<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
  [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the Fiscal Year Ended: November 30, 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
                      Marlboro, Massachusetts 01752-1192
         (Address of principal executive offices, including zip code)
 
                                (508) 481-3700
             (Registrant's telephone number, including area code)
 
          Securities registered pursuant to Section 12(b) of the Act:
                                    (none)
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.01 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 [_]
 
   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 or any
amendment to this Form 10-K [_].
 
   The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $2,948,000 as of January 31, 1999. The number of
shares of Common Stock, $0.01 par value, outstanding as of January 31, 1999
was 2,107,059.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 14, 1999 are incorporated by reference into
Part III.
 
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<PAGE>
 
                                    PART 1
 
Item 1. Business
 
Introduction
 
   Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company")
was incorporated in September 1996 as a wholly-owned subsidiary of Media 100
Inc., f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). In November 1996, Parent
sold a substantial portion of the assets of the networking distribution
business and during 1998 the Company discontinued the remainder of such
business. The Company continues to operate the data acquisition and imaging
and commercial products groups. On December 2, 1996 (the "Distribution Date"),
Parent distributed to its stockholders in the form of a dividend all of the
outstanding shares of capital stock of the Company (the "Distribution").
References to the "Company" below refer to the Contributed Businesses as
operated by the Company after the Distribution, or as operated by Parent prior
to the Distribution, as the context requires.
 
   The Company is a leader in the design, development and manufacture of high
performance data acquisition and imaging products. For more than two decades,
the Company's products have provided engineers and scientists with accurate
and timely data for measurement, analysis and process control in a wide range
of industrial, scientific and medical applications. The Company's principal
products in this area are data acquisition and imaging hardware, which are
used in personal computers ("PCs") to receive analog signals, convert them to
digital form and process the digital data. The Company's strategy is to
identify and capitalize on growth opportunities in the data acquisition and
imaging market.
 
   An outgrowth of the Company's core technology of analog to digital
conversion is its commercial products line which includes a low-cost, high-
performance video capture and encoding system for Microsoft(R) Windows(R)
95/98-based PCs called Broadway(TM). Broadway captures analog video, digitizes
it, compresses it into an editable MPEG-1 format, and writes it to disk in
real time. The Company's Broadway product has many applications, including
incorporation of video into home pages on the world wide web (the "Web"),
multimedia presentations, CD-ROM titles and computer-based training.
 
Data Acquisition and Imaging
 
 Market
 
   The market for the Company's data acquisition and imaging products is
composed primarily of technical users, such as engineers and scientists,
interested in incorporating the Company's systems in their final products.
These products are designed for the scientific research and analysis, test and
measurement and industrial machine vision inspection markets. End users
include original equipment manufacturers, research laboratories, universities,
hospitals and government agencies. Users require highly accurate, real-time
measurement and control of analog signals, such as temperature, pressure,
sound and video.
 
   The data acquisition and imaging markets are highly fragmented and have
been adversely affected in recent years by reduced prices for PCs and
peripherals.
 
 Business Strategy
 
   In the data acquisition and imaging area, the Company is focused on
providing system solutions built around development of its PCI-based products.
These developments are being driven by rapid adoption of PCI bus slots by
personal computer manufacturers.
 
 
                                       2
<PAGE>
 
 Products and Services
 
   The Company's data acquisition and imaging products are designed to
facilitate (i) the high-speed capture of analog signals representing physical
events, such as temperature, pressure, sound and video, (ii) the conversion of
such signals into digital form and (iii) the use of such digital signals in
PCs for processing. These capabilities permit customers to use PCs to
identify, measure, analyze and control physical phenomena (data acquisition)
and to analyze or enhance video images (imaging).
 
   The Company's data acquisition and imaging systems consist of plug-in cards
and Windows-based software which provide an integrated, high performance
systems solution to the general scientific and measurement marketplace.
 
   The Company sells over 100 data acquisition and imaging products, which
range in retail price from $199 to $1,995. Domestically, the Company sells
such products to end users, value-added resellers ("VARs"), system integrators
and original equipment manufacturers ("OEMs"). Internationally, the Company
sells through its wholly-owned subsidiaries, as well as through resellers and
independent distributors. Such prices do not reflect distributor discounts for
international sales, which range from approximately 20% to 35% on hardware
products and up to approximately 50% on software applications.
 
   Data acquisition products provide capabilities ranging from simple
measurement to advanced digital signal processing functions. While
researchers, systems integrators and OEMs have been the predominant data
acquisition users in the past, new data acquisition markets have emerged in
the industrial and medical areas, such as industrial inspection, medical
diagnostic/therapeutic applications, high-performance control, vibration
analysis, acoustics and test and measurement applications. Customers
incorporate the Company's data acquisition boards into PCs to measure real-
world parameters, including temperature, pressure, acceleration and sound; to
analyze this data; and to use the results to control real-world events and
processes.
 
   The Company's imaging products may be used in a number of applications. In
machine vision applications, images can be captured and processed immediately,
in real time, for fast, accurate inspection of manufactured parts. In
scientific imaging applications, images can be captured from video cameras for
analysis, or images can be captured from cameras mounted on microscopes to
identify and count cells. In medical applications, images can be captured from
different diagnostic devices, such as CAT scanners or ultrasound imaging
devices, for enhancement, analysis and display.
 
 Customers and Sales
 
   The Company sells its data acquisition and imaging products to end users,
VARs, system integrators and OEMs for use primarily in the scientific, medical
and industrial markets. End users include manufacturers, research
laboratories, universities, hospitals and government agencies.
 
   The Company sells its data acquisition and imaging products through a
comprehensive, widely distributed annual catalog, an in-house telemarketing
force, OEM-focused direct sales, indirect channels (VARs, distributors and
system integrators), and extensive advertising and promotional campaigns. The
Company has a full-time sales and administrative staff of 10 employees in the
United States to support sales. International sales are supported by two
subsidiaries and various distributors throughout Europe, Asia and the Pacific
Rim.
 
 Competition
 
   The Company competes in the data acquisition market principally with
National Instruments Corporation, Computer Boards, Inc. and Keithley
Instruments, Inc. and in the imaging market with Matrox and Imaging
Technology, Inc., all of which may have substantially greater financial,
technical and marketing resources than the Company. The Company also competes
with a number of smaller companies in each of these markets. The Company's
data acquisition and imaging products compete on the ability to supply
extensive hardware and software components with competitive performance and
price.
 
                                       3
<PAGE>
 
Commercial Products
 
 Market
 
   The convergence of voice, video and data, the advancements in personal
computing, and the growth of the Internet have changed the way in which the
world communicates. As computing processor power and telco/digital/cable modem
technology evolve, so too does the PC user's ability to harness these venues
for creating and delivering video content. As PC costs continue to reach new
lows (the sub-$1,000 PC category is growing the fastest), the majority of PC
users will have access to an affordable tool for video creation. The Company
believes the most lucrative market segments for PC video are Web page
creators/hosts, business users (for uses such as presentations, training,
sales and marketing) and CD-ROM title producers (for uses such as
entertainment, gaming and education).
 
 Product and Technology
 
   Broadway is a high-performance video capture and encoding system for
Windows 95/98 and Windows NT PCs. Broadway is a complete video editing
solution, and its videos can also be integrated with third party video editing
software packages to edit and produce VHS quality digital video clips with CD-
quality stereo sound. Using Broadway, a computer user can capture video from
most analog sources, edit the digitized version created by Broadway, fully
compress it to MPEG-1 and then incorporate the finished video into multimedia
applications, such as Web home pages, multimedia presentations and CD-ROMs.
Broadway is composed of a Peripheral Component Interconnect ("PCI") integrated
circuit board and a graphical user interface compatible with Windows(TM). The
Company's standard Broadway package is shipped complete with Ulead Systems,
Inc.'s MediaStudio Pro(TM) video editing software. Broadway is also designed
to be integrated with a variety of other video editing packages, including
Adobe Premiere(R).
 
   Using the MPEG-1 standard allows Broadway to produce compressed videos
which can be played back at 30 frames per second, the standard, full-motion
video speed. Videos compressed to be played back at speeds slower than 30
frames per second typically drop frames causing the resulting video to be less
than full-motion and of lower image quality. Once the video clip is compressed
and saved on the user's hard drive in the standard video file format, it may
be incorporated into applications such as the Microsoft Office Suite, Web
pages or CD ROMs.
 
 Customers and Sales
 
   The Company's sales and marketing strategy is to move down the technical
sophistication curve and up the volume curve by targeting audio/video
professionals, business presentation and education developers, home hobbyists
and family/home users as primary customers.
 
   Worldwide, the Company's commercial products are sold through a two-tier
distribution network. The Company has direct relationships with international
mass market distributors as well as resellers VARs. The distributors sell the
commercial products to retail outlets as well as smaller computer resellers
and VARs. This allows the Company's products to be available through any
method used by its customers to purchase their products. The Company has a
full-time sales and administrative staff of 3 employees to support sales. The
Company offers a 30-day money back guarantee on its commercial products. The
product packaging was designed to be sold through the retail channel.
 
                                       4
<PAGE>
 
   The Company provides end users with free technical support with the
purchase of the product. Broadway includes extensive on-line technical support
via the Company's Web site, as well as documentation which provides a video
tutorial to the non-video user and an intuitive installation guide.
 
 Competition
 
   The Company has a number of competitors. Some competitors sell products
which, like Broadway, employ MPEG encoding, while others sell products based
on different platforms and video standards. The Company's Broadway product
competes principally on the basis of price, speed of compression, ease of
installation and use, and brand name awareness.
 
   The Company's greatest competition for the Broadway product includes other
products with MPEG encoding such as Pinnacle System's DC30, Matrox's Rainbow
Runner, Videonics' Python and Dazzle Multimedia's Snazzy and Dazzle products.
These companies may have substantially greater financial, technical and
marketing resources than the Company. In addition, there are a number of other
competitors whose products are based on platforms and video standards other
than those used by the Company.
 
Research and Development
 
   The Company intends to continue to invest in research and development for
new products and for enhancements to existing products. The Company is
currently targeting spending on research and development at an annual rate of
approximately 17% of net sales. For the fiscal year ended November 30, 1998,
the Company invested approximately $2,444,000 or 14.6% of net sales in product
development compared to $3,808,000 or 18.6% of net sales in the prior fiscal
year.
 
   The Company employed, as of January 31, 1999, 12 full-time engineers whose
primary duties relate to product development. Outside firms and consultants
are selectively engaged to develop or assist with development of products when
favorable opportunities exist.
 
   In the data acquisition and imaging area, the new areas for hardware
development include the integration of ASICs (application specific integrated
circuits) into circuit boards, which will reduce cost and advance the
development of new computer bus technologies (e.g., PCI). The Company's
software development in data acquisition and imaging centers on supporting
Windows 95/98 and Windows NT(TM).
 
Manufacturing
 
   The Company manufactures all of its products at a leased facility in
Marlboro, Massachusetts. The Company believes its control of manufacturing
significantly contributes to hardware design improvements, and allows for
quicker turn-around of engineering changes for shipment to the market. The
Company periodically assesses its production efficiencies against the benefits
of outsourcing certain hardware production. The Company has been ISO 9001
certified since 1994.
 
   The Company's fully integrated assembly and test operations have sufficient
capacity to meet the Company's needs for assembled printed circuit boards. In
addition, the Company designs circuit boards and modules using advanced
computer-aided-design technology. The Company's manufacturing capabilities
include the assembly of fine pitch, surface mounted electronic devices
utilizing state of the art pick and place robotics for high density, multi-
layered, single or double sided boards. A majority of the Company's shipments
incorporate surface-mount components. Initial testing is performed to assure
that products are free from process-related defects after assembly. Following
this, a complete functional test is performed twice on each board, with an
environmental stress screen between tests to eliminate defects and assure
long-term reliability of products. The Company uses automated test equipment
to assure product quality, improve throughput and increase production yields.
 
 
                                       5
<PAGE>
 
   Components used in circuit board assembly are generally available from
several distributors and manufacturers. Suppliers are selected based on their
ability to provide defect-free products quickly at low cost. The Company
continuously measures the performance of key suppliers. Special programs are
used to speed availability of material and protect the Company from unplanned
shifts in product demand. These programs include ship-to-stock, and point-of-
use bonding, a program where suppliers hold material on-site at the Company
and as the material is used, title transfers to the Company and payment is
made. Certain components used by the Company do not have ready substitutes or
have been subject to industry-wide shortages. There can be no assurance that
the Company's inventories would be adequate to meet the Company's production
needs during any interruption of supply. The Company's inability to develop
alternative supply sources, if required, or a reduction or stoppage in supply,
could adversely affect its operations until new sources of supply became
available.
 
Proprietary Rights
 
   The Company holds nine United States patents, expiring from March 2001
through March 2015, and has two pending patent applications in the United
States, none of which the Company believes is material. Pursuant to an
agreement with Parent, the Company also has full cross-licenses to technology
under Parent's current patents and patent applications, together with
technology resulting from patent applications which Parent applied for through
December 2, 1998.
 
   The Company believes that its success depends primarily upon the
proprietary know-how, innovative skills, technical competence and marketing
abilities of its employees.
 
Backlog
 
   Most customers order products on an as-needed basis, relying, in the case
of most products, on the Company's five-day delivery capability. As a result,
the Company believes that its backlog at any point in time is not indicative
of its future sales and is not material to operations.
 
Employees
 
   As of January 31, 1999, the Company employed approximately 85 persons
worldwide. None of the employees is represented by a labor union. The Company
believes it has good relations with its employees.
 
   Competition for employees with the skills required by the Company is
intense in the geographic areas in which the Company's operations are located.
The Company believes that its future success will depend on its continued
ability to attract and retain qualified employees, especially in research and
development.
 
                       Executive Officers of the Company
 
<TABLE>
<CAPTION>
          Name           Age                 Position with the Company
          ----           ---                 -------------------------
<S>                      <C> <C>
Alfred A. Molinari, Jr.. 57  Chairman and Chief Executive Officer
Jeffrey M. Cronin....... 34  Vice President--Operations
Kevin J. Sullivan....... 37  Vice President--Engineering--Data Acquisition and Imaging
Ellen W. Harpin......... 42  Director, Vice President, and Assistant Treasurer
</TABLE>
 
   Mr. Molinari has been the Chief Executive Officer and Chairman of the
Company since December 1996. Mr. Molinari is the founder of Parent and served
as the Chief Executive Officer and a director of Parent from its inception in
1973 until November 1996.
 
 
                                       6
<PAGE>
 
   Mr. Cronin was appointed Vice President-Operations in February 1999. Prior
to that he served as the Director of Manufacturing of Parent from March 1992
to December 1996 and as Director of Operations and Manufacturing of the
Company from December 1996 to February 1999.
 
   Mr. Sullivan was appointed Vice President of Engineering for Data
Acquisition and Imaging of the Company in November 1997. Prior to that he
served as Director of Engineering for Data Acquisiton and Imaging since
September 1996. Prior to joining the Company, Mr. Sullivan was employed by
Keithley Metrabyte as the Director of Engineering from April 1995 to September
1996. Prior to that he served as Manager of Design Engineering from August
1992 to April 1995.
 
   Ms. Harpin has been Vice President and a Director of the Company since
September 1996 and was appointed Assistant Treasurer in February 1999. Prior
to that she served as Vice President of Administration for Parent from July
1995 until November 1996. She also served as Chief Financial Officer for
Parent from November 1991 to July 1995. Ms. Harpin was employed by Parent from
March 1983 until November 1996 and during her tenure served as Vice President-
Finance and Administration, Treasurer, Vice President-Manufacturing and
Director of Sales.
 
Item 2. Properties
 
   The Company maintains its principal executive, engineering, manufacturing
and sales operations in a 100,000 square foot facility located in Marlboro,
Massachusetts. The building is leased from a related party trust under an
agreement expiring in 2009. The Company sublets a portion of the building to
certain tenants. The minimum annual net basic rent for the building is
approximately $1,092,000, which is allocated between the Company and its
tenants pursuant to certain sub-lease agreements.
 
   The Company's United Kingdom sales operations are conducted in an 1,000
square foot facility in Basingstoke, Hants, England, that is leased by the
Company under a quarterly net lease. The minimum quarterly basic rent is
approximately $11,000 per quarter.
 
   The Company's German sales operations are conducted in a 2,420 square foot
office facility in Bietigheim-Bissingen, Germany that is leased under a five-
year renewable lease, expiring in 2000, by Data Translation GmbH. The minimum
annual basic rent is approximately $40,000 per year.
 
Item 3. Legal Proceedings
 
   From time to time, the Company is involved in disputes and/or litigation
with respect to its products and operations in its normal course of business.
The Company does not believe that the ultimate impact of the resolution of
such matters will have a material adverse effect on the Company's financial
condition or results of operations.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
   There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal 1998.
 
                                       7
<PAGE>
 
                                    PART II
 
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
 
   The common stock of the Company is traded in the over-the-counter market
and is reported on the Nasdaq SmallCap Market System under the symbol: DATX.
The Company's stock began trading on December 16, 1996 subsequent to the stock
dividend issued in connection with the Distribution. The high and low sale
prices of the Company's Common Stock on the over-the-counter market since the
Distribution Date through January 31, 1999 as reported on the Nasdaq SmallCap
Market System were $4.75 and $.53, respectively. The table below sets forth
the high and low quarterly sales prices of the Common Stock during the two
most recent fiscal years:
 
<TABLE>
<CAPTION>
                                                      1998   1998   1997   1997
                                                      High   Low    High   Low
                                                     ------ ------ ------ ------
<S>                                                  <C>    <C>    <C>    <C>
First quarter....................................... $3.125 $1.500 $4.625 $3.375
Second quarter......................................  2.438  1.406  3.750  2.625
Third quarter.......................................  2.000  1.063  4.313  3.375
Fourth quarter......................................  2.125  0.531  4.719  3.000
</TABLE>
   The Company has never paid a cash dividend on its Common Stock, and the
Board of Directors does not anticipate paying cash dividends in the
foreseeable future. As of January 31, 1999, there were approximately 216
stockholders of record of the Company's common stock.
 
Item 6. Selected Financial Data
 
   The following data has been derived from the Company's consolidated
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants, as of and for the fiscal years in the five
year period ended November 30, 1998. The data should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the Consolidated Financial Statements and the notes thereto
and other financial information included elsewhere in this Form 10-K.
 
   For the period presented prior to the Distribution Date, the selected
historical financial data relates to the Contributed Businesses as they were
operated as part of Parent. They also include an allocation of certain general
corporate expenses of Parent which were not directly related to these
businesses. The financial information included herein for periods prior to the
Distribution Date may not, however, reflect the results of operations or
financial position that would have been obtained had the Company been a
separate, independent company. The consolidated financial data for all periods
subsequent to the Distribution Date reflect the results of operations,
financial position, changes in stockholders' equity and cash flows of the
independent company.
 
                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                      Fiscal Year Ended November 30,
                                  -------------------------------------------
                                   1998     1997     1996     1995     1994
                                  -------  -------  -------  -------  -------
                                      (In thousands, except per share
                                                 amounts)
<S>                               <C>      <C>      <C>      <C>      <C>
Consolidated Statements of
 Operations Data:
Net sales........................ $16,781  $20,452  $21,201  $21,826  $22,440
Cost of sales....................   8,070    9,932    8,181    8,187    9,355
                                  -------  -------  -------  -------  -------
  Gross profit...................   8,711   10,520   13,020   13,639   13,085
Research and development
 expenses........................   2,444    3,808    3,736    2,806    3,041
Selling and marketing expenses...   5,621   10,481    9,696    6,799    6,212
General and administrative
 expenses........................   2,001    2,426    2,032    1,627    1,924
                                  -------  -------  -------  -------  -------
  Income (loss) from operations..  (1,355)  (6,195)  (2,444)   2,407    1,908
Interest (expense) income, net...     149      269      560       (7)      (1)
Other income (expense)...........     (46)     (53)     (51)       2       63
                                  -------  -------  -------  -------  -------
  Income (loss) from continuing
   operations before provision
   (benefit) for income taxes....  (1,252)  (5,979)  (1,935)   2,402    1,970
Provision (benefit) for income
 taxes...........................     --       --      (658)     966      798
 
                                  -------  -------  -------  -------  -------
  Income (loss) from continuing
   operations....................  (1,252)  (5,979)  (1,277)   1,436    1,172
Discontinued operations(1).......     --       --    (3,555)      24      381
                                  -------  -------  -------  -------  -------
  Net income (loss).............. $(1,252) $(5,979) $(4,832) $ 1,460  $ 1,553
                                  =======  =======  =======  =======  =======
Basic and diluted net income
 (loss) from continuing
 operations per common and
 potential common share.......... $ (0.60) $ (2.94) $ (0.64)  $ 0.86
Basic and diluted net income
 (loss) from discontinued
 operations per common and
 potential common share..........     --       --     (1.78)    0.01
                                  -------  -------  -------  -------
Basic and diluted net income
 (loss) per common and potential
 common share.................... $ (0.60) $ (2.94) $ (2.42)  $ 0.87
                                  =======  =======  =======  =======
Basic and diluted weighted
 average number of common and
 potential common shares
 outstanding.....................   2,083    2,033    1,998    1,675
                                  =======  =======  =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                       November 30,
                                               --------------------------------
                                                1998   1997    1996       1996
                                               ------ ------- -------    ------
                                                                Pro
                                                              Forma(2)
                                                              -------
                                                      (In thousands)
<S>                                            <C>    <C>     <C>        <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $2,780 $ 3,922 $ 8,828    $    1
Working capital...............................  4,102   6,110  11,433     2,606
Total assets..................................  7,576  10,559  16,361     7,534
Total liabilities.............................  2,024   3,830   3,743     3,743
Total stockholders' investment................  5,552   6,729  12,618(3)  3,791
</TABLE>
--------
(1) Discontinued operations relates to the networking distribution business of
    Parent prior to the Distribution. On November 11, 1996, Parent sold a
    substantial portion of the assets of the networking distribution business,
    and the Company discontinued the remainder of such business during 1998.
(2) Adjusted to give effect to the deemed contribution by the Parent to the
    Company of $8,827,000 in cash and cash equivalents on December 2, 1996.
(3) Does not include any tax considerations pertaining to the Distribution.
 
                                       9
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
Forward Looking Statements
 
   Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). The words
"believe", "expect", "anticipate", "intend", "estimate", "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which are in some cases beyond the control of the Company and may cause the
actual results, performance or achievements of the Company to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements.
 
   Certain factors that might cause such differences include, but are not
limited to, the following: dependence on new products, impact of competitive
products, ability of the Company to meet its future operating and capital
requirements, ability to attract and retain qualified personnel and the
dependence on proprietary technology.
 
   For further discussion identifying important factors that could cause
actual results to differ materially from those anticipated in forward-looking
statements, see the Company's SEC filings, in particular, the Company's Form
10, "Special Factors" and "Business of the Company."
 
Background
 
   Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company")
was incorporated in September 1996 as a wholly-owned subsidiary of Media 100
Inc., f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). On November 11, 1996,
Parent sold a substantial portion of the assets of the networking distribution
business, and during 1998 the Company discontinued the remainder of such
business. The Company will continue to operate the data acquisition and
imaging and commercial products groups. On December 2, 1996 (the "Distribution
Date"), Parent distributed to its stockholders in the form of a dividend all
of the outstanding shares of capital stock of the Company (the
"Distribution").
 
   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations is based upon the financial statements of the
Company, which present the Company's results of operations, financial position
and cash flows. For the periods presented prior to the Distribution Date, the
historical financial statements include the assets, liabilities, income and
expenses that were directly related to the Contributed Businesses as they were
operated within Parent. In the case of assets and liabilities not specifically
allocable to any particular business of Parent, only those assets and
liabilities owned by the Company after the Distribution were included in the
Company's separate balance sheets. Regardless of the allocation of these
assets and liabilities, however, the Company's statement of operations
includes all of the related costs of doing business, including charges for the
use of facilities and for employee benefits, and includes an allocation of
certain general corporate expenses of Parent which were not directly related
to the Contributed Businesses, including costs for corporate logistics,
corporate research and development, information technologies, finance, legal
and corporate executives. These allocations were based on a number of factors
including, for example, personnel, space, time and effort, and sales volume.
Management believes these allocations as well as the assumptions underlying
the development of the Company's separate financial statements to be
reasonable. The consolidated financial statements for all periods subsequent
to the Distribution Date reflect the results of operations, financial
position, changes in stockholders' equity and cash flows of the independent
company.
 
   The financial information included herein for periods prior to the
Distribution Date may not, however, necessarily reflect the results of
operations, financial position and cash flows of the Company as it would have
been had the Company been a separate, stand-alone entity during these periods.
This is due, in part, to the historical operation of the Company as an
integral part of the larger Parent.
 
                                      10
<PAGE>
 
   Following the Distribution, the Company became a stand-alone entity with
objectives and strategies separate from those of Parent. The Company is
focused on providing products in the data acquisition, imaging and PC video
editing industries.
 
Discontinued Operations
 
   On July 30, 1996, Parent announced its strategic decision to discontinue
the operations comprising its networking business. The networking operations
were historically operated by TFS Wokingham, Limited, f/k/a Data Translation
Networking Limited ("Networking") which distributed, integrated and supported
enterprise-wide networking products manufactured by third party suppliers in
the United Kingdom. On November 11, 1996, Parent sold certain assets of the
networking distribution business, primarily inventories, equipment and its
ongoing business, for approximately $1.3 million. In fiscal 1996, Parent
recognized a gain of approximately $340,000 on this transaction. The Company
estimated a loss on the disposal of the remaining business assets and
settlement of liabilities of approximately $1,561,000 before applicable income
taxes, in fiscal 1996. Net sales from Networking were approximately
$16,522,000 for the year ended November 30, 1996. During 1998, the Company
completed winding-up the remainder of such business.
 
Results of Operations
 
   The following table shows certain statements of operations data as a
percentage of net sales.
 
<TABLE>
<CAPTION>
                                                         Fiscal Year Ended
                                                            November 30,
                                                       ---------------------
                                                       1998    1997    1996
                                                       -----   -----   -----
<S>                                                    <C>     <C>     <C>
Net sales............................................. 100.0%  100.0%  100.0%
Gross margin..........................................  51.9    51.4    61.4
Research and development expenses.....................  14.6    18.6    17.6
Selling and marketing expenses........................  33.5    51.2    45.7
General and administrative expenses...................  11.9    11.9     9.6
                                                       -----   -----   -----
Loss from operations..................................  (8.1)  (30.3)  (11.5)
Interest income (expense) and other, net..............   0.6     1.1     2.4
                                                       -----   -----   -----
Loss from continuing operations before benefit from
 income taxes.........................................  (7.5)  (29.2)   (9.1)
Benefit from income taxes.............................  (0.0)   (0.0)   (3.1)
                                                       -----   -----   -----
Loss from continuing operations.......................  (7.5)  (29.2)   (6.0)
Loss from discontinued operations.....................   0.0     0.0   (16.8)
                                                       -----   -----   -----
Net loss..............................................  (7.5)% (29.2)% (22.8)%
                                                       =====   =====   =====
</TABLE>
 
Comparison of Fiscal Year Ended November 30, 1998 to Fiscal Year Ended
November 30, 1997
 
   Net sales for the fiscal year ended November 30, 1998 were $16,781,000
compared to $20,452,000 for the same period in the prior year, which
represents a decrease of approximately 17.9% or $3,671,000. Sales from the
Company's data acquisition and imaging products decreased approximately
$2,860,000 or 16.6% from the prior fiscal year. Sales from these products were
adversely impacted by various market conditions including a continued shift in
the product markets toward new, lower priced hardware and software solutions
(particularly in PC prices), competitive pricing pressures and the decline of
the worldwide financial markets. Sales from the Company's commercial product,
Broadway, decreased approximately $811,000 or 24.9% from the comparable period
in fiscal 1997 primarily due to lower international sales.
 
                                      11
<PAGE>
 
   Gross margin for the period ended November 30, 1998 was 51.9% of net sales
compared to 51.4% of net sales for the same period in the prior year. The
slight increase in gross margin was primarily the result of lower overall
manufacturing overhead expenses, offset partially by lower overhead absorption
due to decreased production levels as well as lower average selling prices.
 
   Loss from operations for fiscal 1998 was $1,355,000 compared to a loss of
$6,195,000 for the same period in the prior year. A decrease in operating
expenses contributed to a reduction in the loss from operations. Operating
expenses for fiscal 1998 were $10,066,000 or 60.0% of net sales compared to
$16,715,000 or 81.7% of net sales in the prior year. Research and development
expenses were $2,444,000 or 14.6% of net sales compared to $3,808,000 or 18.6%
of net sales in fiscal 1997. Selling and marketing expenses were $5,621,000 or
33.5% of net sales compared to $10,481,000 or 51.2% of net sales in fiscal
1997. General and administrative expenses were $2,001,000 or 11.9% of net
sales compared to $2,426,000 or 11.9% of net sales in fiscal 1997. Prior year
operating expenses include a significant investment in product development,
advertising, promotion and sales channel development for the Company's
commercial 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 anticipates maintaining total
operating expenses, as a percentage of sales, at approximately this level.
 
   Interest income declined $120,000 (44.6%) from fiscal 1997 to fiscal 1998
primarily due to lower average cash balances available for investment.
 
   The Company incurred a net loss of $1,252,000 or $0.60 per share for the
fiscal year ended November 30, 1998 compared to $5,979,000 or $2.94 per share
in the prior fiscal year.
 
Comparison of Fiscal Year Ended November 30, 1997 to Fiscal Year Ended
November 30, 1996
 
   Net sales for the fiscal year ended November 30, 1997 were $20,452,000
compared to $21,201,000 for the same period in the prior year, which
represents a decrease of approximately 3.5% or $749,000. Sales from the
Company's data acquisition and imaging products decreased approximately 15.8%,
mostly due to lower unit sales of older mature products as well as lower
average selling prices. This decline was partially offset by sales from the
Company's Broadway products which were $3,251,000 in fiscal 1997 compared to
$774,000 in the prior year.
 
   Gross margin for the period ended November 30, 1997 was 51.4% of net sales
compared to 61.4% of net sales for the same period in the prior year. The
decrease in gross margin was primarily the result of lower average selling
prices in the data acquisition and imaging product lines, under-utilization of
the Company's manufacturing capacity, as well as an increase in sales from the
Broadway products which carry a lower margin than the data acquisition and
imaging products.
 
   Loss from operations for fiscal 1997 was $6,195,000 compared to a loss of
$2,444,000 for the same period in the prior year. The increased loss was
primarily due to the lower gross margin as described above, as well as an
increase in operating expenses over the prior year of $1,251,000. Operating
expenses include the impact of a workforce reduction and a charge for the
potential impairment of prepaid royalties of approximately $150,000 and
$196,000, respectively, which were taken in the fourth quarter of fiscal 1997.
Research and development expenses were $3,808,000 or 18.6% of net sales
compared to $3,736,000 or 17.6% of net sales in fiscal 1996. The increase in
research and development expenses was directly attributable to the write-off
of prepaid royalties which were advanced as consideration for the rights and
license of certain future products. Selling and marketing expenses were
$10,481,000 or 51.2% of net sales compared to $9,696,000 or 45.7% of net sales
in fiscal 1996. The increase in selling and marketing expenses was due largely
to the marketing, promotion, and sales channel development for the Company's
Broadway products. General and administrative expenses were $2,426,000 or
11.9% of net sales compared to $2,032,000 or 9.6% of net sales in fiscal 1996.
Fiscal 1997's general and administrative expenses are reflective of the
Company operating on a stand-alone basis compared to allocated expenses in
fiscal 1996.
 
                                      12
<PAGE>
 
   Any potential tax benefits due to operating losses in the fiscal year ended
November 30, 1997 have not been recognized and any potential deferred tax
asset has been fully reserved as disclosed in the Notes to the Consolidated
Financial Statements. The prior year's comparable period includes a tax
benefit of $658,000 on a stand-alone, pro-forma basis. Prior to the
Distribution Date, the Company filed its tax return as part of a consolidated
group with Parent. The offsetting charge for the tax benefit has been included
as an element of Parent's net investment in the Company as reflected in the
accompanying consolidated statements of stockholders' investment. This benefit
for income taxes may not necessarily reflect the consolidated results of
operations of the Company had it been a separate, stand-alone entity during
the periods prior to the Distribution Date.
 
   Loss from continuing operations was $5,979,000 for the fiscal year ended
November 30, 1997, compared to a loss from continuing operations of $1,277,000
in the prior fiscal year.
 
   The Company incurred a net loss of $5,979,000 or $2.94 per share for the
fiscal year ended November 30, 1997 compared to $4,832,000 or $2.42 per share
in the prior fiscal year. These results include a loss on discontinued
operations of $3,555,000 or $1.78 per share for the fiscal year ended November
30, 1996. See "Discontinued Operations."
 
Liquidity and Capital Resources
 
   During fiscal 1998, net cash used in operations was $761,000, which
resulted primarily from a net loss of $1,252,000 and the settlement of net
liabilities from discontinued operations of $1,424,000, offset by $1,049,000
of depreciation and amortization expense and a decrease in accounts receivable
of $991,000. The Company also decreased its purchases of property and
equipment from the prior year by $181,000. In fiscal 1997, as noted in Item 6,
"Selected Financial Data," the Company received a contribution from Parent of
$8,827,000. 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.
 
   In December 1997, in connection with the winding-up of 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 the Company is a guarantor, on a secured basis. During fiscal 1998, the
Company paid approximately $1,228,000 to BankBoston, N.A. under Networking's
credit facility. At November 30, 1998 approximately $28,000 was outstanding
and is included in accrued expenses. The Company expects that, during the
second quarter of fiscal 1999, all amounts outstanding to BankBoston, N.A.
under Networking's credit facility will be paid from available cash.
 
Year 2000 Compliance Disclosure
 
Year 2000 Definition
 
   The Year 2000 problem refers to computer programs that were written using
two digits rather than four to define the applicable year, and the resulting
inability of software to process date information later than December 31,
1999. 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 does not carry out any date
manipulation and thus, by its very nature, is Year 2000 compliant. Similarly,
the Company's software products are Year 2000 compliant because they do not
have user interface for the input of date data. This compliance, however,
depends on whether the underlying operating system and other products used
with the Company's products are Year 2000 compliant. The Company has solicited
the status of Year 2000 compliance with respect to all of its third party
product offerings.
 
                                      13
<PAGE>
 
The Company's Internal Systems; State of Readiness and Costs to Remedy
 
   The Company has conducted an assessment of its computer information systems
and has implemented a Year 2000 Plan to modify, upgrade or replace some of its
internal financial and operational systems. The Company has 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 95% complete with the implementation process and has incurred
approximately 90% of the total estimated cost. The Company has funded its Year
2000 Plan from operating cash flows. 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.
 
Third Party Relationships
 
   The Company also intends to determine the extent to which it may be
vulnerable to any failures by its major suppliers, distributors and service
providers, as well as any third parties related to the Company's two foreign
sales offices, to remedy their own Year 2000 problems. The Company 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 problems. 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 adverse 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.
 
Year 2000 Risks; Contingency Plan
 
   While the Company anticipates that its Year 2000 risks will be remedied
before the Year 2000, no assurance can be given that the Company's or its
material third parties' Year 2000 conversion will be completed by such time.
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 problem could have a material adverse impact on the
Company's business, financial condition or results of operations. Management
has assessed the most reasonably likely worst case scenario. Given its efforts
to minimize the risk of Year 2000 failures, the Company believes the worst
case scenario would occur if the Company were unable to process and fulfill
customer orders because of the Year 2000 problem. The Company has initiated
the development of a comprehensive contingency plan in the event that its Year
2000 conversion is not successfully completed. The Company anticipates the
contingency plan to be completed during the third quarter of fiscal 1999.
 
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.
 
   The preceding "Year 2000 Compliance Disclosure" contains various forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Compliance Disclosure,"
the words "believes," "expects," "estimates" and similar
 
                                      14
<PAGE>
 
expressions are intended to identify forward-looking statements. Forward-
looking statements include, without limitation, the Company's expectations as
to when it will complete the installation and testing of its internal systems;
its estimated cost of achieving Year 2000 readiness; and the Company's belief
that its internal systems will be Year 2000 compliant in a timely manner. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected
results.
 
   Factors that may cause these differences include, but are not limited to,
the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of third parties with respect to Year 2000
problems.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
   Not applicable.
 
                                      15
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of November 30, 1998 and 1997............. F-3
Consolidated Statements of Operations for the Years Ended November 30,
 1998, 1997, and 1996.................................................... F-4
Consolidated Statements of Stockholders' Investment for the Years ended
 November 30, 1998, 1997, and 1996....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended November 30,
 1998, 1997, and 1996.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
 
                                      F-1
<PAGE>
 
Item 8. Financial Statements and Supplementary Data
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Data Translation, Inc.:
 
   We have audited the accompanying consolidated balance sheets of Data
Translation, Inc. (a Delaware corporation) and subsidiaries as of November 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended November 30, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Data Translation, Inc. and
subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1998, in conformity with generally accepted accounting
principles.
 
                                          Arthur Andersen LLP
 
Boston, Massachusetts
January 5, 1999
 
                                      F-2
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                      November 30, November 30,
                                                          1998         1997
                                                      ------------ ------------
<S>                                                   <C>          <C>
Current Assets:
  Cash and cash equivalents..........................  $2,780,000  $ 3,922,000
  Accounts receivable, net of reserves of $397,000
   and $389,000 in 1998 and 1997, respectively.......   1,763,000    2,754,000
  Inventories........................................   1,202,000    1,407,000
  Prepaid expenses...................................     378,000      430,000
                                                       ----------  -----------
    Total current assets.............................   6,123,000    8,513,000
Property and equipment, net..........................   1,328,000    1,851,000
Other assets, net....................................     125,000      195,000
                                                       ----------  -----------
    Total Assets.....................................  $7,576,000  $10,559,000
                                                       ==========  ===========
Current Liabilities:
  Accounts payable...................................  $  256,000  $   174,000
  Due to related party...............................         --       546,000
  Accrued expenses...................................   1,765,000    1,683,000
                                                       ----------  -----------
    Total current liabilities........................   2,021,000    2,403,000
Net liabilities of discontinued operations...........         --     1,424,000
Deferred income taxes................................       3,000        3,000
Commitments and Contingencies (Note 7)

Stockholders' Investment:
  Preferred stock, $.01 par value--Authorized:
   5,000,000 shares, none issued and outstanding.....         --           --
  Common stock, $.01 par value--Authorized:
   30,000,000 shares, 2,096,920 and 2,048,765 shares
   issued and outstanding at November 30, 1998 and
   1997, respectively................................      21,000       20,000
  Additional paid-in capital.........................  12,764,000   12,691,000
  Accumulated deficit................................  (7,231,000)  (5,979,000)
  Cumulative translation adjustment..................      (2,000)      (3,000)
                                                       ----------  -----------
    Total stockholders' investment...................   5,552,000    6,729,000
                                                       ----------  -----------
    Total Liabilities and Stockholders' Investment...  $7,576,000  $10,559,000
                                                       ==========  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                           Fiscal Years Ended November 30,
                                         -------------------------------------
                                            1998         1997         1996
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Net sales............................... $16,781,000  $20,452,000  $21,201,000
Cost of sales...........................   8,070,000    9,932,000    8,181,000
                                         -----------  -----------  -----------
    Gross profit........................   8,711,000   10,520,000   13,020,000
Research and development expenses.......   2,444,000    3,808,000    3,736,000
Selling and marketing expenses..........   5,621,000   10,481,000    9,696,000
General and administrative expenses.....   2,001,000    2,426,000    2,032,000
                                         -----------  -----------  -----------
    Loss from operations................  (1,355,000)  (6,195,000)  (2,444,000)
Interest income.........................     149,000      269,000      560,000
Other expense...........................     (46,000)     (53,000)     (51,000)
                                         -----------  -----------  -----------
    Loss from continuing operations
     before tax benefit.................  (1,252,000)  (5,979,000)  (1,935,000)
Benefit from income taxes...............         --           --      (658,000)
                                         -----------  -----------  -----------
    Loss from continuing operations.....  (1,252,000)  (5,979,000)  (1,277,000)
Discontinued operations (Note 3):
  Loss from discontinued operations of
   TFS Wokingham, Limited (less
   applicable benefit from income taxes
   of $10,000 in 1996)..................         --           --    (3,555,000)
                                         -----------  -----------  -----------
    Net loss............................ $(1,252,000) $(5,979,000) $(4,832,000)
                                         ===========  ===========  ===========
Basic and diluted net loss from
 continuing operations per common and
 potential common share................. $     (0.60) $     (2.94) $     (0.64)
Basic and diluted net loss from
 discontinued operations per common and
 potential common share.................         --           --         (1.78)
                                         -----------  -----------  -----------
Basic and diluted net loss per common
 and potential common share............. $     (0.60) $     (2.94) $     (2.42)
                                         ===========  ===========  ===========
Basic and diluted weighted average
 number of common and potential common
 shares outstanding.....................   2,083,000    2,033,000    1,998,000
                                         ===========  ===========  ===========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
 
<TABLE>
<CAPTION>
                                              Common Stock
                                           ------------------ Additional               Cumulative      Total
                              Investment   Number of $.01 Par   Paid-in   Accumulated  Translation Stockholders'
                               by Parent    Shares    Value     Capital     Deficit    Adjustment   Investment
                              -----------  --------- -------- ----------- -----------  ----------- -------------
<S>                           <C>          <C>       <C>      <C>         <C>          <C>         <C>
Balance, November 30, 1995..  $ 6,102,000        --  $   --   $       --  $       --    $168,000    $6,270,000
 Net activity with Parent...    1,894,000        --      --           --          --         --      1,864,000
 Impact of income taxes.....      658,000        --      --           --          --         --        658,000
 Translation adjustment.....          --         --      --           --          --    (199,000)     (199,000)
 Net loss...................   (4,832,000)       --      --           --          --         --     (4,832,000)
                              -----------  --------- -------  ----------- -----------   --------    ----------
Balance, November 30, 1996..    3,822,000        --      --           --          --     (31,000)    3,791,000
 Contribution from Parent...    8,827,000        --      --           --          --         --      8,827,000
 Dividend distribution of
  Investment by Parent......  (12,649,000) 2,022,021  20,000   12,629,000         --         --            --
 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..          --      48,155   1,000       73,000         --         --         74,000
 Translation adjustment.....          --         --      --           --          --       1,000         1,000
 Net loss...................          --         --      --           --   (1,252,000)       --     (1,252,000)
                              -----------  --------- -------  ----------- -----------   --------    ----------
Balance, November 30, 1998..  $       --   2,096,920 $21,000  $12,764,000 $(7,231,000)  $ (2,000)   $5,552,000
                              ===========  ========= =======  =========== ===========   ========    ==========
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-5
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                            Fiscal Years Ended November 30,
                                          -------------------------------------
                                             1998         1997         1996
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
Cash Flows from Operating Activities:
  Net loss..............................  $(1,252,000) $(5,979,000) $(4,832,000)
  Adjustments to reconcile net loss to
   net cash used in operating
   activities:
    Depreciation and amortization.......    1,049,000    1,214,000      844,000
    Loss on disposal of equipment.......          --         7,000          --
    Deferred income taxes...............          --           --         3,000
    Changes in current assets and
     liabilities:
      Accounts receivable...............      991,000      (13,000)     512,000
      Inventories.......................      205,000       83,000     (404,000)
      Prepaid expenses..................       52,000      260,000     (307,000)
      Net assets (liabilities) of
       discontinued operations..........   (1,424,000)         --     3,656,000
      Accounts payable..................       82,000     (203,000)    (339,000)
      Due to related party..............     (546,000)     546,000          --
      Accrued expenses..................       82,000     (256,000)    (373,000)
                                          -----------  -----------  -----------
        Net cash used in operating
         activities.....................     (761,000)  (4,341,000)  (1,240,000)
                                          -----------  -----------  -----------
Cash Flows from Investing Activities:
  Purchases of property and equipment...     (407,000)    (588,000)    (861,000)
  Increase in other assets..............      (50,000)     (70,000)    (212,000)
                                          -----------  -----------  -----------
        Net cash used in investing
         activities.....................     (457,000)    (658,000)  (1,073,000)
                                          -----------  -----------  -----------
Cash Flows from Financing Activities:
  Contribution from Parent..............          --     8,827,000          --
  Proceeds from stock plans.............       74,000       62,000          --
  Net borrowings from bank..............          --           --       (39,000)
  Impact of income taxes................          --           --       658,000
  Decrease in investment by Parent......          --           --     1,894,000
                                                                -
                                          -----------  -----------  -----------
        Net cash provided by financing
         activities.....................       74,000    8,889,000    2,513,000
Exchange Rate Effects...................        2,000       31,000     (199,000)
                                          -----------  -----------  -----------
Net increase (decrease) in cash and cash
 equivalents............................   (1,142,000)   3,921,000        1,000
Cash and cash equivalents, beginning of
 period.................................    3,922,000        1,000          --
 
                                          -----------  -----------  -----------
Cash and cash equivalents, end of
 period.................................  $ 2,780,000  $ 3,922,000  $     1,000
                                          ===========  ===========  ===========
Supplemental Disclosure of Cash Flow
 Information:
  Cash paid for income taxes............  $       --   $       --   $       --
                                          ===========  ===========  ===========
  Cash paid for interest................  $       --   $       --   $       --
                                          ===========  ===========  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Background and Basis of Presentation
 
 (a) Background
 
   Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company")
was incorporated in September 1996 as a wholly-owned subsidiary of Media 100
Inc., f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). On November 11, 1996,
Parent sold a substantial portion of the assets of the networking distribution
business, and the Company completed the winding-up of the remainder of such
business during 1998. On December 2, 1996 (the "Distribution Date"), Parent
distributed to its stockholders in the form of a dividend all of the
outstanding shares of capital stock of the Company (the "Distribution"). The
Company continues to operate the data acquisition and imaging and commercial
products groups.
 
   Based on the law in effect at the time and certain facts beyond the control
of the Company and Parent assumed to be true at the time of the Distribution,
Parent believes that the Distribution may have qualified as a tax-free
distribution under Section 355 of the Internal Revenue Code (the "Code").
However, there is a significant risk that the Distribution may not have
qualified as a tax-free distribution. Parent did not request and does not
intend to request a letter ruling from the Internal Revenue Service (the
"IRS") nor did Parent receive an opinion of counsel on the tax treatment of
the Distribution. Further, the tax treatment of the Distribution is not
entirely clear. The Distribution may not have satisfied the IRS' published
guidelines for issuing advance letter rulings on the tax-free treatment of
spin-off transactions. The Distribution was not conditioned on either the
receipt of a letter ruling from the IRS or an opinion of counsel that the
Distribution qualified as a tax-free distribution. If the Distribution were to
fail to qualify for such tax-free treatment, the Distribution may be taxable
to Parent and would be taxable to its stockholders receiving Common Stock of
the Company pursuant thereto.
 
   The Company designs, develops and manufactures high performance data
acquisition and imaging products for use with personal computers. The
Company's principal products are digital signal processing boards and software
which receive analog signals, convert them to digital form and process the
digital data.
 
 (b) Basis of Presentation
 
   For fiscal year ended November 30, 1996, the consolidated financial
statements reflect the results of operations, changes in stockholders'
investment and cash flows of the businesses that were transferred to the
Company from Parent in the Distribution as if the Company were a separate
entity prior to the Distribution Date. These consolidated financial statements
have been prepared using the historical basis in assets and liabilities and
historical results of operations related to the Contributed Businesses.
Changes in stockholders' investment represent Parent's contribution of its net
investment after giving effect to the net loss of the Company plus net cash
transfers to or from Parent. The Company began accumulating its retained
earnings on the date of the Distribution. The consolidated financial
statements for all periods subsequent to the Distribution Date reflect the
results of operations, changes in stockholders' investment and cash flows of
the autonomous company.
 
   Additionally, the consolidated financial statements for periods presented
prior to the Distribution Date include allocations of certain Parent corporate
assets, liabilities and expenses relating to the Contributed Businesses that
were transferred to the Company from Parent. Management believes these
allocations are reasonable. All material intercompany transactions and
balances between the Contributed Businesses have been eliminated.
 
   General corporate overhead related to corporate headquarters and common
support divisions were allocated by the Company based on a number of factors
including, for example, personnel, space, time and effort, and sales volume.
Management believes these allocations are reasonable. However, the costs of
these services charged to the Company are not necessarily indicative of the
costs that would have been incurred if the Company
 
                                      F-7
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
had performed these functions as a stand-alone entity. Subsequent to the
Distribution and through November 1997, the Company allocated costs associated
with certain shared services to Parent as disclosed in the Corporate Services
and Use and Occupancy Agreements (see Note 7(a)). Additionally, income taxes
were calculated on a separate tax return basis (see Notes 2(i) and 8).
 
   The financial information included herein may not necessarily reflect what
the consolidated results of operations, financial position, changes in
stockholder's investment and cash flows of the Company would have been had it
been a separate, stand-alone entity during the periods presented prior to the
fiscal year ended November 30, 1997.
 
2. Summary of Significant Accounting Policies
 
 (a) Principles of Consolidation
 
   The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
 
 (b) Cash and 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, U.S. Treasury bills and repurchase agreements with
overnight maturities.
 
 (c) Inventories
 
   Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market and consist of the following:
 
<TABLE>
<CAPTION>
                                                               November 30,
                                                           ---------------------
                                                              1998       1997
                                                           ---------- ----------
      <S>                                                  <C>        <C>
      Raw materials....................................... $  817,000 $  830,000
      Work-in-process.....................................     54,000     10,000
      Finished goods......................................    331,000    567,000
                                                           ---------- ----------
                                                           $1,202,000 $1,407,000
                                                           ========== ==========
</TABLE>
 
   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 plan and reduces the
carrying cost of inventory items to the lower of cost or market (with market
value generally defined as the lower of replacement cost or net realizable
value).
 
 (d) Depreciation and Amortization
 
   The Company provides for depreciation and amortization, using the straight-
line method, by charges to operations in amounts that allocate the cost of the
equipment and leasehold improvements over the following estimated useful
lives:
 
<TABLE>
<CAPTION>
                               Description                          Useful Lives
                               -----------                          ------------
      <S>                                                           <C>
      Machinery and equipment...................................... 3 to 7 years
      Furniture and fixtures.......................................   7 years
      Vehicles.....................................................   3 years
</TABLE>
 
   Leasehold improvements are amortized over the shorter of their economic
life or the life of the lease.
 
                                      F-8
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 (e) Property and Equipment
 
   Property and equipment are stated at cost, less accumulated depreciation
and amortization, and consist of the following:
 
<TABLE>
<CAPTION>
                                                            November 30,
                                                       -----------------------
                                                          1998        1997
                                                       ----------- -----------
      <S>                                              <C>         <C>
      Machinery and equipment......................... $14,930,000 $14,840,000
      Furniture and fixtures..........................   2,136,000   2,136,000
      Vehicles........................................     103,000     103,000
      Leasehold improvements..........................   2,497,000   2,177,000
                                                       ----------- -----------
                                                        19,666,000  19,256,000
      Less--Accumulated depreciation and
       amortization...................................  18,338,000  17,405,000
                                                       ----------- -----------
                                                       $ 1,328,000 $ 1,851,000
                                                       =========== ===========
</TABLE>
 
 (f) Foreign Currency
 
   The Company translates the assets and liabilities of its foreign
subsidiaries at the rates of exchange in effect at year-end. Revenues and
expenses are translated using exchange rates in effect during the year. Gains
and losses from foreign currency translation are credited or charged to
"Cumulative translation adjustment" included in stockholders' investment in
the accompanying consolidated balance sheets. Foreign currency transaction
gains and losses are included in "Other expense" in the accompanying
consolidated statements of operations. Foreign currency transaction gains and
losses were not significant for the years ended November 30, 1998, 1997 or
1996.
 
 (g) Revenue Recognition
 
   The Company recognizes revenue when products are shipped. Costs of service
and warranty are not significant and are charged to operations as incurred.
Revenues from hardware systems with other than incidental software components
and stand-alone software sales are recognized upon shipment, provided that no
significant vendor or postcontract support obligations remain outstanding and
collection of the resulting receivable is deemed to be probable.
 
                                      F-9
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 (h) Research and Development Costs
 
   The Company charges research and development costs to operations as
incurred. However, in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company
capitalizes certain computer software development costs upon establishing
technological feasibility. Capitalized costs, net of accumulated amortization,
were approximately $121,000 and $191,000 as of November 30, 1998 and 1997,
respectively, and are included in other assets. These costs are amortized on a
straight-line basis over the lesser of two years or the economic life of the
product. Amortization expense, included in cost of sales in the accompanying
consolidated statements of operations, was $120,000, $135,000 and $85,000 in
1998, 1997 and 1996, respectively.
 
 (i) Income Taxes
 
   The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby a deferred tax asset or liability is
recognized for the expected future tax consequences of temporary differences
between the financial statement and the tax bases of the assets and
liabilities.
 
   For all periods prior to the Distribution Date, the Company's results of
operations have been included in the consolidated income tax returns filed by
Parent. Accordingly, the benefit for income taxes in the Company's
consolidated financial statements for fiscal 1996 has been calculated on
separate tax return basis.
 
 (j) Concentration of Credit Risk
 
   SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. Financial instruments that subject the Company
to credit risk consist primarily of trade accounts receivable. As of November
30, 1998 no customers accounted for greater than 10% of accounts receivable.
 
 (k) Disclosure About Fair Value of Financial Instruments
 
   SFAS No. 107, Disclosure About Fair Market Value of Financial Instruments,
requires disclosure of estimated fair values for certain financial
instruments. The Company's financial instruments include accounts receivable
and accounts payable. The carrying amounts of these financial instruments
approximate their fair value.
 
 (l) Stock-Based Compensation
 
   The Company accounts for its stock-based compensation under Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, Accounting for Stock-Based Compensation, which is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 establishes a
fair-value-based method of accounting for stock-based compensation plans. The
Company has adopted the disclosure-only alternative under SFAS No. 123, which
requires the disclosure of the pro forma effects on earnings and earnings per
share as if the accounting prescribed by SFAS No. 123 had been adopted, as
well as certain other information. (See Note 5).
 
                                     F-10
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 (m) New Accounting Standards
 
   In June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
 
   In July 1997 the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Unless impracticable,
companies would be required to disclose similar prior period information upon
adoption. Accordingly, the Company will adopt this standard for its fiscal
year ending November 30, 1999.
 
   In March 1998 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires computer
software costs associated with internal use software to be charged to
operations as incurred until certain capitalization criteria are met. SOP 98-1
is effective beginning January 1, 1999. The Company does not expect adoption
of this statement to have a material effect on its consolidated financial
position or results of operations.
 
   In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for fiscal
years beginning after December 15, 1999. The Company does not expect adoption
of this statement to have a material impact on its consolidated financial
position or results of operations.
 
 (n) Use of Estimates
 
   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.
 
3. Discontinued Operations
 
   On July 30, 1996, Parent announced its strategic decision to discontinue
the operations comprising its networking business. The networking operations
were historically operated by TFS Wokingham, Limited, f/k/a Data Translation
Networking Limited ("Networking") which distributed, integrated and supported
enterprise-wide networking products manufactured by third party suppliers in
the United Kingdom. On November 11, 1996, the Parent sold certain assets of
the networking distribution business, primarily inventories, equipment and its
ongoing business, for approximately $1.3 million. In fiscal 1996, Parent
recognized a gain of approximately $340,000 on this transaction. During 1998,
the Company completed winding-up the remainder of such business.
 
   The Company estimated a loss on the disposal of the remaining business
assets and extinguishment of liabilities of approximately $1,561,000 before
applicable income taxes, in fiscal 1996.
 
   Sales from Networking were approximately $16,522,000 for the year ended
November 30, 1996.
 
                                     F-11
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The components of net liabilities of discontinued operations included in
the accompanying consolidated balance sheets at November 30, 1998 and 1997
follow:
 
<TABLE>
<CAPTION>
                                                              November 30,
                                                           -------------------
                                                            1998      1997
                                                           ------- -----------
      <S>                                                  <C>     <C>
      Accounts receivable, net............................ $   --  $   123,000
      Borrowings from a bank..............................     --     (963,000)
      Accrued expenses....................................     --     (584,000)
                                                           ------- -----------
                                                           $   --  $(1,424,000)
                                                           ======= ===========
</TABLE>
 
4. Net Loss Per Common Share
 
   Prior to the Distribution, the Company had 100 shares of Common Stock
outstanding, all of which were owned by Parent. Effective with the
Distribution discussed in Note 1(a), the stockholders of Parent received one
share of the common stock of the Company for each four shares of common stock
held of Parent.
 
   In March 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
The Company has applied SFAS No. 128 beginning in the year ended November 30,
1998. Earnings per share information for the years ended November 30, 1996 and
1997 has been restated to reflect the adoption of SFAS No. 128.
 
   Basic and diluted net loss per common share was computed by dividing net
loss by the weighted average number of common shares outstanding during the
year. Diluted weighted average shares outstanding for all periods presented
exclude the potential common shares from stock options, because to include
such shares would have been antidilutive. As of November 30, 1998, 1997 and
1996, 394,730, 375,254, and 358,180 potential common shares were outstanding,
respectively.
 
5. Stockholders' Investment
 
 (a) Stock Option Plans
 
 Parent Stock Option Plans
 
   Prior to the Distribution, key employees of the Company were eligible to
receive stock options under the Parent's 1992 Key Employee Incentive Plan and
its 1982 Key Employee Incentive Plan (the "Parent Plans"). Information with
respect to Parent Options held only by Transferred Employees, as defined
below, without adjustment for Replacement Options for the year ended November
30, 1996 follows:
 
<TABLE>
<CAPTION>
                                           Number of Option Price    Weighted
                                            Options      Range     Average Price
                                           --------- ------------- -------------
<S>                                        <C>       <C>           <C>
Outstanding at November 30, 1995..........  292,840  $1.38 - 16.88    $ 8.66
  Granted.................................  131,500   8.13 - 16.25     16.16
  Exercised...............................  (65,960)  1.38 - 11.00      3.39
  Expired/canceled........................     (200)          1.50      1.50
                                            -------  -------------    ------
Outstanding at November 30, 1996..........  358,180  $1.81 - 16.88    $12.39
                                            =======  =============    ======
</TABLE>
 
                                     F-12
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Replacement Stock Option Plan
 
   Effective December 2, 1996, the Company's Board of Directors adopted the
Company's Replacement Stock Option Plan (the "Replacement Plan"). The
Replacement Plan provided for the issuance of options to purchase shares of
the Company's common stock (the "Replacement Options") to holders of options
to purchase shares of Parent Stock that were granted under Parent Plans and
which were outstanding on the Distribution Date (the "Parent Options") as part
of an adjustment to the Parent Options. The Company has authorized the
issuance of up to 275,000 shares of the Company's common stock under the
Replacement Plan, of which options for 264,794 shares of common stock were
granted as of November 30, 1998. No additional options may be granted under
the Replacement Plan.
 
   The number of Replacement Options granted equals the number of Parent
options divided by four and rounded down to the nearest whole share. The
exercise price of Replacement Options equals the exercise price of Parent
options multiplied by .285714 and rounded up to the nearest full cent.
 
   It is intended that Replacement Options issued to employees of the Company
("Transferred Employees") in respect of Parent Options that qualify as
Incentive Options shall continue to qualify as Incentive Options pursuant to
Section 424(a) of the Code. Replacement Options that do not qualify as
Incentive Options will be Non-Qualified Options.
 
 1996 Plan
 
   Effective with the Distribution, the Company adopted the 1996 Stock Option
Plan (the "1996 Plan") for its key employees, directors, and others, which
permits the grant of stock options as approved by the Company's Board of
Directors. Under the 1996 Plan, 500,000 shares of common stock have been
reserved for issuance. Options granted pursuant to the 1996 Plan may, at the
discretion of the Board, be incentive stock options as defined by the Internal
Revenue Code. Subject to the provisions of the 1996 Plan, options granted are
at a price as specified by the Board. The Board will determine when the
options will vest and expire, but in no event will the option period exceed
ten years. As of November 30, 1998, 346,604 shares of common stock were
available for future issuance under the 1996 Plan.
 
   The stock option activity under the Replacement Plan and the 1996 Plan for
the two years ended November 30, 1998 follows:
 
<TABLE>
<CAPTION>
                                              Number of  Exercise Price Weighted
                                               Options       Range      Average
                                              ---------  -------------- --------
<S>                                           <C>        <C>            <C>
Outstanding, November 30, 1996...............      --    $         --    $ --
  Granted under the Replacement Plan.........  264,794   $0.52 - $5.08   $3.08
  Granted under the 1996 Plan................  167,125   $3.00 - $4.00   $3.26
  Exercised..................................  (13,035)  $0.52 - $3.15   $1.63
  Expired/canceled...........................  (43,035)  $0.52 - $5.08   $3.09
                                              --------   -------------   -----
Outstanding, November 30, 1997...............  375,254   $0.52 - $5.08   $3.21
  Granted under the 1996 Plan................  137,200   $1.31 - $2.41   $2.11
  Exercised..................................   (9,830)  $0.81 - $3.00   $0.82
  Expired/canceled........................... (107,894)  $0.52 - $5.08   $2.69
                                              --------   -------------   -----
Outstanding, November 30, 1998...............  394,730   $0.61 - $5.08   $3.03
                                              ========   =============   =====
Exercisable, November 30, 1998...............   76,263   $1.29 - $4.65   $3.32
                                              ========   =============   =====
</TABLE>
 
                                     F-13
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 (b) Employee Stock Purchase Plan
 
   Effective with the Distribution, the Company established an Employee Stock
Purchase Plan (the "ESPP") which permits the eligible employees of the Company
and its subsidiaries to purchase shares of the Company's common stock, at 85%
of the lower of the Company's closing market price on the first day or last
day of the applicable six-month period. Employees may participate in the ESPP
through regular monthly payroll deductions of up to 10% of their pre-tax gross
salary. Subject to adjustment for stock splits, stock dividends and similar
events, a maximum of 150,000 shares of common stock may be issued under the
ESPP. Through November 30, 1998, 52,034 shares of common stock have been
purchased under the ESPP.
 
 (c) Stock-Based Compensation
 
   The Company has computed the pro forma disclosure required under SFAS No.
123 for all stock compensation plan grants during the years ended November 30,
1998, 1997 and 1996 using the Black-Scholes option pricing model prescribed by
SFAS No. 123. Furthermore, the pro forma compensation amount for stock grants
in fiscal 1996 has been determined based on an allocation of the total pro
forma computation computed by Parent with respect to grants under the Parent
Plans, as described above. The allocation was determined based on a weighted
average compensation amount per option granted to Transferred Employees. The
assumptions used in 1998, 1997 and 1996 are as follows: dividend yield of 0%
for all years; expected volatility of 95.0%, 91.5% and 77.3%, risk-free
interest rates of 5.52% - 5.86%, 6.33% - 6.76%, and 6.30% - 6.60%; and
expected lives of 6, 4 and 6 years, respectively. The weighted average grant
date fair value of options granted during 1998, 1997 and 1996 was $1.87, $2.07
and $10.62, respectively. The weighted average remaining contractual life of
outstanding options at November 30, 1998 was 4.8 years.
 
   Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts for the years ended November 30,
1998, 1997 and 1996, as follows:
 
<TABLE>
<CAPTION>
                                           1998         1997         1996
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Net loss, as reported.................. $(1,252,000) $(5,979,000) $(4,832,000)
Pro forma net loss, as adjusted........  (1,411,000)  (6,083,000)  (4,868,000)
Basic and diluted net loss per common
 and
 potential common shares outstanding:
  As reported.......................... $     (0.60) $     (2.94) $     (2.42)
  Pro forma............................       (0.68)       (2.99)       (2.43)
</TABLE>
 
   The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years, as the pro forma expense may vary
based on the number of options granted. The Black-Scholes option pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions, including
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
 
6. Retirement Plan
 
   The majority of the Company's employees were eligible to participate in
Parent's employee savings plan (the "Savings Plan") in compliance with Section
401(k) of the Internal Revenue Code. Following the Distribution, the Company
established a plan similar to the Savings Plan. The Savings Plan provides for
annual Company contributions of up to 15% of the first 6% of total salary per
participant. These contributions vest immediately. Contributions to the
Savings Plan charged to operations with respect to Company's employees were
$56,000, $61,000 and $43,000 in 1998, 1997 and 1996, respectively.
 
                                     F-14
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employer's Accounting for Postretirement Benefits
Other Than Pensions.
 
7. Commitments and Contingencies
 
 (a) Intercompany Agreements
 
 (i) Distribution Agreement
 
   The Distribution Agreement provided for indemnification of Parent by the
Company in a manner designed to place financial responsibility with the
Company for specified liabilities arising out of the Contributed Businesses,
including such liabilities prior to the Distribution. Parent has indemnified
the Company for liabilities arising out of the Media 100 business both prior
to and after the Distribution.
 
   The Distribution Agreement also provided for a tax sharing arrangement
between the Company and Parent. Parent is solely responsible for any tax
liabilities relating to periods prior to the Distribution Date, and is
entitled to any tax refunds relating to such periods. After the date of the
Distribution, each of the Company and Parent are responsible for tax
liabilities relating to their respective operations.
 
   With respect to any liability relating to the Distribution being deemed a
taxable transaction, Parent is responsible for 75% of any such liability and
the Company is responsible for 25% of any such liability; provided, however,
that if the Distribution is deemed a taxable transaction as a result of
certain actions taken, caused by or within the control of either Parent or the
Company, such party shall be solely responsible for the resulting tax
liability. The Parent and the Company believe that the Distribution qualifies
as a tax-free distribution. No amounts have been provided for this uncertainty
as the probability and range of potential cost is not reasonably estimable.
 
 (ii) Corporate Services and Use and Occupancy Agreements
 
   Effective as of the date of the Distribution, the Company and Parent had
corporate services and use and occupancy agreements under which the Company
provided Parent with certain facilities, equipment and administrative
services. Parent paid the Company in accordance with the predetermined rates
and fees mutually agreed upon. The use and occupancy agreement terminated in
April 1997. Substantially all of the corporate services provided to Parent
ceased in November 1997. Fees collected under these agreements in fiscal 1997
totaled approximately $889,000.
 
   Prior to the corporate services agreement, related expenses were allocated
based on estimated time spent relating directly to the Company's activities.
Management believes these allocations are reasonable. Allocated expenses
totaled $3,541,000 in fiscal year 1996.
 
 (b) 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 matters will have a
material adverse effect on the Company's financial condition or results of
operations.
 
 (c) Lease Commitments
 
   The Company has operating lease agreements expiring December 1, 2009 for a
building and property owned by a related party trust. The agreements provide
for aggregate minimum annual rental payments plus other expenses of the lessor
on a net basis. Total rental expense charged to operations on these leases
included in the accompanying consolidated statements of operations, net of
sub-lease and rent allocations, was approximately $335,000, $359,000 and
$546,000 for each of the years ended November 30, 1998, 1997 and 1996,
respectively.
 
                                     F-15
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   In addition, the Company leases sales facilities and equipment under leases
expiring through 2001. Rent expense, net of sub-lease and rent allocations to
Parent, under these agreements totaled $146,000, $193,000 and $360,000 in the
years ended November 30, 1998, 1997 and 1996, respectively. Future minimum
lease payments, net of estimated sub-lease payments to be received, under all
operating leases are as follows:
 
<TABLE>
<CAPTION>
      Fiscal Years Ended November 30,                                  Amount
      -------------------------------                                ----------
      <S>                                                            <C>
      1999.......................................................... $  457,000
      2000..........................................................    416,000
      2001..........................................................    374,000
      2002..........................................................    577,000
      2003..........................................................  1,056,000
      Thereafter....................................................  6,578,000
                                                                     ----------
        Total minimum lease payments................................ $9,458,000
                                                                     ==========
</TABLE>
 
8. Income Taxes
 
   For fiscal 1996 the income tax benefit in the accompanying consolidated
statements of operations has been calculated on a separate tax return basis.
Prior to the Distribution discussed in Note 1(a), the Company filed its tax
return as part of a consolidated group with Parent. The consolidated group did
not have any net tax requirements during any of those periods due to the
utilization of net operating losses of its other entities. Thus, the
offsetting charge for the income tax provision has been included as an element
of the "Investment by Parent" in the accompanying consolidated statements of
stockholders' investment. The financial information included herein may not
necessarily reflect what the consolidated results of operations of the Company
would have been had it been a separate, stand-alone entity during the periods
presented.
 
   The approximate tax effect of each type of temporary difference is
summarized as follows:
 
<TABLE>
<CAPTION>
                                                            November 30,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
      <S>                                               <C>         <C>
      Net operating loss............................... $2,108,000  $1,732,000
      Depreciation.....................................    348,000     519,000
      Nondeductible reserves and accruals..............    700,000     694,000
      Capitalized software development costs...........    (56,000)    (77,000)
                                                        ----------  ----------
                                                         3,100,000   2,868,000
      Less--Valuation Allowance........................  3,103,000   2,871,000
                                                        ----------  ----------
                                                        $  (3,000)  $   (3,000)
                                                        ==========  ==========
</TABLE>
 
   Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future income tax returns, the Company has
placed a valuation allowance against its otherwise recognizable deferred tax
assets.
 
                                     F-16
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The income tax benefits shown in the accompanying consolidated statements
of operations comprise the following:
<TABLE>
<CAPTION>
                                                             November 30,
                                                         ---------------------
                                                         1998  1997    1996
                                                         ----- ----- ---------
<S>                                                      <C>   <C>   <C>
Federal:
  Current............................................... $ --  $ --  $(814,000)
  Deferred..............................................   --    --    135,000
State:
  Current...............................................   --    --    (39,000)
  Deferred..............................................   --    --     39,000
Foreign--Current (benefit)..............................   --    --     21,000
                                                         ----- ----- ---------
                                                         $ --  $ --  $(658,000)
                                                         ===== ===== =========
</TABLE>
 
9. Geographic Information
 
   Operations in various geographic areas for the three years ended November
30, 1998 are summarized as follows:
 
<TABLE>
<CAPTION>
                                United
                                States       Europe   Eliminations  Consolidated
                             ------------  ---------- ------------  ------------
<S>                          <C>           <C>        <C>           <C>
Fiscal 1996
Sales to unaffiliated
 customers(1)..............  $ 17,480,000  $3,721,000 $        --   $ 21,201,000
Sales or transfers between
 geographic areas..........     1,870,000         --   (1,870,000)           --
                             ------------  ---------- -----------   ------------
Total net sales............  $ 19,350,000  $3,721,000 $(1,870,000)  $ 21,201,000
                             ============  ========== ===========   ============
Income (loss) from
 continuing operations
 before provision for
 income taxes..............  $ (2,037,000) $   50,000 $    52,000   $ (1,935,000)
                             ============  ========== ===========   ============
Identifiable assets from
 continuing operations(2)..  $  7,909,000  $  881,000 $(1,256,000)  $  7,534,000
                             ============  ========== ===========   ============
Fiscal 1997
Sales to unaffiliated
 customers(1)..............  $ 17,133,000  $3,319,000 $       --    $ 20,452,000
Sales or transfers between
 geographic areas..........     1,616,000         --   (1,616,000)           --
                             ------------  ---------- -----------   ------------
Total net sales............  $ 18,749,000  $3,319,000 $(1,616,000)  $ 20,452,000
                             ============  ========== ===========   ============
Income (loss) from
 continuing operations
 before provision for
 income taxes..............  $ (5,913,000) $    8,000 $   (74,000)  $ (5,979,000)
                             ============  ========== ===========   ============
Identifiable assets from
 continuing operations(2)..  $ 10,414,000  $1,778,000 $(1,633,000)  $ 10,559,000
                             ============  ========== ===========   ============
Fiscal 1998
Sales to unaffiliated
 customers(1)..............  $ 13,054,000  $3,727,000 $       --    $ 16,781,000
Sales or transfers between
 geographic areas..........     1,755,000         --   (1,755,000)           --
                             ------------  ---------- -----------   ------------
Total net sales............  $ 14,809,000  $3,727,000 $(1,755,000)  $ 16,781,000
                             ============  ========== ===========   ============
Income (loss) from
 continuing operations
 before provision for
 income taxes..............  $ (1,229,000) $   44,000 $   (67,000)  $ (1,252,000)
                             ============  ========== ===========   ============
Identifiable assets from
 continuing
 operations(2).............  $  9,409,000  $1,247,000 $(3,080,000)  $  7,576,000
                             ============  ========== ===========   ============
</TABLE>
--------
(1) Foreign sales from the United States to unaffiliated customers for the
    years ended November 30, 1998, 1997 and 1996 were approximately
    $2,655,000, $3,622,000 and $3,536,000, respectively.
(2) Excludes net liabilities of discontinued operations of $0 as of November
    30, 1998 and $1,424,000 as of November 30, 1997 and 1996.
 
                                     F-17
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
10. Accrued Expenses
 
   Accrued expenses consist of the following:
 
<TABLE>
<CAPTION>
                                                              November 30,
                                                          ---------------------
                                                             1998       1997
                                                          ---------- ----------
      <S>                                                 <C>        <C>
      Payroll and related taxes.......................... $  361,000 $  461,000
      Fringe benefits....................................    150,000     73,000
      Marketing..........................................    109,000    100,000
      Other..............................................  1,145,000  1,049,000
                                                          ---------- ----------
                                                          $1,765,000 $1,683,000
                                                          ========== ==========
</TABLE>
 
11. Valuation and Qualifying Accounts
 
   The following table sets forth activity in the Company's accounts receivable
reserve account:
 
<TABLE>
<CAPTION>
                                         Beginning Cost and             End of
               Balance At                 of Year  Expense  Deductions  Period
               ----------                --------- -------- ---------- --------
<S>                                      <C>       <C>      <C>        <C>
For the Year Ended November 30, 1996.... $156,000  $  5,000  $29,000   $132,000
For the Year Ended November 30, 1997.... $132,000  $302,000  $45,000   $389,000
For the Year Ended November 30, 1998.... $389,000  $ 60,000  $52,000   $397,000
</TABLE>
 
12. Selected Quarterly Information (Unaudited)
 
<TABLE>
<CAPTION>
                                        For the Fiscal Quarters Ended:
                                 ---------------------------------------------
                                 February 28, May 31,  August 31, November 30,
                                     1998      1998       1998        1998
                                 ------------ -------  ---------- ------------
<S>                              <C>          <C>      <C>        <C>
Net sales.......................    $4,556    $4,435     $3,919      $3,871
Gross profit....................     2,326     2,422      1,929       2,034
Loss from operations............      (299)     (233)      (797)        (26)
Net income (loss)...............      (274)     (225)      (763)         10
Basic and diluted net income
 (loss) per share...............    $(0.13)   $(0.11)    $(0.36)     $ 0.00
<CAPTION>
                                        For the Fiscal Quarters Ended:
                                 ---------------------------------------------
                                 February 28, May 31,  August 31, November 30,
                                     1997      1997       1997        1997
                                 ------------ -------  ---------- ------------
<S>                              <C>          <C>      <C>        <C>
Net sales.......................    $5,056    $6,163     $5,068      $4,165
Gross profit....................     2,610     3,183      2,678       2,049
Loss from operations............    (1,718)   (1,797)      (949)     (1,731)
Net loss........................    (1,659)   (1,733)      (942)     (1,645)
Basic and diluted net loss per
share...........................    $(0.82)   $(0.86)    $(0.46)     $(0.80)
</TABLE>
 
                                      F-18
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
 
   None.
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
   Directors. The information appearing under the caption "Nomination and
Election of Directors" in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held on April 14, 1999 (the "Proxy Statement") is
incorporated herein by reference.
 
   Executive Officers. Information in response to this Item appears under the
caption "Executive Officers of the Company" in Item 1 of this Form 10-K.
 
Item 11. Executive Compensation
 
   The information required by this Item appears under the caption "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
   The information required by this Item appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
and is incorporated herein by reference.
 
Item 13. Certain Relationships and Related Transactions
 
   The information required by this Item appears under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
 
                                     II-1
<PAGE>
 
                                    PART IV
 
Item 14. Financial Statements and Exhibits.
 
  (a)(1) Financial Statements. The Index to Consolidated Financial Statements
appears at page F-1 of this Form 10-K.
 
  (a)(2) Schedules. Schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been omitted
because the information is disclosed in the financial statements or because
such schedules are not required or are not applicable. See Index to
Consolidated Financial Statements.
 
  (a)(3) Exhibits. Exhibits 10.6 through 10.8 constitute all of the management
contracts and compensation plans and arrangements of the Company required to
be filed as Exhibits to this Form 10-K.
 
<TABLE>
   <C>    <S>
    3.1   Certificate of Incorporation of Registrant(1)
    3.2   By-laws of Registrant(1)
          Specimen Stock Certificate of Common Stock (See also Exhibits 3.1 and
    4.1   3.2)(1)
          Distribution Agreement dated as of November 19, 1996 with Media 100
   10.1   Inc.(2)
   10.2   Intellectual Property Agreement dated as of December 2, 1996 with
          Media 100 Inc.(3)
   10.3   Corporate Services Agreement dated as of December 2, 1996 with Media
          100 Inc.(4)
   10.4   Use and Occupancy Agreement dated as of December 2, 1996 with Media
          100 Inc.(5)
   10.5   Lease dated December 1, 1979, as amended, for Locke Drive with Nason
          Hill Trust(1)
   10.6   1996 Stock Option Plan(6)
   10.7   Employee Stock Purchase Plan(7)
   10.8   Replacement Stock Option Plan(8)
   10.9*  Software Bundling Master License Agreement(1)
   10.10* Distribution Agreement dated June 26, 1996 by and between Data
          Translation, Inc. and DS Datenverarbeitung und Sensortechnik GmbH(1)
   21     List of Subsidiaries of the Registrant
   23.1   Consent of Arthur Andersen LLP
   27     Financial Data Schedule
</TABLE>
--------
*  Certain portions have been omitted and filed separately with the Securities
   and Exchange Commission.
(1) Incorporated herein by reference to the Company's Registration Statement
    on Form 10 (No. 000-21367) filed with the Securities and Exchange
    Commission on November 26, 1996
(2) Incorporated herein by reference to Exhibit 10.8.1 to the 1996 Annual
    Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
    Securities and Exchange Commission on February 28, 1997
(3) Incorporated herein by reference to Exhibit 10.8.2 to the 1996 Annual
    Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
    Securities and Exchange Commission on February 28, 1997
(4) Incorporated herein by reference to Exhibit 10.8.3 to the 1996 Annual
    Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
    Securities and Exchange Commission on February 28, 1997
(5) Incorporated herein by reference to Exhibit 10.8.4 to the 1996 Annual
    Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
    Securities and Exchange Commission on February 28, 1997
(6) Incorporated herein by reference to the Company's Registration Statement
    on Form S-8 (No. 333-16855) filed with the Securities and Exchange
    Commission on November 26, 1996
(7) Incorporated herein by reference to the Company's Registration Statement
    on Form S-8 (No. 333-16857) filed with the Securities and Exchange
    Commission on November 26, 1996
(8) Incorporated herein by reference to the Company's Registration Statement
    on Form S-8 (No. 333-16859) filed with the Securities and Exchange
    Commission on November 26, 1996
 
                                     II-2
<PAGE>
 
                                  SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          Data Translation, Inc.
 
                                                /s/ Alfred A. Molinari, Jr.
                                          By: _________________________________
                                                 Alfred A. Molinari, Jr.,
                                                  Chief Executive Officer
 
Date: February 26, 1999
 
   Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
 
<S>                                  <C>                           <C>
    /s/ Alfred A. Molinari, Jr.      Chief Executive Officer and   February 26, 1999
____________________________________  Chairman
       Alfred A.Molinari, Jr.
 
        /s/ Ellen W. Harpin          Vice President and Director   February 26, 1999
____________________________________  (Principal Financial
          Ellen W. Harpin             Officer)
 
       /s/ Dr. David Cyganski        Director                      February 26, 1999
____________________________________
         Dr. David Cyganski
 
          /s/ D'Anne Hurd            Director                      February 26, 1999
____________________________________
            D'Anne Hurd
 
</TABLE>
 
                                     II-3
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 Exhibit
 Number  Document Description
 ------- --------------------
 <C>     <S>
 21      List of Subsidiaries of the Registrant
 23.1    Consent of Arthur Andersen LLP
 27      Financial Data
</TABLE>