

     Consolidated Statements of Stockholders' Investment
         For the Fiscal Years Ended November 30, 1996 and 1997
         and for the Nine Months Ended August 31, 1998 ....................5

     Consolidated Statements of Cash Flows for the Nine Months
         Ended August 31, 1998 and 1997 ...................................6

     Notes to Consolidated Financial Statements ...........................7-8

     Management's Discussion and Analysis of
         Financial Condition and Results of Operations ....................9-11


Part II - Other Information ...............................................12

Signatures ................................................................13
<PAGE>
 
                                                                    Page 3 of 13

PART I.  FINANCIAL INFORMATION

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                  August 31,     November 30,
                                                                     1998            1997
                                                                 (Unaudited)
                                                                 ------------    ------------
<S>                                                              <C>             <C>         
Current Assets:
     Cash and cash equivalents                                   $  3,370,000    $  3,922,000
     Accounts receivable, net of reserves of
       $420,000 in 1998 and $389,000 in 1997                        2,052,000       2,754,000
     Inventories                                                    1,464,000       1,407,000
     Prepaid expenses                                                 525,000         430,000
                                                                 ------------    ------------
          Total current assets                                      7,411,000       8,513,000

Equipment and Leasehold Improvements, net                           1,332,000       1,851,000

Other Assets - net                                                    125,000         195,000
                                                                 ------------    ------------

Total Assets                                                     $  8,868,000    $ 10,559,000
                                                                 ============    ============


Current Liabilities:
      Accounts payable                                           $    363,000    $    174,000
      Due to related party                                            273,000         546,000
      Accrued expenses                                              2,361,000       1,683,000
                                                                 ------------    ------------
           Total current liabilities                                2,997,000       2,403,000

Net liabilities of discontinued operations                            311,000       1,424,000

Deferred Income Taxes                                                   3,000           3,000

Stockholders' Investment:
     Preferred Stock, $.01 par value,
        Authorized - 5,000,000 shares, none issued                         --              --
     Common Stock, $.01 par value,
        Authorized - 30,000,000 shares, issued -
        2,096,820 and 2,048,765 in 1998 and 1997, respectively         21,000          20,000
     Capital in excess of par value                                12,764,000      12,691,000
     Accumulated deficit                                           (7,240,000)     (5,979,000)
     Cumulative translation adjustment                                 12,000          (3,000)
                                                                 ------------    ------------

          Total stockholders' investment                            5,557,000       6,729,000
                                                                 ------------    ------------

Total Liabilities and Stockholders' Investment                   $  8,868,000    $ 10,559,000
                                                                 ============    ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                                                                    Page 4 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                 Three Months Ended              Nine Months Ended
                                             August 31,       August 31,      August 31,      August 31,
                                                1998            1997            1998            1997
                                            ------------    ------------    ------------    ------------
<S>                                         <C>             <C>             <C>             <C>         
Net sales                                   $  3,919,000    $  5,068,000    $ 12,910,000    $ 16,287,000

Cost of sales                                  1,990,000       2,390,000       6,233,000       7,816,000
                                            ------------    ------------    ------------    ------------

     Gross profit                              1,929,000       2,678,000       6,677,000       8,471,000

Research and development expenses                705,000         872,000       1,876,000       2,788,000
Selling and marketing expenses                 1,517,000       2,173,000       4,606,000       8,257,000
General and administrative expenses              504,000         582,000       1,523,000       1,889,000
                                            ------------    ------------    ------------    ------------

     Loss from operations                       (797,000)       (949,000)     (1,328,000)     (4,463,000)

Interest income                                   35,000          50,000         116,000         221,000
Other expense, net                                (1,000)        (43,000)        (49,000)        (91,000)
                                            ------------    ------------    ------------    ------------

     Net loss                               $   (763,000)   $   (942,000)   $ (1,261,000)   $ (4,333,000)
                                            ============    ============    ============    ============

Basic and diluted loss per share            $      (0.36)   $      (0.46)   $      (0.61)   $      (2.14)
                                            ============    ============    ============    ============

Basic and diluted weighted average number
     of shares outstanding                     2,092,000       2,036,000       2,079,000       2,028,000

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                                                                    Page 5 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT

<TABLE>
<CAPTION>

                                                       Common Stock            
                                                   --------------------     Capital                     Cumulative        Total
                                  Investment         Number    $.01 Par   in Excess of    Accumulated   Translation    Stockholders'
                               by Media 100 Inc.   of Shares     Value     Par Value        Deficit     Adjustment      Investment
                               -----------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>         <C>        <C>             <C>           <C>            <C>  
Balance, November 30, 1996      $  3,822,000             --    $    --    $        --     $       --     $ (31,000)    $  3,791,000

   Contribution from Media         
   100 Inc.                        8,827,000             --         --             --             --            --        8,827,000

   Dividend distribution of
   Investment by Media 100 Inc.  (12,649,000)     2,022,021     20,000     12,629,000             --            --               --
                               -----------------------------------------------------------------------------------------------------

Pro Forma balance,
 November 30, 1996              $         --      2,022,021    $20,000    $12,629,000     $       --     $ (31,000)    $ 12,618,000

 
   Proceeds from stock plans              --         26,744         --         62,000             --            --           62,000

   Translation adjustment                 --             --         --             --             --        28,000           28,000

   Net loss                               --             --         --             --     (5,979,000)           --       (5,979,000)
                               -----------------------------------------------------------------------------------------------------

Balance, November 30, 1997      $         --      2,048,765    $20,000    $12,691,000    $(5,979,000)     $ (3,000)     $ 6,729,000

   Proceeds from stock plans              --         48,055      1,000         73,000             --            --           74,000

   Translation adjustment                 --             --         --             --             --        15,000           15,000

   Net loss                               --             --         --             --     (1,261,000)           --       (1,261,000)
                              ------------------------------------------------------------------------------------------------------
Balance, August 31, 1998
   (Unaudited)                  $         --      2,096,820    $21,000    $12,764,000    $(7,240,000)     $ 12,000      $ 5,557,000
                              ======================================================================================================


</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                                                                    Page 6 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                Nine Months Ended
                                                             August 31,     August 31,
                                                                1998           1997
                                                            -----------    -----------
<S>                                                          <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $(1,261,000)   $(4,333,000)
  Adjustments to reconcile net loss to
   net cash used in operating activities-
         Depreciation and amortization                           839,000        901,000
         Loss on disposal of equipment                                --          2,000
         Change in assets and liabilities-
           Accounts receivable                                   702,000       (655,000)
           Inventories                                           (57,000)        67,000
           Prepaid expenses                                      (95,000)      (193,000)
           Accounts payable                                      189,000       (118,000)
           Due to related party                                 (273,000)       273,000
           Accrued expenses                                      678,000         32,000
           Net liabilities of discontinued operations         (1,113,000)            --
                                                             -----------    -----------

         Net cash used in operating activities               $  (391,000)   $(4,024,000)
                                                             -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of equipment and leasehold improvements      (201,000)      (526,000)
         Increase in other assets                                (50,000)       (50,000)
                                                             -----------    -----------

         Net cash used in investing activities               $  (251,000)   $  (576,000)
                                                             -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Contribution from Media 100 Inc.                             --      8,827,000
         Proceeds from stock plans                                74,000         14,000
                                                             -----------    -----------

         Net cash provided by financing activities           $    74,000    $ 8,841,000
                                                             -----------    -----------

EXCHANGE RATE EFFECTS                                             16,000         (3,000)
                                                             -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         $  (552,000)   $ 4,238,000

CASH AND CASH EQUIVALENTS, beginning of period                 3,922,000          1,000
                                                             -----------    -----------

CASH AND CASH EQUIVALENTS, end of period                     $ 3,370,000    $ 4,239,000
                                                             ===========    ===========

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                                                                    Page 7 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Basis of Presentation

     In the opinion of management, these unaudited consolidated financial
statements and disclosures reflect all adjustments necessary for fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest audited
financial statements, which are contained in the Company's 1997 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 27,
1998.

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

2. Cash Equivalents

     Cash equivalents are carried at cost which approximates market value and
have original maturities of less than three months. Cash equivalents include
money market accounts, overnight time deposits, and U.S. Treasury bills.

3.  Inventories

     Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market and consist of the following:

                                            August 31,          November 30,
                                              1998                  1997
                                              ----                  ----
        Raw material                       $  896,000           $  830,000
        Work-in-process                        96,000               10,000
        Finished goods                        472,000              567,000
                                           ----------           ----------
                                           $1,464,000           $1,407,000
                                           ==========           ==========


Work-in-process and finished goods inventories include material, labor and
manufacturing overhead. Management performs periodic reviews of inventory and
disposes of items not required by their manufacturing and marketing plan.

4.  Net Loss Per Common Share

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings per Share. This standard is
effective for fiscal periods ending after December 15, 1997 and requires
presentation of both basic and diluted earnings per share on the face of the
Consolidated Statements of Operations. These financial statements have been
prepared and presented based on the new standard. Prior period amounts have been
restated to conform to current year presentation. Basic net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share for the periods
presented is the same as basic net loss per share as the inclusion of the
potential common stock equivalents would be antidilutive.

5.  Contingencies

     From time to time the Company is involved in disputes and/or litigation
encountered in its normal course of business. The Company does not believe that
the ultimate impact of the resolution of such outstanding matters will have a
material effect on the Company's financial condition or results of operations.
<PAGE>
 
                                                                    Page 8 of 13

                     DATA TRANSLATION, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Capitalized Software Development Costs

     The Company capitalizes certain computer software development costs. Such
costs, net of accumulated amortization, were approximately $121,000 and $191,000
as of August 31, 1998 and November 30, 1997, respectively and are included in
other assets. These costs are amortized on a straight-line basis over two years
which approximates the life of the product. Amortization expense, included in
cost of sales, was approximately $120,000 and $95,000 for the nine months ended
August 31, 1998 and 1997, respectively.

7.  Discontinued Operations

     On November 11, 1996, Media 100 Inc. ("Media") sold certain assets of its
networking distribution business, primarily inventories, equipment and its
ongoing business, for approximately $1.3 million. The balance of Media's
networking distribution business was contributed to the Company in connection
with Media's spin-off of the Company on December 2, 1996 (the "Spin-off"). The
Company is in the process of discontinuing and winding-up the remainder of such
business.

     The components of net liabilities of discontinued operations included in
the accompanying consolidated balance sheets at August 31, 1998 and November 30,
1997 follow:

                                                  August 31,     November 30,
                                                    1998            1997
                                                    ----            ----

Accounts receivable, net                         $    33,000     $   123,000
Borrowings from a bank                              (301,000)       (963,000)
Accrued expenses                                     (43,000)       (584,000)
                                                 -----------     -----------
Net liabilities of discontinued operations       $  (311,000)    $(1,424,000)
                                                 ===========     ===========

8.  Pro Forma Results

     The consolidated statements of stockholders' investment is reflective of a
stock dividend in connection with the Spin-off of the Company from Media.
<PAGE>
 
                                                                    Page 9 of 13

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

     This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements as a result of the following
risk factors: dependence on new products, impact of competitive products,
ability of the Company to meet its future capital requirements, ability to
attract qualified personnel, the absence of history as an independent company,
and the dependence on proprietary technology.

Results of Operations

     The following table sets forth certain consolidated statement of operations
data as a percentage of net sales.

<TABLE>
<CAPTION>

                                            Three Months Ended     Nine Months Ended
                                            ------------------     -----------------
                                                August 31,            August 31,
                                                ----------            ----------

                                             1998       1997       1998       1997
                                             ----       ----       ----       ----
<S>                                         <C>        <C>        <C>        <C>  
Net sales ..............................    100.0      100.0      100.0      100.0
Gross margin ...........................     49.2       52.8       51.7       52.0
Research and development expenses ......     18.0       17.2       14.5       17.1
Selling and marketing expenses .........     38.7       42.9       35.7       50.7
General and administrative expenses ....     12.9       11.4       11.8       11.6
                                           ------     ------     ------     ------
Loss from operations ...................    (20.4)     (18.7)     (10.3)     (27.4)

Interest (expense) income and other, net      0.9        0.1        0.5        0.8
                                           ------     ------     ------     ------
Net loss ...............................    (19.5)%    (18.6)%     (9.8)%    (26.6)%
                                           ======     ======     ======     ======

</TABLE>

Comparison of Third Fiscal Quarter of 1998 to Third Fiscal Quarter of 1997:

     Net sales for the fiscal quarter ended August 31, 1998 were $3,919,000, a
decrease of 22.7% or $1,149,000 from the same period a year ago. The decrease in
net sales were due primarily from lower orders for all products within all
geographies. Sales of the Company's commercial product, BroadwayTM, decreased
approximately $636,000 or 60% in the same period a year ago. The Company's data
acquisition and imaging products decreased approximately $514,000 or 12.8% from
the same period a year ago. Sales continue to be adversely impacted by various
market conditions including, a continued shift in the data acquisition and
imaging markets toward new, lower priced hardware and software solutions,
competitive pricing pressures and the decline of the worldwide financial
markets.

     Gross margin for the fiscal quarter ended August 31, 1998 was 49.2%,
compared to 52.8% in the comparable quarter of the prior year. The decrease in
gross margin from the period in the prior year was the result of lower overhead
absorption due to decreased production levels as well as lower average selling
prices.

     The loss from operations for the third fiscal quarter of 1998 was $797,000,
compared to $949,000 in the comparable period of the prior year. A decrease in
operating expenses, slightly offset by lower gross margins contributed to
reducing the loss from operations. Operating expenses for the third quarter of
fiscal 1998 were $2,726,000 or 69.6% of net sales compared to $3,627,000 or
71.6% of net sales in the prior year. Research and development expenses were
$705,000 or 18.0% of net sales compared to $872,000 or 17.2% of net sales for
the comparable period last year. Sales and marketing expenses were $1,517,000 or
38.7% of net sales compared to $2,173,000 or 42.9% of net sales in the prior
year. General and administrative expenses were $504,000 or 12.9% of net sales
compared to $582,000 or 11.4% of net sales for the same period last year. On
September 17, 1998, the Company announced a decision to initiate
cost-containment measures including a 15% workforce reduction and other related
spending cuts. These expense reductions aggregated approximately $170,000 and
are reflected in the third quarter financial results.

     The Company incurred a net loss of $763,000 or $0.36 per share for the
quarter ended August 31, 1998, compared to a net loss of $942,000 or $0.46 per
share for the same period in 1997.
<PAGE>
                                                                   Page 10 of 13

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS
                                   (CONTINUED)

Comparison of the First Nine Months of Fiscal 1998 to the First Nine Months of
Fiscal 1997:

     Net sales for the nine months ended August 31, 1998 were $12,910,000, a
decrease of 20.7% or $3,377,000 from the same period a year ago. Sales of the
Company's data acquisition and imaging products for the nine months ended August
31, 1998 have decreased approximately $2,320,000 or 17.4% from the same period
in fiscal 1997 mainly due to the conditions described above. Sales of the
Company's commercial products for the nine months ended August 31, 1998 have
decreased approximately $1,057,000 or 36.0% from the comparable period in fiscal
1997.

     Gross margin for the nine months ended August 31, 1998 was 51.7%, compared
to 52.0% in the comparable period of the prior year. The decrease in gross
margin from the period in the prior year was the result of lower overhead
absorption due to decreased production levels as well as lower average selling
prices, offset partially by lower manufacturing overhead expenses.

     The loss from operations for the first nine months of fiscal 1998 was
$1,328,000, compared to $4,463,000 in the comparable period of the prior year. A
decrease in operating expenses contributed to reducing the loss from operations.
Operating expenses for the first nine months of fiscal 1998 were $8,005,000 or
62.0% of net sales compared to $12,934,000 or 79.4% of net sales in the prior
year. Research and development expenses were $1,876,000 or 14.5% of net sales
compared to $2,788,000 or 17.1% of net sales for the comparable period last
year. Sales and marketing expenses were $4,606,000 or 35.7% of net sales
compared to $8,257,000 or 50.7% of net sales in the prior year. General and
administrative expenses were $1,523,000 or 11.8% of net sales compared to
$1,889,000 or 11.6% of net sales for the same period last year. Prior year
operating expenses include a significant investment in product development,
advertising, promotion and sales channel development for the Company's Broadway
products. In the fourth quarter of fiscal 1997, the Company took certain
measures to lower its operating expenses across all categories and improve its
operating results.

     The Company incurred a net loss of $1,261,000 or $0.61 per share for the
nine months ended August 31, 1998, compared to a net loss of
$4,333,000 or $2.14 per share for the same period in 1997.

Liquidity and Capital Resources

     During the first nine months of fiscal 1998, net cash used in operations
was $391,000, which resulted primarily from a net loss of $1,261,000 and the
partial payment of net liabilities from discontinued operations of $1,113,000,
offset by $839,000 of depreciation and amortization expense, a decrease in
accounts receivable of $702,000 and an increase in accrued expenses of $678,000.
Given current available funds, the Company believes that it will be able to meet
its current operating requirements for at least the next twelve months. If the
Company is unsuccessful in increasing revenues, or if its liquidity position
continues to deteriorate, or if cash flows are weaker than anticipated, the
Company will need to secure external financing in order to meet its ongoing
operating expenses. Therefore, the Company is exploring possible financing
alternatives. There can be no assurance whether the Company would successful in
obtaining any required financing.

     In December 1997, in connection with winding-up its networking business,
the Company placed into receivership its wholly owned United Kingdom subsidiary,
TFS Wokingham, Limited f/k/a/ Data Translation Networking Limited
("Networking"). Networking has a credit facility with BankBoston, N.A. under
which approximately $92,000 was outstanding at September 30, 1998. The Company
is a guarantor, on a secured basis, of Networking's obligations to BankBoston,
N.A. During the first nine months of fiscal 1998, the Company paid approximately
$895,000 to BankBoston, N.A. under Networking's credit facility. The Company
expects that, during the fourth quarter of this fiscal year, it will pay all
amounts outstanding to BankBoston under Networking's credit facility. The
Company expects to fund such payments from available cash.

YEAR 2000 COMPLIANCE DISCLOSURE

     Year 2000 Definition
     --------------------

     The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

     Company Products
     ----------------

     The firmware in the Company's hardware products do not carry out any date
manipulation therefore, by their very nature, are Year 2000 compliant. The
Company's software products do not have user interface for the input of date
data therefore, are Year 2000 compliant, provided that the underlying operating
system and other products used with the Company's products are Year 2000
compliant. The Company has also, solicited and received confirmation of Year
2000 compliance with respect to all of its third party product offerings.
<PAGE>
 
                                                                   Page 11 of 13

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS
                                   (CONTINUED)



     The Company's Internal Systems
     ------------------------------

     The Company has conducted an assessment of its computer information systems
and is in the process of implementing a Year 2000 Plan that modifies, upgrades
or replaces some of its internal financial and operational systems. The Company
has evaluated and estimated the cost of bringing all internal systems, equipment
and operations into Year 2000 compliance to be approximately $250,000.
Currently, the Company is approximately 75% complete with the implementation
process and has incurred approximately 50% of the total cost. The Company
believes, based upon currently available information, that these costs will not
have a material adverse effect on its business, financial condition or results
of operations. However, if these efforts are not completed on time, or if the
cost of updating or replacing the Company's information systems exceeds the
Company's current estimates, the Year 2000 issue could have a material adverse
impact on the Company's business, financial condition or results of operations.
The Company has initiated the development of a comprehensive contingency plan to
address situations that may result if the Company is unable to achieve Year 2000
readiness of its internal systems on a timely manner. The contingency plan is
expected to be completed during the second quarter of fiscal 1999.

     Third Party Relationships
     -------------------------

     The Company also intends to determine the extent to which the Company may
be vulnerable to any failures by its major suppliers, distributors and service
providers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third party suppliers, distributors and service
providers to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material shipment delays from
its major product suppliers or any material sales delays from its major
distributors due to Year 2000 issues. However, there can be no assurance that
these third parties will not experience Year 2000 problems or that any problems
would not have a material effect on the Company's product supply and
distribution channels. Because the cost and timing of Year 2000 compliance by
third parties such as suppliers, distributors and service providers is not
within the Company's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Company of any
failure by these third parties to achieve Year 2000 compliance.

     In addition, the Company does not currently have meaningful information
concerning the Year 2000 compliance status of its customers. As is the case with
other companies, if significant numbers of the Company's current and future
customers fail to achieve Year 2000 compliance, or if they divert technology
expenditures away from those that were reserved for engineering products to
address Year 2000 compliance issues, the Company's business, results of
operations, or financial condition could be materially adversely affected.

     Potential Liability to Third Parties 
     ------------------------------------

     Some commentators have predicted significant litigation regarding Year 2000
compliance issues and because of the unprecedented nature of such litigation, it
is uncertain whether, or to what extent, the Company may be affected.
<PAGE>
 
                                                                   Page 12 of 13

                           PART II. OTHER INFORMATION


Item 6. Exhibits and Reports on Form 8-K
        --------------------------------

            a)  Exhibits

                         Exhibit
                         Number                              Description
                         ------                       -----------------------

                           27                         Financial Data Schedule

            b)  Reports on Form 8-K

                 No reports were filed during the period covered by this report.
<PAGE>
 
                                                                   Page 13 of 13

                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                           Data Translation, Inc.





Date: October 15, 1998     By:  /s/ Gary B. Godin
                              --------------------------------
                                    Gary B. Godin
                                Chief Financial Officer