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

                                   FORM 10-Q

(Mark One)

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

                    For The Quarterly Period Ended:  August 31, 1996
                                                     ---------------

            [ ]   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: 0-14779
                                    -------

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

           Delaware                                   04-2532613
-------------------------------------------- ----------------------------
(State or other jurisdiction of organization        (I.R.S. Employer
   or incorporation)                              Identification Number)
               

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

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

                                (508) 481-3700
               -------------------------------------------------
              (Registrant's telephone number, including area code)
 
        Indicate by check mark whether the registrant (1) has filed all reports
    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) been subject to such
    filing requirements for the past 90 days.

                Yes   X                    No
                    -----                     ------
 
        Indicate the number of shares outstanding of each of the issuer's
    classes of common stock, as of the latest practicable date.
 
Common Stock, par value $.01 per share             8,072,984 shares
--------------------------------------        ---------------------------
               Class                        Outstanding at September 30,1996
<PAGE>
 
                                                                 Page 2 of 14

                    DATA TRANSLATION, INC. AND SUBSIDIARIES

                                     INDEX
                                     -----

                                                            Page No.
                                                            --------
Part I - Financial Information:
  Consolidated Balance Sheets as of
    August 31, 1996 and November 30, 1995.......................3

  Consolidated Statements of Operations for the
    Three and Nine Months Ended August 31, 1996 and 1995........4

  Consolidated Statements of Stockholders' Equity
    For the Fiscal Year Ended November 30, 1995
     and the Nine Months Ended August 31, 1996..................5

  Consolidated Statements of Cash Flows for the Nine Months
    Ended August 31, 1996 and 1995..............................6

  Notes to Consolidated Financial Statements....................7-9

  Management's Discussion and Analysis of
    Financial Condition and Results of Operations...............10-12

Part II - Other Information.....................................13

Signatures......................................................14
<PAGE>
 
                                                              Page 3 of 14
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE> 
<CAPTION> 

                                                          August 31,                      November 30,
                                                             1996                             1995
                                                        -------------                     -------------
<S>           <C>                                   <C>                              <C>            
Current Assets:
              Cash and cash equivalents                 $   4,639,000                     $  28,602,000
              Marketable securities                        33,721,000                         6,559,000
              Accounts receivable, net of reserves of
                $395,000 in 1996 and $204,000 in 1995      10,227,000                         6,062,000
              Inventories                                   1,710,000                         1,900,000
              Prepaid expenses                                725,000                           339,000
              Prepaid income taxes                             60,000                            60,000
                                                        -------------                     -------------
                Total current assets                       51,082,000                        43,522,000
 
Net assets of discontinued operations                       4,796,000                         6,270,000
            
Equipment and Leasehold Improvements, net                   2,342,000                         1,414,000
 
Other Assets - net                                            111,000                            85,000
                                                        -------------                     -------------
Total Assets                                            $  58,331,000                     $  51,291,000
                                                        =============                     =============
 
Current Liabilities:
              Accounts payable                          $     823,000                     $     516,000
              Accrued expenses                              5,407,000                         2,853,000
              Deferred revenue                              1,670,000                         1,010,000
                                                        -------------                     -------------
                Total current liabilities                   7,900,000                         4,379,000
 
Deferred Income Taxes                                           3,000                             3,000
 
Stockholders' Equity:
              Preferred Stock, $.01 par value,
              Authorized - 1,000,000 shares, none issued       -                                 -
              Common Stock, $.01 par value,
                Authorized - 10,000,000 shares, issued -            
                8,070,284 in 1996 and 8,491,208 in 1995        81,000                            85,000              
              Capital in excess of par value               39,957,000                        37,062,000              
              Retained earnings                            10,723,000                        11,665,000
              Cumulative translation adjustment               (29,000)                           (5,000)
              Treasury stock, at cost, 869,096 
                shares in 1995                                 -                             (1,843,000)
              Unrealized holding loss on available for 
                sale securities                              (304,000)                          (55,000)
                                                        -------------                     -------------
 
                Total stockholders' equity                 50,428,000                        46,909,000
                                                        -------------                     -------------
 
Total Liabilities and Stockholders' Equity              $  58,331,000                     $  51,291,000
                                                        =============                     =============
</TABLE> 
 
 
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                                                                    Page 4 of 14

                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
<TABLE> 
<CAPTION> 
                                                                Three Months Ended August 31,      Nine Months Ended August 31,
                                                                     1996           1995               1996             1995
                                                                --------------  -------------     --------------   -------------- 
<S>                                                             <C>             <C>               <C>              <C>   
Net sales                                                           13,066,000  $   8,137,000     $   36,677,000   $   20,323,000
                                                                                                                 
Cost of sales                                                        4,947,000      3,376,000         14,508,000        8,687,000
                                                                --------------  -------------     --------------   --------------  
                                                                                                
  Gross profit                                                       8,119,000      4,761,000         22,169,000       11,636,000
                                                                                                                 
Research and development expenses                                    1,787,000      1,357,000          4,455,000        3,538,000
Selling and marketing expenses                                       3,802,000      2,321,000         10,649,000        6,233,000
General and administrative expenses                                  1,401,000        635,000          3,871,000        1,402,000
                                                                --------------  -------------     --------------   -------------- 
                                                                                                                 
  Operating income                                                   1,129,000        448,000          3,194,000          463,000
                                                                                                                 
Interest income                                                        556,000        135,000          1,579,000          493,000
Interest expense                                                       -               (1,000)            (1,000)          (3,000)
Other income (expense)                                                   2,000          3,000            (47,000)           2,000
                                                                --------------  -------------       ------------    ------------- 
  Income from continuing operations                                                                                      
    before tax provision                                             1,687,000        585,000          4,725,000          955,000
                                                                                                                 
Tax provision                                                          337,000        -                  945,000            7,000
                                                                --------------  -------------        -----------   --------------
Income from continuing operations                                    1,350,000        585,000          3,780,000          948,000
                                                                                                                 
Discontinued operations:                                                                                         
  Income (loss) from discontinued operations                                                                                      
  of Data Translation II, Inc. (includes transaction                                            
  costs of $1,500,000 related to spin-off and                                                   
  estimated loss on disposal of Data Translation                                                
  Networking Limited of $1,563,000)                                 (4,764,000)       841,000         (4,722,000)       2,216,000 
                                                                --------------   ------------       ------------   --------------
                                                                                                
  Net income (loss)                                             $   (3,414,000)  $  1,426,000       $   (942,000)   $   3,164,000
                                                                ==============   ============       ============    =============
Income from continuing operations per common                                                    
  share                                                                   0.16   $       0.09       $       0.44    $        0.14
Income (loss) from discontinued operations per                                                  
  common share                                                           (0.56)  $       0.12       $      (0.55)    $       0.34
                                                                --------------   ------------       ------------   --------------
                                                                                                                 
Net income (loss) per common share                                       (0.40)  $       0.21       $      (0.11)    $       0.48
                                                                ==============   ============       ============    =============
Weighted average number of common                                                               
  and common equivalent shares outstanding                           8,483,000      6,812,000          8,520,000        6,621,000
</TABLE> 
                The accompanying notes are an integral part of 
                   these consolidated financial statements.
<PAGE>
 
                                                                    Page 5 of 14
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE> 
<CAPTION> 
                                     Common Stock                                                          Unrealized 
                                    $.01 Par Value                                                         Holding    
                             ------------------------------                                                Loss on         
                                                   Capital in                  Cumulative                  Available   Total 
                              Issued               Excess of     Retained      Translation   Treasury      for Sale    Stockholders'
                              Shares     Amount    Par Value     Earnings      Adjustment    Stock         Securities  Equity
                            --------------------------------------------------------------------------------------------------------
<S>                          <C>         <C>       <C>           <C>           <C>          <C>            <C>         <C> 

Balance, November 30, 1994   6,765,472   $68,000    $8,739,000    $6,894,000      $64,000   ($4,781,000)           -    $10,984,000

Proceeds from stock plans      325,736     3,000     1,166,000             -            -             -            -      1,169,000

Public sale of treasury                                                                                               
 stock, net of issuance 
 costs of $375,000                   -         -     5,864,000             -            -     2,938,000            -      8,802,000

Public sale of common                                                                                                 
 stock, net of issuance 
 costs of $400,000           1,400,000    14,000    21,293,000             -            -             -            -     21,307,000

Translation adjustment               -         -             -             -      (69,000)            -            -        (69,000)

Net income                           -         -             -     4,771,000            -             -            -      4,771,000
                                                                                                                      
Reserve for unrealized                                                                                                
 investment losses                   -         -             -             -            -             -      (55,000)       (55,000)
                            --------------------------------------------------------------------------------------------------------
                                                                                                                      
Balance, November 30, 1995   8,491,208   $85,000   $37,062,000   $11,665,000      ($5,000)  ($1,843,000)    ($55,000)   $46,909,000
                                                                                                                      
Proceeds from stock plans      224,672     3,000     1,281,000             -            -             -            -      1,284,000
                                                                                                                      
Retirement of treasury                                                                                                              
 stock                        (869,096)   (9,000)   (1,834,000)            -            -     1,843,000            -              - 
                                                                                                                      
Public sale of common stock    223,500     2,000     3,448,000             -            -             -            -      3,450,000
                                                                                                                      
Translation adjustment               -         -             -             -      (24,000)            -            -        (24,000)

Net loss                             -         -             -      (942,000)           -             -            -       (942,000)

Reserve for unrealized                                                                                                
 investment losses                   -         -             -             -            -             -     (249,000)      (249,000)
                           ---------------------------------------------------------------------------------------------------------

Balance, August 31, 1996     8,070,284   $81,000   $39,957,000   $10,723,000     ($29,000)            -    ($304,000)   $50,428,000
                           =========================================================================================================
</TABLE> 
 
                The accompanying notes are an integral part of 
                   these consolidated financial statements.
<PAGE>
 
                                                                    Page 6 of 14

                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE> 
<CAPTION> 
                                                                                                Nine Months Ended August 31,
                                                                                                   1996             1995
                                                                                            --------------     ---------------
<S>                                                                                           <C>              <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                        $    (942,000)      $     3,164,000
  Adjustments to reconcile net income (loss) to 
   net cash used in operating activities-
                    Depreciation and amortization                                                720,000               379,000
                    Deferred income taxes                                                              -                 1,000
                    Loss on sale of marketable securities                                         28,000                34,000

                    Change in assets and liabilities-
                     Accounts receivable                                                      (4,165,000)           (2,098,000)
                     Inventories                                                                 190,000              (511,000)
                     Prepaid expenses                                                           (386,000)             (325,000)
                     Prepaid income taxes                                                              -                 1,000
                     Net assets of discontinued operations                                     1,474,000            (1,120,000)
                     Accounts payable                                                            307,000               510,000
                     Accrued expenses                                                          2,554,000              (167,000)
                     Deferred revenue                                                            660,000             1,262,000
                                                                                            ------------        --------------
                    Net cash provided by operating activities                              $     440,000       $     1,130,000
                                                                                            ------------        --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
                    Purchases of equipment and leasehold improvements                         (1,607,000)             (508,000)
                    Increase in other assets                                                     (66,000)              (57,000)
                    Purchases of marketable securities                                       (42,245,000)           (9,132,000)
                    Proceeds from sales of marketable securities                              14,806,000             4,966,000
                                                                                            ------------        --------------
                    Net cash used in investing activities                                  $ (29,112,000)      $    (4,731,000)
                                                                                            ------------        --------------
CASH FLOWS FROM FINANCING ACTIVITIES: 
                    Borrowings from bank                                                               -                38,000
                    Proceeds from stock plans                                                  1,284,000             1,085,000
                    Net proceeds from public sale of common stock                              3,450,000             8,802,000
                                                                                            ------------        --------------
                    Net cash provided by financing activities                              $   4,734,000       $     9,925,000
                                                                                            ------------        --------------
EXCHANGE RATE EFFECTS                                                                            (25,000)              (30,000)
                                                                                            ------------        --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       $ (23,963,000)      $     6,294,000

CASH AND CASH EQUIVALENTS, beginning of period                                                28,602,000               778,000
                                                                                            ------------        --------------
CASH AND CASH EQUIVALENTS, end of period                                                   $   4,639,000       $     7,072,000
                                                                                            ============        ==============
OTHER TRANSACTIONS NOT PROVIDING (USING) CASH 
                    Decrease in value of marketable securities                                   249,000                61,000
                    Increase in unrealized holding loss on                                                        
                     available for sale securities                                              (249,000)              (61,000)
                                                                                            ------------        --------------
                                                                                           $        -          $          -
                                                                                            ============        ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                    Cash paid for income taxes                                             $     694,000       $       (21,000)
                                                                                            ============        ==============
                    Cash paid for interest                                                 $       1,000       $         3,000
                                                                                            ============        ==============
</TABLE> 

                The accompanying notes are an integral part of 
                   these consolidated financial statements.
<PAGE>
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

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

        Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
audited financial statements, which are contained in the Company's 1995 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
February 26, 1996.

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

2. Cash Equivalents and Marketable Securities

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

        The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 115 requires
enterprises to classify debt and equity securities as either held-to-maturity,
available-for-sale or trading. Under SFAS No. 115, the accounting for the
effects of unrealized gains and losses reported on investment holdings differs
according to the nature of an investment classification.

        Marketable securities held as of August 31, 1996, consist of the
following:

<TABLE>
<CAPTION>
                                          Maturity            Market Value
                                        ----------------------------------
<S>                                     <C>                    <C>
Investments available for sale:
  U.S. Treasury Bills                   Less than 1 year       $ 4,483,000
  U.S. Treasury Bills                   1 - 5 years              6,893,000
                                                               -----------
      Total U.S. Treasury Bills                                 11,376,000
                                                     
  U.S. Agency Bonds                     1 - 5 years                548,000
  U.S. Agency Bonds                     6 - 10 years               285,000
                                                               -----------
      Total U.S. Agency Bonds                                      833,000
                                                     
  Utility Bonds                         1 - 5 years                 98,000
  Utility Bonds                         6 - 10 years               204,000
                                                               -----------
      Total Utility Bonds                                          302,000
                                                     
  Municipal Bonds                       1 - 5 years              1,981,000
  Municipal Bonds                       6 - 10 years             1,300,000
  Municipal Bonds                       10+ years                2,500,000
                                                               -----------
      Total Municipal Bonds                                      5,781,000
                                                     
  Corporate Obligations                 1 - 5 years              7,511,000
  Corporate Obligations                 6 - 10 years             5,444,000
  Corporate Obligations                 10+ years                2,474,000
                                                               -----------
      Total Corporate Obligations                               15,429,000
                                                               -----------
Total investments available for sale                           $33,721,000
                                                               ===========
                                                              
</TABLE>

       Marketable securities had a cost of $34,025,000 and $6,614,000 at August
31, 1996 and November 30, 1995, respectively, and a market value of $33,721,000
and $6,559,000, respectively. To reduce the carrying amount of the portfolio to
market value, a valuation allowance has been reflected as a separate component
of stockholders' equity.
<PAGE>
 
                                                                    Page 8 of 14

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

3.  Inventories

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

<TABLE>
<CAPTION>
                                      August 31,   November 30,
                                         1996          1995
                                         ----          ----    
<S>                                   <C>          <C>
     Raw material                     $   522,000   $ 1,060,000
     Work-in-process                      504,000       418,000
     Finished goods                       684,000       422,000
                                       ----------    ----------
                                      $ 1,710,000   $ 1,900,000
                                       ==========    ==========
</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 and marketing plan.

4.  Net Income Per Common Share

        Net income per common share is determined by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during each period. Common equivalent shares have been calculated in accordance
with the treasury stock method and are included for all periods where their
effect is dilutive. Fully diluted net income per share has not been separately
presented, as the amounts would not be materially different from net income per
share.

5.  Contingencies

        On June 7, 1995, a lawsuit was filed against the Company by Avid
Technology, Inc. ("Avid"), in the United States District Court for the District
of Massachusetts. The complaint generally alleges patent infringement by the
Company arising from the manufacture, sale, and use of the Company's Media
100/(R)/ product. The complaint includes requests for injunctive relief, treble
damages, interest, costs and fees. In July, 1995 the Company filed an Answer and
Counterclaim denying any infringement and asserting that the Avid patent in
question is invalid. The Company intends to vigorously defend the lawsuit. In
addition, Avid is seeking reissue of the patent, including claims that it
asserts are broader than in the existing patent, and these reissue proceedings
remain pending before the U.S. Patent and Trademark Office.  On July 31, 1996,
the court ordered a stay of all proceedings in the lawsuit pending conclusion of
the reissue proceedings referred to above.

        Also, on April 5, 1996, the Company asserted, by motion for leave to
file a supplemental counterclaim, its own claims against Avid for infringement
of a newly-issued Company patent relating to the Company's Media 100 digital
video system. The court denied the Company's motion for a leave to proceed by
supplemental counterclaim, following which the Company on April 23, 1996 filed
its own, separate complaint against Avid, in the United States District Court
for the District of Massachusetts, asserting these infringement claims. The
Company contends that the products infringing this newly-issued Company patent
include certain versions of Avid's Media Composer product. In May, 1996, Avid
filed a responsive Answer and Counterclaim denying infringement and asserting
that the Company patent in question is invalid.

        There can be no assurance that the Company will prevail on the lawsuit
asserted by Avid or that the expense or other effects of the lawsuits, whether
or not the Company prevails, will not be material.

        From time to time the Company is involved in other 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 other outstanding
matters will have a material effect on the Company's financial condition or
results of operations.
<PAGE>

                                                                    Page 9 of 14
 
                    DATA TRANSLATION, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Capitalized Software Development Costs

        The Company capitalizes certain computer software development costs.
Such costs, net of accumulated amortization, were approximately $104,000 and
$84,000 as of August 31, 1996 and November 30, 1995, respectively and are
included in other assets.  These costs are amortized on a straight-line basis
over two years which approximates the life of the product. Amortization expense,
included in cost of goods sold, was approximately $40,000 and $63,000 for the
nine months ended August 31, 1996 and 1995, respectively.

7. Income Taxes

        Based on the projected taxable income from continuing operations for
fiscal 1996, the Company has provided for income taxes using an effective tax
rate of approximately 20% taking into consideration full utilization of its
remaining net operating loss carryforwards, research and development tax credit
carryforwards, and other general business tax credits. A corresponding tax
benefit, has been provided for within discontinued operations.  During fiscal
1995, substantially all of the potential tax provision resulting from profitable
operations in the Company's domestic operations were offset by net operating
loss carryforwards.

8. Discontinued Operations

     On July 30, 1996, the Company announced its intention to separate its 
Media 100(R) digital media business from its data acquisition and imaging, 
commercial products and networking distribution businesses. The Company intends 
to transfer the assets and liabilities associated with the data acquisition and 
imaging, commercial products and networking distribution businesses to a wholly 
owned subsidiary, Data Translation II, Inc. ("DTI II"), in connection with the 
proposed spin off of those businesses to the Company's stockholders. The Company
also announced its intention to dispose of the networking distribution business 
within twelve months. In the event that the disposal of that business is not 
completed prior to the effective date of the proposed spin off transaction, that
business will be transferred to DTI II as described above.

     The components of net assets of discontinued operations included in the
accompanying consolidated balance sheets at August 31, 1996 and November 30,
1995 follow:

<TABLE>
<CAPTION>
                                                     August 31,   November 30,
                                                        1996          1995
                                                        ----          ----     
<S>                                                 <C>           <C>
Current assets                                      $ 4,692,000    $ 4,722,000
Net assets (liabilities) of discontinued
 operations                                            (474,000)     2,232,000
Equipment and leasehold improvements, net             2,420,000      2,250,000
Other assets - net                                      290,000        133,000
Current liabilities                                  (2,132,000)    (3,067,000)
                                                    -----------    -----------
Net assets of discontinued operations               $ 4,796,000    $ 6,270,000
                                                    ===========    ===========
</TABLE>

The above net assets (liabilities) of discontinued operations reflects the
activity of Networking.


     The components of discontinued operations included in the accompanying
consolidated statements of operations for the three month and nine month periods
ended August 31, 1996 and 1995, respectively, follows:

<TABLE>
<CAPTION>
                                              Three Months Ended August 31,   Nine Months Ended August 31,
                                                   1996            1995            1996           1995
                                                   ----            ----            ----           ----      
<S>                                           <C>              <C>            <C>             <C>
Net sales                                        $ 5,100,000      $5,583,000    $15,858,000     $16,359,000
Income (loss) from continuing operations          (1,260,000)        828,000       (846,000)      2,111,000
Income (loss) from discontinued operations        (2,270,000)         10,000     (2,605,000)        120,000
Net income (loss)                                 (3,264,000)        841,000     (3,222,000)      2,216,000
</TABLE>

The above income (loss) from discontinued operations reflects the activity of
Networking and includes an estimated loss on disposal of approximately
$1,563,000.  Spin-off transaction costs of $1,500,000 are also included within
the discontinued operations of the Company.
<PAGE>

                                                                   Page 10 of 14
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS



General

   On July 30, 1996, the Company announced its intention to separate its Media
100 digital media business from its data acquisition and imaging, commercial
products and networking distribution businesses.  The Company intends to
transfer the assets and liabilities associated with the data acquisition and
imaging, commercial products and networking distribution businesses to a wholly
owned subsidiary, Data Translation II, Inc. ("DTI II"), in connection with the
proposed spin off of those businesses to the Company's stockholders.  The
Company also announced its intention to dispose of the networking distribution
business within twelve months.  In the event that the disposal of that business
is not completed prior to the effective date of the proposed spin off
transaction, that business will be transferred to DTI II as described above.

Results of Continuing Operations

  The following table shows certain consolidated statements of operations
  data as a percentage of net sales from continuing operations.  Continuing
  operations consist of the Company's Media 100 digital media business:

<TABLE>
<CAPTION>
                                          Three Months Ended    Nine Months Ended
                                          Aug 31,    Aug 31,    Aug 31,    Aug 31,
                                           1996       1995       1996       1995
                                           ----       ----       ----       ----  
<S>                                      <C>        <C>        <C>        <C>
 Net sales from continuing operations..     100.0%     100.0%     100.0%    100.0%
 Gross margin..........................      62.1       58.5       60.4      57.3
 Research and development expenses.....      13.7       16.7       12.1      17.4
 Selling and marketing expenses........      29.1       28.5       29.0      30.7
 General and administrative expenses...      10.7        7.8       10.6       6.9
                                            -----      -----      -----     -----
 Operating income......................       8.6        5.5        8.7       2.3
 Interest income and other, net........       4.3        1.7        4.2       2.4
 Provision for income taxes............       2.6        0.0        2.6       0.0
                                            -----      -----      -----     -----
 Income from continuing operations.....      10.3%       7.2%      10.3%      4.7%
                                            =====      =====      =====     =====
</TABLE>
Comparison of Third Fiscal Quarter of 1996 to Third Fiscal Quarter of 1995:

  Net sales from continuing operations for the fiscal quarter ended August 31,
1996 were $13,066,000, an increase of 60.6% or $4,929,000 from the same period a
year ago. The increase in sales was due to higher unit sales of Media 100 and
shipments of the Company's newest product, Media 100 qx, which began shipping in
April 1996.

  Gross margin for the fiscal quarter ended August 31, 1996 was 62.1%, compared
to 58.5% in the comparable quarter of the prior year. The increase in gross
margin was primarily a result of lower raw material costs, as well as higher
software sales.

  Operating income for the third fiscal quarter of 1996 was $1,129,000
representing 8.6% of net sales, compared to $448,000 representing 5.5% of net
sales in the comparable quarter of the prior year. The operating income reflects
the higher net sales, partially offset by an increase in operating expenses of
$2,677,000 from the comparable quarter in the prior fiscal year. Selling and
marketing expenses in the third fiscal quarter of 1996 increased by $1,481,000
representing 29.1% of net sales compared to 28.5% in the comparable quarter in
1995. The increase in selling and marketing expenses were largely due to the
additional costs associated with the increased sales and promotion of Media 100
and Media 100 qx products, as well as an increased focus on international
channel development. General and administrative expenses increased to
$1,401,000, or  10.7% of net sales up from $635,000, or 7.8% of net sales in the
comparable quarter. The increase was due primarily to additional operational
costs relating to higher sales volumes and higher legal fees associated with the
pending patent lawsuits, as discussed in Note 5 to the Consolidated Financial
Statements. These higher legal expenses are expected to continue in the
foreseeable future. Research and development expenses were $1,787,000, or 13.7%
of net sales compared to $1,357,000, or 16.7% of net sales in the third quarter
of fiscal 1995. The dollar increase in research and development expenses was a
result of the Company's continued investment in product development primarily in
digital media technology.

<PAGE>
 
                                                                Page 11 of 14

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

Comparison of Third Fiscal Quarter of 1996 to Third Fiscal Quarter of 1995
(continued):

  Interest income for the fiscal quarter ended August 31, 1996 was $556,000, or
4.3% of net sales, compared to $135,000, or 1.7% of net sales, in the comparable
quarter a year ago reflecting an increase in cash balances including cash
equivalents and marketable securities on hand during the quarter.

  A tax provision of $337,000 was provided for in the third fiscal quarter of
1996 compared to no tax provision in the comparable period of fiscal 1995. The
tax provision for the third quarter of fiscal 1996 reflects a year to date
effective tax rate to approximately 20% on continuing domestic operations. This
effective tax rate takes into consideration remaining net operating loss
carryforwards, research and development tax credit carryforwards and other
business tax credits available to be used against taxable income. Any potential
tax provision resulting from operating income by the Company's domestic
operations during the third quarter of 1995 was entirely offset by net operating
loss carryforwards.

  Income from continuing operations for the fiscal quarter ended August 31, 1996
was $1,350,000 or $0.16 per share, compared to $585,000 or $0.09 per share for
the comparable period in fiscal 1995. For the third fiscal quarter in 1996,
weighted average number of common and common equivalent shares outstanding were
8,483,000 compared to 6,812,000 in the comparable fiscal quarter in 1995.

Comparison of First Nine Months of Fiscal 1996 to the First Nine Months of
Fiscal 1995:

  Net sales from continuing operations for the nine months ended August 31, 1996
were $36,677,000, an increase of 80.5% or $16,354,000 from the same period a
year ago. The increase in sales was due to higher unit sales of Media 100 and
shipments of the Company's newest product, Media 100 qx, which began shipping in
April 1996.

  Gross margin for the nine months ended August 31, 1996 was 60.4%, compared to
57.3% in the comparable period of the prior year. The increase in gross margin
was primarily a result of lower raw material costs, as well as higher software
sales.

  Operating income for the first nine months of fiscal 1996 was $3,194,000
representing 8.7% of net sales, compared to $463,000 representing 2.3% of net
sales in the comparable period of the prior year. The operating income reflects
the higher net sales, partially offset by an increase in operating expenses of
$7,802,000. Selling and marketing expenses increased by $4,416,000 largely due
to the additional costs associated with the increased sales and promotion of
Media 100 and Media 100 qx products, as well as an increased focus on
international channel development. General and administrative expenses increased
to $3,871,000, or 10.6% of net sales up from $1,402,000, or 6.9% of net sales in
the comparable period. The increase has been primarily due to additional
operational costs relating to higher sales volumes and higher legal fees
associated with the pending patent lawsuits. Research and development expenses
were $4,455,000, or 12.1% of net sales compared to $3,538,000, or 17.4% of net
sales in the first nine months of fiscal 1995. The dollar increase in research
and development expenses was a result of the Company's continued investment in
product development primarily in digital media technology.

  Interest income for the nine months ended August 31, 1996 was $1,579,000, or
4.2% of net sales, compared to $493,000, or 2.4% of net sales, in the comparable
nine month period reflecting an increase in cash balances including cash
equivalents and marketable securities on hand during the period. Interest income
has been partially offset by $47,000 of other expenses which was primarily a
result of foreign transaction losses.
<PAGE>
 
                                                                  Page 12 of 14

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

Comparison of First Nine Months of  Fiscal 1996 to the First Nine Months of
Fiscal 1995 (continued):

  A tax provision of $945,000 was provided for in the first nine months of
fiscal 1996 compared to a tax provision of $7,000 in the comparable period of
fiscal 1995. The tax provision for the first nine months in fiscal 1996 includes
an effective tax rate of approximately 20% on profitable continuing domestic
operations due to net operating loss carryforwards, research and development tax
credit carryforwards, and business tax credits available to be used against
taxable income. Any potential tax provision resulting from operating income by
the Company's domestic operations during fiscal 1995 were offset by net
operating loss carryforwards.

  Income from continuing operations for the nine month period ended August 31,
1996 was $3,780,000 or $0.44 per share, compared to $948,000 or $0.14 per share
for the same period in 1995. For the first nine months in fiscal 1996, weighted
average number of common and common equivalent shares outstanding were 8,520,000
compared to 6,621,000 in the comparable period in fiscal 1995.


Discontinued Operations

Losses from discontinued operations for the three and nine months ended August
31, 1996 were $4,764,000 and $4,722,000, respectively. Included in these losses
were estimated transaction costs related to the spin-off of $1,500,000 and
estimated loss on disposal of the networking distribution business of
$1,563,000. The remaining loss of $1,701,000 for the three months ended August
31, 1996 can be compared to net income of $841,000 in the comparable period in
the prior fiscal year, reflecting declining gross margins in the Networking
business, as well as, continued investment in the promotion and channel
development of Broadway. For the nine months ended August 31, 1996 and 1995,
results from discontinued operations were $1,659,000 loss and income of
$2,216,000, respectively, reflecting declining gross margins in the Networking
business, as well as, continued investment in the promotion and channel
development of Broadway. Net sales were $8,917,000 and $10,936,000 for the three
months ended August 31, 1996 and 1995, respectively, which includes net sales
for Networking of $3,817,000 and $5,353,000 for the three months ended August
31, 1996 and 1995, respectively. For the nine months ended August 31, 1996 and
1995, net sales were $32,380,000 and $30,963,000, respectively, which includes
net sales for Networking of $16,522,000 and $14,604,000 for the nine months
ended August 31, 1996 and 1995, respectively. See Note 8 to the Consolidated
Financial Statements.

Liquidity and Capital Resources

  As of August 31, 1996, the Company had $43,182,000 of working capital.
Included in working capital was $4,639,000 of cash and cash equivalents as well
as $33,721,000 of marketable securities as described in Note 2 to these
Consolidated Financial Statements. As part of the spin-off transaction described
above under "General," the Company intends to contribute to DTI II an amount in
cash and cash equivalents equal to $10,000,000, subject to adjustment based upon
(1) changes in working capital of the transferred businesses between September
1, 1996 and the consummation of the spin-off and (2) any net proceeds or loss
from the disposition of the networking distribution business, if completed prior
to the effective date of the proposed spin off transaction. Although management
believes the Company's capital needs for 1996 will be met through its credit
facilities and cash flow from operations, the Company may need to raise
additional capital from equity and/or debt sources in order to finance its
anticipated growth and capital requirements beyond 1996.

  For a description of certain pending patent lawsuits, see Note 5 to the
Consolidated Financial Statements.
<PAGE>
 
                                                               Page 13 of 14

                          PART II.  OTHER INFORMATION

Item 1. Legal Proceedings
        -----------------

        On June 7, 1995, a lawsuit was filed against the Company by Avid
Technology, Inc. ("Avid"), in the United States District Court for the District
of Massachusetts. The complaint generally alleges patent infringement by the
Company arising from the manufacture, sale, and use of the Company's Media 100
product. The complaint includes requests for injunctive relief, treble damages,
interest, costs and fees. In July, 1995 the Company filed an Answer and
Counterclaim denying any infringement and asserting that the Avid patent in
question is invalid. The Company intends to vigorously defend the lawsuit. In
addition, Avid is seeking reissue of the patent, including claims that it
asserts are broader than in the existing patent, and these reissue proceedings
remain pending before the U.S. Patent and Trademark Office.  On July 31, 1996,
the court ordered a stay of all proceedings in the lawsuit pending conclusion of
the reissue proceedings referred to above.

        Also, on April 5, 1996, the Company asserted, by motion for leave to
file a supplemental counterclaim, its own claims against Avid for infringement
of a newly-issued Company patent relating to the Company's Media 100 digital
video system. The court denied the Company's motion for a leave to proceed by
supplemental counterclaim, following which the Company on April 23, 1996 filed
its own, separate complaint against Avid, in the United States District Court
for the District of Massachusetts, asserting these infringement claims. The
Company contends that the products infringing this newly-issued Company patent
include certain versions of Avid's Media Composer product. In May, 1996, Avid
filed a responsive Answer and Counterclaim denying infringement and asserting
that the Company patent in question is invalid.

        There can be no assurance that the Company will prevail on the lawsuit
asserted by Avid, or that the expense or other effects of the lawsuits, whether
or not the Company prevails, will not be material.

        The foregoing supplement is made to the Company's disclosure in its
Quarterly Report on Form 10-Q for the fiscal quarters ended February 29 and 
May 31, 1996.

Item 5. Other Information
        -----------------

        On September 12, 1996, the Company merged with and into its wholly owned
subsidiary, Data Translation, Inc., a Delaware corporation, effecting the 
reincorporation of the Company from Massachusetts to Delaware. The effects of 
the reincorporation of the Company in Delaware are described in the Company's 
proxy statement dated March 8, 1996 for the Annual Meeting of Shareholders which
was held on April 10, 1996 and at which the reincorporation was approved by the 
Company's stockholders.

        The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, par value $.01 per share (the "Common Stock") and
1,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock").

        The holders of shares of Common Stock are entitled to one vote for each 
share held of record on all matters submitted to a vote of stockholders. Holders
of Common Stock are entitled to receive ratably such dividends as may be 
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities. Holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. All of the
outstanding shares of Common Stock are fully paid and nonassessable.

        The Board of Directors is authorized, subject to any limitations 
prescribed by law, from time to time to issue up to an aggregate of 1,000,000 
shares of Preferred Stock with such powers, designations, preferences and
relative, participating, optional and other special rights and such
qualifications, limitations or restrictions thereof, as shall be determined by
the Board of Directors in a resolution or resolutions providing for the issue of
such Preferred Stock. Thus, any series may, if so determined by the Board of
Directors, have full voting rights with Common Stock or superior or limited 
voting rights, be convertible into Common Stock or another security of the
Company, and have such other preferences, relative rights, and limitations as
the Board of Directors shall determine. As a result, any series of Preferred
Stock could have rights which would adversely affect the voting power of the 
Common Stock. The shares of any class or series of Preferred Stock need not be 
identical. The issuance of Preferred Stock could have the effect of delaying or 
preventing a change in control of the Company without any further action by 
stockholders.

        The Company's Certificate of Incorporation provides, among other things,
that, subject to certain exceptions, the affirmative vote of the holders of 75%
of the Common Stock and any other voting securities outstanding shall be
required to approve (i) any merger or consolidation of the Company with a
Related Person (as defined below), (ii) any sale, lease, exchange, transfer or
other disposition of more than 10% of the assets of the Company to a Related
Person or more than 10% of the assets of a Related Person to the Company, (iii)
the issuance of any securities of the Company to a Related Person, (iv) the
acquisition by the Company of any securities of a Related Person or (v) certain
redemptions or recapitalizations involving Common Stock which take place within
two years after a Related Person becomes a Related Person; provided, that such
stockholder approval shall not be required if the proposed transaction is
approved by the Board of Directors prior to the time the Related Person became a
Related Person or is otherwise approved by the Board of Directors where a
majority of the members of the Board of Directors voting for approval of such
transaction were members of the Board of Directors before each Related Person
involved in the transaction became a Related Person.

         For purposes of the foregoing, a "Related Person" includes any person
or entity that, together with its affiliates and associates, beneficially owns
5% of more of the outstanding shares of the capital stock of the Company;
provided, that the term "Related Person" does not include any person or entity
that together with its affiliates or associates beneficially owned on December
31, 1995 in the aggregate more than 15% of the outstanding shares of any class
of stock of the Company's Massachusetts predecessor corporation.

         The Certificate of Incorporation provides that no director of the
Company shall be liable to the Company for monetary damages for any breach of
fiduciary duty, except to the extent such exculpation from liability is not
permitted under the General Corporation Law of the State of Delaware. This
provision does not prevent stockholders from obtaining injunctive or other
equitable relief against directors nor does it shield directors from liability
under federal or state securities laws. The Certificate of Incorporation
provides that the Company shall indemnify its directors and officers to the 
maximum extent permitted by Delaware law.

          The Certificate of Incorporation provides that, so long as the 
Company has a class of stock registered pursuant to the provisions of the 
Securities Exchange Act of 1934, as amended, any action by the stockholders
of such class must be taken at an annual or special meeting of stockholders and 
may not be taken by written consent.

          The Certificate of Incorporation provides that the provisions of 
Section 203 of the General Corporation Law of the State of Delaware shall not 
apply to the Company.


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

        a)  Exhibits

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

                 3.1      Certificate of Incorporation of Data Translation, Inc.

                 3.2      By-laws of Data Translation, Inc.

                 27       Financial Data Schedule

        b)  Reports on Form 8-K

            No reports on Form 8-K have been filed during the quarter for which
            this report is filed.
<PAGE>
 
                                                                Page 14 of 14

                                   SIGNATURES

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

                          Data Translation, Inc.

Date: October 15, 1996    By:    /s/ Peter J. Rice
                               ------------------------
                                     Peter J. Rice
                               Vice President & Treasurer
 
Date: October 15, 1996    By:    /s/ Gary B. Godin
                               ------------------------
                                     Gary B. Godin
                               Chief Accounting Officer and
                                Corporate Controller