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, imaging and machine vision 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. In addition, the Company supports its existing hardware product lines with a blend of software offerings that enables the customer to further analyze the data produced by the hardware. The Company's strategy is to identify and capitalize on growth opportunities in the data acquisition, imaging and machine vision markets.

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 web pages on the World Wide Web (the "Web"), multimedia presentations, Webstreaming, CD-ROM titles and computer-based training.

Data Acquisition, Imaging and Machine Vision

Market

The market for the Company's data acquisition, imaging products and machine vision products, which are the Company's core products, is composed primarily of technical users, such as engineers and scientists, interested in incorporating the Company's products 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, industrial 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, imaging and machine vision area, the Company is focused on providing system solutions built around development of its Peripheral Component Interconnect ("PCI") and Universal Serial Bus ("USB") based products in combination with its software offerings. These developments are being driven by rapid adoption of PCI and USB slots by personal computer manufacturers.

Products and Services

The Company's data acquisition, imaging and machine vision 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 for data acquisition, to identify, measure, analyze and control physical phenomena, and for imaging and machine vision, to analyze or enhance video images.

The Company's data acquisition, imaging and machine vision systems consist of plug-in cards and Microsoft(R) Windows(R)-based software which provide an integrated, high performance systems solution to the general scientific and measurement marketplace.

The Company sells over 100 data acquisition, imaging and machine vision products, which range in retail price from $200 to $4,000. 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, system 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 and software 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 and machine vision 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, imaging and machine vision 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, imaging and machine vision products through a comprehensive, widely distributed annual catalog, an in-house telesales 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. Two subsidiaries and various distributors throughout Europe, Asia and the Pacific Rim support international sales.

Competition

The Company competes in the data acquisition market principally with National Instruments Corporation, Measurement Computing Corporation and IOtech Incorporated. In the imaging and machine vision markets the Company competes with Matrox Electronic Systems, Coreco, Inc., and Cognex Corporation. The aforementioned competitors 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, imaging and machine vision products compete based upon their ability to supply extensive hardware and software components with competitive performance and price.

Commercial Products

Market

The convergence of voice, video and data, the advances in personal computing, and the growth of the Internet have changed the way in which the world communicates. As computing processor power and telecom/digital/cable modem technologies 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 with substantial increases in computing power, 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 use in presentations, training, sales and marketing and CD-ROM/Digital Video Disk ("DVD") title producers developing entertainment, gaming and education content.

Product and Technology

Broadway is a high-performance video capture and encoding system for Windows(R) based PCs. Broadway is a complete streaming and video editing solution, and its videos may also be integrated with third party video editing software packages to edit and produce Web streaming video based on Real Networks technology, as well as 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 distribute it on the Web or in hard media form. Users can also incorporate the finished video into multimedia applications, such as Web home pages, multimedia presentations and CD-ROMs. Broadway is composed of a PCI integrated circuit board and a graphical user interface compatible with Microsoft(R) Windows(R) based operating systems. 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).

Broadway uses a robust implementation of the MPEG-1 and MPEG-2 standard that uses a combination of hardware and software to fully compress video clips into the MPEG-1 and MPEG-2 format. Users of the latest Pentium III+ processors can compress into MPEG-1 format in real-time. PCs with slower processors utilize hardware compression to achieve real-time compression. Advances in processor speed may make use of various software techniques to achieve faster compression and enhanced editing capability.

Using the MPEG-1 and MPEG-2 standard allows Broadway to produce compressed videos, which may be played back at 30 frames per second: the standard, full-motion video speed. Additionally, many users choose to share video content via the Internet. These clips may be streamed, utilizing RealNetworks technology and played back at their destination via a RealNetworks player. Since many users have installed this player on their PC, this ability to communicate with video is rapidly gaining adherents.

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 as primary customers audio/video professionals, business presentation and education developers, home hobbyists and family/home users.

Worldwide, the Company's commercial products are sold directly on-line, as well as through a two-tier distribution network. Users can order directly from the Company's Web site for rapid delivery. The Company maintains direct relationships with international mass-market distributors as well as OEMs, resellers and 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 virtually any method used by its customers to purchase their products. The Company currently offers a 30-day money back guarantee on its commercial products.

The Company currently provides end users with 90 days of free technical support with the purchase of any 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 ease of installation and use, brand name awareness, and price.

The Company's principal competition for the Broadway product includes other products with MPEG encoding such as Pinnacle System's DV500 DVD, Matrox's RT2500, 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 28.0% of net sales. For the fiscal year ended November 30, 2002, the Company invested approximately $2,844,000, or 24.8% of net sales, in product development compared to $3,050,000, or 20.5% of net sales in the prior fiscal year.

The Company employed, as of November 30, 2002, approximately 19 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 Company's focus on hardware development includes the integration of application specific integrated circuits ("ASICs") into circuit boards, which may reduce cost and advance the development of new computer bus technologies (e.g., PCI). The Company's software development in data acquisition, imaging and machine vision centers on supporting Microsoft(R) Windows(R)-based operating systems.

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 more rapid turn-around of product development to the marketplace. 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 current 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 initial testing, 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.

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 in which 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 twelve United States patents, expiring from July 2003 through May 2019, and has two pending patent applications in the United States, none of which the Company believes is material to its business or operations. Pursuant to an agreement with Parent, the Company also has 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 of the Company's 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 November 30, 2002, the Company employed approximately 83 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 product knowledge and skill set 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

Name Age Position with the Company ---- --- -------------------------- Alfred A. Molinari, Jr. 61 Chairman and Chief Executive Officer Jeffrey M. Cronin 38 Vice President, Operations Michael A. DiPoto 35 Vice President, Finance, CFO and Treasurer Ellen W. Harpin 47 Vice President Engineering Andreas C. Randow 32 Vice President Technology

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.

Mr. Cronin was appointed Vice President, Operations in February 1999. Prior to that Mr. Cronin served as Director of Operations and Manufacturing of the Company from December 1996 to February 1999 and as Director of Manufacturing of Parent from March 1992 to December 1996.

Mr. DiPoto was appointed Vice President of Finance, Chief Financial and Treasurer in July 1999. Prior to that Mr. DiPoto served as the Chief Accounting Officer of the Company from March 1999 to June 1999. Prior to joining the Company Mr. DiPoto served as Corporate Controller of NuMega Technologies, Inc. from January 1996 to March 1999. Prior to that Mr. DiPoto served as Accounting Manager and Corporate Controller of Acuity Imaging, Inc. from January 1994 to December 1995.

Ms. Harpin was appointed Vice President of Engineering in July 2001. Ms. Harpin has been the Secretary and a director of the Company since 1997. Ms. Harpin previously served as Vice President, Administration from October 1998 to May 1999 and as Vice President, Sales from October 1997 to October 1998. Ms. Harpin served as Vice President of Administration of Parent from July 1995 to September 1996. Ms. Harpin was employed by the Parent from March 1983 until November 1996 serving as Chief Financial Officer, Treasurer, Vice President, Manufacturing and Director of Sales.

Mr. Randow was appointed Vice President of Technology in August 2002. Prior to joining the Company Mr. Randow served as Director of GTM Measure Precise, GmbH from May 1998 to July 2002. Prior to that Mr. Randow served as Director of Randow Softwaretechnik from January 1996 to April 1998.

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