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                UNITED STATES 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 MARCH 31, 1999

                                       OR

             [ ] 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 0-26516

                                 EUPHONIX, INC.
             (Exact name of registrant as specified in its charter)

         California                                           77-0189481
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)

                     220  Portage  Avenue,  Palo  Alto,  CA  94306  (Address  of
                   principal executives, zip code)

                                (650) 855-0400
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant has filed (1) 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 _________



The number of shares  outstanding of the  registrant's  common stock as of March
31, 1999 was 7,956,521 ($.001 par value).


<PAGE>


                                 EUPHONIX, INC.

                                    FORM 10-Q
                                TABLE OF CONTENTS


                                                                       Page
PART I.  FINANCIAL INFORMATION                                         ----

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited):

         Condensed Consolidated Statements of Operations for the
          three months ended March 31, 1999 and 1998.....................3

         Condensed Consolidated Balance Sheets as of
          March 31, 1999 and December 31, 1998...........................4

         Condensed Consolidated Statements of Cash Flows
          for the three months ended March 31, 1999 and 1998.............5

         Notes to Condensed Consolidated Financial Statements ...........6

ITEM 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.............................8


PART II. OTHER INFORMATION

ITEM 6.  Exhibits and Reports on Form 8-K...............................14

Signatures..............................................................15





                                       2
<PAGE>


PART I.           FINANCIAL INFORMATION

Item 1.           Condensed Consolidated Financial Statements

                                 Euphonix, Inc.
                 Condensed Consolidated Statements of Operations
                                   (unaudited)




                                                    Three Months Ended
                                                         March 31,
                                                1999                1998
                                          ------------------  -----------------
Net revenues..............................   $  2,159,447       $  4,280,167    
Cost of sales.............................      1,762,000          2,118,852    
                                          ------------------  -----------------
Gross profit..............................        397,447          2,161,315
Operating expenses:
  Research & development..................      1,225,264            881,758    
  Sales & marketing.......................      1,228,730          1,215,927    
  General & administrative................        539,545            679,937    
                                          ------------------  -----------------
Total operating expenses..................      2,993,539          2,777,622  
                                          ------------------  -----------------

Operating loss............................     (2,596,092)          (616,307)   
Other income..............................         12,484             19,776    
                                          ------------------  -----------------
Loss before income taxes..................     (2,583,608)          (596,531)   
Tax (benefit)/provision...................           ----               ----    
                                          ------------------  -----------------
Net loss..................................   $ (2,583,608)      $   (596,531)   
                                          ==================  =================

Net loss per share:
 Basic and diluted........................   $      (0.34)      $      (0.10)   
                                          ==================  =================

Number of shares used in computing per share amounts:
 Basic and diluted........................      7,589,063          5,716,935    
                                          ==================  =================



                              See accompanying notes.










                                       3
<PAGE>




                                 Euphonix, Inc.
                      Condensed Consolidated Balance Sheets

                                           March 31,             December 31,
                                             1999                   1998
                                    --------------------    --------------------
                                         (unaudited)               (Note)
                          ASSETS
CURRENT ASSETS:
 Cash and cash equivalents........    $   1,108,313           $   1,637,332     
 Short-term investments...........           12,619                 601,146     
 Accounts receivable, net.........        1,388,585               1,543,335
 Inventories......................        6,525,771               5,558,637
 Income tax receivable............             ----                    ----     
 Prepaid expenses and other current                                             
  assets..........................          330,448                 237,512
                                    --------------------    --------------------
Total current assets..............        9,365,736               9,577,962     
Property and equipment, net.......        1,588,649               1,360,186
Deposits and other assets.........          291,506                 292,716     
                                    --------------------    --------------------
Total assets......................    $  11,245,891           $  11,230,864

                                    ====================    ====================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable.................    $   3,141,966           $   1,636,357
 Accrued payroll and related 
  liabilities, including deferred                                  
   salary.........................          474,538                 548,926
 Accrued warranty.................          448,713                 439,397     
 Accrued commissions..............           41,006                 126,094    
 Sales tax payable................           26,729                 187,687
 Deferred revenues................          220,391                 185,344
 Other accrued liabilities........          422,732                 401,118     
 Customer deposits................          162,941                  97,914     
 Short term portion capital leases           20,930                  29,692     
                                    --------------------    --------------------
Total current liabilities........         4,959,946               3,652,529

Long term portion capital leases.             2,282                   2,282     
Deferred rent....................               703                   1,055     
Deferred income taxes............           200,000                 200,000     
SHAREHOLDERS' EQUITY:
 Preferred stock.................              ----                    ----
 Common stock....................             7,957                   6,636     
 Additional paid-in capital......        16,975,164              15,672,808

 Accumulated Other Comprehensive 
  Income/(Loss)..................            40,368                  74,975     
 Accumulated deficit.............       (10,913,529)             (8,329,921)
 Deferred compensation...........           (27,000)                (49,500)    
                                    --------------------    --------------------
Total shareholders'equity........         6,082,960               7,374,998

                                    --------------------    --------------------
Total liabilities and shareholders'                               
 equity..........................     $  11,245,891           $  11,230,864

                                    ====================    ====================

Note:  The balance sheet at December 31, 1998 has been derived from the audited 
financial  statements  at that date.  See notes to condensed consolidated 
financial statements.

                              See accompanying notes.





                                       4
<PAGE>

                                 Euphonix, Inc.
                 Condensed Consolidated Statements of Cash Flows
                                   (unaudited)


                                                   Three Months Ended
                                                       March 31,
                                                1999                1998
                                          ----------------    ----------------
Operating activities
Net loss................................   $ (2,583,608)       $  (596,531)
Adjustments to reconcile net income to
 net cash used in operating activities:
 Depreciation and amortization..........        139,610            144,835
 Deferred compensation amortization.....         22,500             22,500
 Changes in operating assets and liabilities:
  Prepaid expenses, other current assets  
   and other assets.....................       (127,543)           141,596
  Accounts receivable...................        154,750         (1,297,583)
  Inventories...........................       (967,134)          (320,758)
  Income tax receivable.................           ----              6,427
  Accounts payable, accrued liabilities,                        
   and deferred rent....................      1,250,799            488,852
  Customer deposits.....................         65,027             95,365
                                          -----------------   ----------------
Total adjustments.......................        538,009           (718,766)
                                          -----------------   ----------------
Net cash used in operating activities...     (2,045,599)        (1,315,297)
Investing activities
Proceeds from sales of available-for-sale 
 securities.............................        588,527          1,676,312
Purchases of available-for-sale securities         ----         (1,044,889)
Purchase of property and equipment......       (366,863)          (246,853)
                                          -----------------   ----------------
Net cash provided by (used in)investing 
 activities.............................        221,664            384,570
Financing activities
Principal payments under capital lease                                          
 obligations............................         (8,761)           (14,574)
Proceeds from sale of common stock......      1,303,677          1,949,998      
                                          -----------------   ----------------
Net cash provided by (used in) financing      1,294,916          1,935,424
                                          -----------------   ----------------
Net increase (decrease) in cash and cash 
 equivalents............................       (529,019)         1,004,697
Cash and cash equivalents at beginning of                                     
 period.................................      1,637,332          1,880,093
                                          -----------------   ----------------
Cash and cash equivalents at end of                                         
 period.................................   $ 1,108,313         $ 2,884,790
                                          =================   ================

Supplemental schedules of noncash investing 
 and financing activities

 Translation adjustment gain/(loss)        $   (34,607)        $      ----

   
                          See accompanying notes.



                                       5
<PAGE>



                                 EUPHONIX, INC.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


1.       Basis of Presentation

         The accompanying  unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information  and with the  instructions to Form 10-Q and
article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals)  considered  necessary for a fair
presentation have been included.  Operating  results for the three-month  period
ended March 31, 1999 are not  necessarily  indicative of the results that may be
expected for the entire year ending December 31, 1999.

         For further information,  refer to the audited financial statements and
footnotes  thereto  included in the Registrant  Company's  annual report on Form
10-K for the year ended December 31, 1998.

2.       Use of Estimates

         The preparation of the financial  statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the amounts  reported in the  financial statements
and  accompanying  notes.  Actual results could differ from those estimates.


3.       Inventories

Inventories are stated at the lower cost (first-in, first-out) or market (net 
realizable value). Inventories consist of the following:
<TABLE>
<CAPTION>
<S>                                        <C>                 <C>    

                                                March 31,          December 31,
                                                  1999                1998
                                            ----------------    ----------------


         Raw materials.....................   $  2,296,299        $  2,112,349
         Work-in-process...................      1,818,545           1,390,931       
         Finished goods....................      2,410,928           2,055,357                                                      
                                            -----------------   ----------------
                                              $  6,525,771        $  5,558,637
                                            =================   ================
</TABLE>

4.       Total  comprehensive  loss  for the  three  month  periods  ended  
March  31,  1999  and 1998  was  $2,618,215  and  $603,392, respectively.
   

         





                                       6
<PAGE>

                                  EUPHONIX, INC.
           Notes to Condensed Consolidated Financial Statements - Continued



5.       Impact of Recently Issued Accounting Pronouncements

         In June 1998, the Financial Accounting Standard Boards issued State-   
ment of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. The adoption of SFAS 133 is not
expected to materially impact the Company's results of operations, financial
position or cash flows.

         The American Institute of Certified Public Accountants issued State-
ment of Position 98-1, "Accounting For the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for internal
use. SOP 98-1 is effective for financial statements for fiscal years begin-
ning after December 15, 1998. The adoption of SOP 98-1 is not expected to
materially impact the Company's results of operations, financial position or
cash flow.

         
6.       Common Stock

         In January  1999,  the Company  received  proceeds of  $1,303,676  from
existing  investors in exchange  for the issuance of 1,320,446  shares of $0.001
par value common stock at $0.987 per share, 90% of the average closing bid price
per share on the  NASDAQ,  for the ten days  immediately  preceding  January 26,
1999.  The  authorized  capital  stock  of the  Company  as of the  date of this
agreement is 20,000,000 shares of common stock and 2,000,000 shares of preferred
stock,  par value $0.001.  As of March 31, 1999, there were 7,956,521 shares of
common stock issued and  outstanding,  and there were no issued and  outstanding
shares of preferred stock.


7.       Subsequent Event

         In April 1999, the Company executed a secured promissory note with
existing investors under which the Company may draw up to $2 million through
July 31, 1999. The note is convertible into common stock of the Company under
certain circumstances and is secured by the assets of the Company.















                                       7
<PAGE>


    

Item 2.  Management's Discussion & Analysis of Financial Condition & Results of
         Operations.

         This Quarterly Report on Form 10-Q contains forward-looking  statements
that involve risks and  uncertainties.  The Company's  actual results may differ
significantly  from the results  discussed  in the  forward-looking  statements.
Factors  that might  cause such a  difference  include,  but are not limited to,
those discussed in the section  entitled  "Factors  Affecting  Future  Operating
Results."

Results of Operations

         Net  Revenues.  Net  revenues  decreased  to $2.2  million in the first
quarter  of  1999  down  from  $4.3  million  in  the  first  quarter  of  1998,
representing  a decrease of 49.5% in 1999 from 1998.  The Company's  decrease in
net  revenues  for the  first  quarter  of 1999 as  compared  to 1998,  resulted
primarily from reduced sales in the United States and the Pacific Rim.

         Domestic sales of the Company's  products for the first quarter of 1999
and  1998  were  $1.1  million  and  $2.4  million,   respectively,   comprising
approximately  49.8%  and  56.7% of the  Company's  net  revenues  for the first
quarter of 1999 and 1998, respectively.  Export sales were $1.1 million and $1.9
million comprising  approximately  50.2% and 43.3% of the Company's revenues for
the first quarter of 1999 and 1998,  respectively.  Export sales as a percent of
net revenues decreased in the first three months of 1999 due to reduced sales in
the Pacific Rim, Canada and South America, as compared to the first three months
of 1998.

         The Company  anticipates that continuing in the second quarter of 1999,
a  significant  portion of its  revenues  will come from its new R-1  multitrack
recorder which was announced in the second quarter of 1998, and began shipping
in the first quarter of 1999.

         Gross  Margin.  The  Company's  gross margin  decreased to 18.4% in the
first quarter of 1999 down from 50.5% in the first quarter of 1998, representing
a  decrease  of 81.6% in the  first  quarter  of 1999 as  compared  to the first
quarter of 1998.  The  decrease in the first three months of 1999 from the first
three months of 1998 was  primarily due to unfavorable absorption variances
which were caused by a significant decrease in sales volume during the quarter,
the Company selling a new product, R-1, in the first quarter which had lower
margins, selling off older/used inventory at lower margins, and to manufacturing
overhead investments associated with the new R-1 Recorder and other product
development activities. 
       
         Research and Development  Expenses.  Research and development  expenses
increased to $1.2 million in the first  quarter of 1999, up from $881,800 in the
first quarter of 1998,  representing  an increase of 39% in the first quarter of
1999 as compared to the first quarter of 1998. Research and development expenses
as a percentage of net revenues increased to 56.7% in the first quarter of 1999,
up from 20.6% in the first  quarter  of 1998.  The  increase  in  reasearch  and
development expenses in the first quarter of 1999 from the first quarter of 1998
resulted primarily from new product  development costs primarily related to next
generation products,  and additional personnel.  The Company expects research
and development costs next quarter to continue to increase as it develops its 
next generation products.

         Sales and Marketing  Expenses.  Sales and marketing  expenses were $1.2
million in the first  quarter  of 1999 and 1998.  Sales and  marketing  expenses
increased as a percentage  of net revenues to 56.9% in the first quarter of 1999
from 28.4% in the first quarter of 1998 due to lower sales.



                                       8
<PAGE>


General  and  Administrative  Expenses.   General  and  administrative  expenses
decreased  to $539,500 in the first  quarter of 1999 from  $680,000 in the first
quarter of 1998,  representing a decrease of 20.6%.  General and  administrative
expenses as a percent of net revenues  increased to 25% in the first  quarter of
1999 from 15.9% in the first quarter of 1998,  primarily due to lower sales. The
decrease in general and administrative expenses in absolute dollars is primarily
due to a decrease  in  insurance  expense,  rent  expense due to a sublease of a
portion of the Palo Alto facility, lower bad debt expense due to lower receiv-
able balances as compared to the first quarter of 1998, and the reclassification
of Euphonix Japan's expenses from general and administrative expense to sales
and marketing expense.

         Provision / (benefit) for Income  Taxes.  For the first quarter of 1999
and 1998, the Company did not recognize the tax benefit of its operating losses.
Management  believes the resulting  deferred tax assets are not  realizable on a
more likely than not basis. The Company's effective tax rate was 0% in the first
quarter of 1999 and 1998, and differs from the federal  statutory rate primarily
due to the  limitations  controlling the timing for realization of net operating
losses and tax credits  established  by the  Statement of  Financial  Accounting
Standards No. 109, "Accounting for Income Taxes".

Liquidity and Capital Resources

         The Company has funded its  operations to date  primarily  through cash
flows from operations,  the private sale of equity  securities,  and the initial
public  offering of Common Stock completed in September 1995. In March 1998, the
Company received proceeds of $1,950,000 from existing  investors in exchange for
the issuance of 1,040,000  shares of $0.001 par value common stock at $1.875 per
share, the closing price of the Company's common stock on the NASDAQ on the date
the common stock purchase  agreement was executed.  In January 1999, the Company
received  proceeds of  $1,303,676  from  existing  investors in exchange for the
issuance  of  1,320,446  shares of $0.001 par value  common  stock at $0.987 per
share. In April 1999, the Company executed a secured promissory note with exist-
ing investors under which the Company may draw up to $2 million through July 31,
1999. The note is convertible into common stock of the Company under certain
circumstances and is secured by the assets of the Company. For the first quarter
ended March 31, 1999, cash, cash equivalents and short-term investments 
decreased by $529,000 to approximately $1.1 million. Also, during this period,
working capital decreased by $1.5 million to approximately $4.4 million.

         The Company's  operating  activities  used cash of  approximately  $2.0
million  and $1.3  million for the three  months  ended March 31, 1999 and 1998,
respectively. Cash used in operating activities for 1999 was comprised primarily
of net loss and an increase in inventories,  prepaid  expenses and other current
assets and other assets, offset partially by an increase in accounts payable and
other accrued  liabilities, depreciation, and customer deposits and a decrease
in accounts receivable. Cash used in operating activities for 1998 was comprised
primarily of net loss, an increase in accounts receivable and inventories, 
offset partially by an increase in accounts payable and other accrued liabili-
ties, depreciation and amortization, prepaid expenses, other current assets and
other assets, and customer deposits. The Company's investing activities of
$222,000 and $385,000 for the three months ended March 31, 1999 and 1998, 
respectively, provided cash from the proceeds from sales of available-for-sale
securities, offset by the purchase of property and equipment.

        The Company's financing  activities provided $1.3 million in cash from
the sale of common  stock to existing  investors  during the first three  months
ended March 31, 1999.  For the first three months ended March 31, 1998 proceeds
from the sale of common stock provided $1,949,998.


                                     9
<PAGE>


         As of March 31, 1999, the Company's sources of liquidity included cash,
cash equivalents and short-term investments totaling approximately $1.1 million.
Management  believes  that  cash and  short  term  investments  of $1.1  million
combined with the equity financing  received in January 1999, and the additional
$2.0 million of convertible debt financing  from  existing  investors and others
received in the second quarter ended June 30, 1999, and a possible reduction in
operating  expenses during the second half of 1999 will be sufficient to support
its operations through at least December 1999. In addition, the Company may need
to delay or significantly reduce other operating expenditures, which would have
a material adverse effect on its business, results of operations and business
prospects.

General  Description  of the Year 2000 Issue and the Nature and  Effects  of the
Year 2000 on  Information  Technology  (IT) and Non-IT Systems

      The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable  year. Any of the Company's
computer  programs or  hardware  that have  date-sensitive  software or embedded
chips may  recognize  a date  using "00" as the year 1900  rather  than the year
2000.

      Based on recent  assessments,  the Company determined that it would not be
required to upgrade, modify, and/or replace portions of its software and certain
hardware so that those systems will properly  utilize dates beyond  December 31,
1999.  The  Company  presently  believes  that the Year 2000  issue is  resolved
without modifications or replacements of existing software and certain hardware.

      The Company's plan in resolving the Year 2000 issue involved the following
four phases: inventory,  assessment,  remediation,  and  testing/implementation.
Both information  technology ("IT") and  non-information  technology  technology
("Non-IT")  systems were addressed.  The Company has completed its assessment of
IT and Non-IT  systems that could have been  significantly  affected by the Year
2000. The completed assessment  indicated that all of the Company's  significant
IT systems would not be affected,  particularly the order entry, general ledger,
billing, and inventory  systems. The assessment also indicated that Non-IT sys-
tems would not be affected.

      Based on a review of its product lines,  the Company has  determined  that
most of the  products  it has  sold  and will  continue  to sell do not  require
remediation  to be Year 2000  compliant.  Based on the results of product review
and testing  completed,  the Company  believes its programming  software for its
audio consoles and R-1  Multi-track  Recorders to be compliant as defined by the
British Standards Institute DISC PC-2000-1 definition.  Accordingly, the Company
does not believe that the Year 2000  presents a material  exposure as it relates
to the Company's products.

      The   Company  has  queried   all  of  its   significant   suppliers   and
subcontractors systems with the Company  ("suppliers").  To date, the Company is
not aware of any supplier  with a Year 2000 issue that would  materially  impact
the Company's results of operations,  liquidity, or capital resources.  However,
the Company has no means of ensuring that its suppliers will be Year 2000 ready.
The inability of suppliers to complete their Year 2000  resolution  process in a
timely fashion could materially and adversely impact the Company. However, many
significant suppliers have been second sourced and the Company is currently
taking steps to assess whether these suppliers are currently taking steps to
address any Year 2000 issues they may have.



                                       10
<PAGE>


      To date,  the Company  has  incurred  costs of less than $5,000 on the
Year 2000  project, and estimates  that there will be no material future costs.

      As noted above, the Company has completed all necessary phases of the Year
2000 program.  The Company  believes  that it is more likely to experience  Year
2000 problems  with the systems of key suppliers  rather than with the Company's
internal  systems or products.  The Company's Year 2000 program includes efforts
to assess the Year 2000 compliance of its key suppliers.

      The Company  currently has no  contingency  plans in place in the event it
does not complete all phases of the Year 2000  program.  The Company  intends to
develop a  contingency  plan to deal with Year 2000 issues  that may  materially
adversely  affect  its  business  processes.  The  Company  intends  to  have  a
contingency plan in place no later than September 30, 1999.


Factors Affecting Future Operating Results

      The Company has derived  virtually  all of its revenues  from sales of its
digitally controlled audio mixing console system, which system is based upon its
hardware  platform.  The Company believes that sales of this system,  along with
enhancements thereof, and the R-1 recorder will continue to constitute virtually
all of the  Company's  revenues for the  foreseeable  future.  Accordingly,  any
factor  adversely  affecting  the  Company's  base  system,  whether  technical,
competitive or otherwise,  could have a material adverse effect on the Company's
business and results of operations.

      The Company has expended and will continue to expend  substantial funds to
launch its new  product  developments  in the second  half of fiscal  1999.  The
Company's ability to fund operations through December 31, 1999 is dependent upon
achievement of its operating plan and  attainment of additional financing.  The
Company believes that additional debt or equity financing will be available from
existing  investors  and others.  However,  there can be no  assurance as to the
terms and  conditions of any such financing and no certainty that funds would be
available  when needed.  The  inability  to obtain  additional  financing,  when
needed, would be likely to curtail the Company's sales and marketing and product
development efforts and would be likely to have a material adverse effect on the
Company.  To the  extent  that any  future  financing  involves  the sale of the
Company's equity securities,  the Company's then existing  shareholders could be
substantially diluted.

     A limited  number of the  Company's  system sales  typically  account for a
substantial  percentage  of  the  Company's  quarterly  revenue  because  of the
relatively  high average  sales price of such systems.  Moreover,  the Company's
expense  levels  are  based  in  part on its  expectations  of  future  revenue.
Therefore, if revenue is below expectations, the Company's operating results are
likely  to be  adversely  affected.  In  addition,  the  timing  of  revenue  is
influenced  by a number of other  factors,  including  the timing of  individual
orders and shipments,  industry trade shows,  seasonal customer buying patterns,
changes in product  development  and sales and  marketing  expenditures,  custom
financing arrangements, production limitations and international sales activity.
Because the Company's operating expenses are based on anticipated revenue levels
and a high  percentage of the  Company's  expenses are  relatively  fixed in the
short  term,  variations  in the timing of  recognition  of revenue  could cause
significant  fluctuations  in operating  results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.



                                       11
<PAGE>


      The  markets  for the  Company's  system  are  characterized  by  changing
technologies  and new product  introductions.  The Company's future success will
depend in part upon its  continued  ability  to  enhance  its base  system  with
features  including new software and hardware  add-ons and to develop or acquire
and  introduce  new  products  and  features  which meet new market  demands and
changing  customer  requirements  on a timely  basis.  The Company is  currently
designing  and  developing  new  products,  primarily in the areas of recording,
editing  and mixing  functions  of sound  production  as well as  digital  audio
processing and networking systems.  In addition,  there can be no assurance that
products  or  technologies  developed  by others  will not render the  Company's
products or technologies non-competitive or obsolete. See "Business".

      To date,  the  Company's  primary  market  success  has been in the  music
segment of the professional  audio market. In order for the Company to grow, the
Company  believes that it must continue to gain market share in the music market
segment,  as well as in its  other  targeted  market  segments.  There can be no
assurance  that the  Company  will be able to  compete  favorably  in any market
segments.  The Company's  inability to compete  favorably  could have a material
adverse  effect on its business and results of  operations.  The markets for the
Company's  products are intensely  competitive and  characterized by significant
price  competition.  The Company believes that its ability to compete depends on
elements  both within and outside its control,  including the success and timing
of new product development  (including development on a timely basis of digital
products,  of which there can be  no assurance) and  introduction  by  the
Company  and its  competitors,  product  performance  and  price,  distribution,
availability  of lease or other financing  alternatives,  resale of used systems
and customer support. See "Business--Competition".

      Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to the integrated  circuits included in the Company's base
system. Major delays or terminations in supplies of such components could have a
significant  adverse  effect on the Company's  timely  shipment of its products,
which in turn would  adversely  affect the  Company's  business  and  results of
operations.  The Company  also  relies on single  vendors to  manufacture  major
subassemblies for its products.  Any extended  interruption in the future supply
or increase in the cost of  subassemblies  manufactured  by its primary or other
third  party  vendors  could have a  material  adverse  effect on the  Company's
business and results of operations. See "Business--Manufacturing and Suppliers".

      In  addition,  as  different  electrical,  radiation  or  other  standards
applicable  to the Company's  products are adopted in  countries,  including the
United  States,  or groups of countries in which the Company sells its products,
the failure of the Company to modify its products, if necessary,  to comply with
such standards would likely have an adverse effect on the Company's business and
results of operations. See "Business--Sales and Distribution".

      The Company  generally relies on a combination of trade secret,  copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary  rights in its products and technologies.  However,  the Company
believes that such measures  provide only limited  protection of its proprietary
information,  and there is no assurance  that such  measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the  proprietary  rights of others or to defend  against  claims of
infringement.  There  can  be no  assurance  that  third-party  claims  alleging
infringement  will not be asserted  against the Company in the future.  Any such
claims  could have a  material  adverse  effect on the  Company's  business  and
results of operations. See "Business--Proprietary Rights".

  

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     The  Company's  success  depends,  in part,  on its ability to retain key
management  and technical  employees  and its  continued  ability to attract and
retain highly skilled  personnel.  In addition,  the Company's ability to manage
any growth will  require it to  continue  to improve and expand its  management,
operational and financial systems and controls.  If the Company's  management is
unable to manage growth effectively, its business and results of operations will
be adversely affected.

      The Company acquired  Spectral in February 1996. Sale of Spectral products
for 1998,  1997 and 1996 were  significantly  below  plan and below  1995  sales
levels.  Spectral's pre-tax operating loss for 1998 decreased from 1997 and 1996
due  primarily  to  transferring  the  general  and  administrative,  and  sales
functions  to Palo Alto.  In 1996,  Spectral  engineering,  marketing  and sales
activities were integrated into the respective Euphonix organizations.  In 1997,
the Company  further  integrated  Spectral  activities  by the transfer of their
manufacturing to Euphonix  headquarters in Palo Alto,  California.  In 1998, the
Company sold Spectral's technology to Telos, Inc.

      As a result  of these and  other  factors,  the  Company  has  experienced
significant  quarterly  fluctuations in operating  results and anticipates  that
these  fluctuations  will continue in future periods.  There can be no assurance
that  the  Company  will  be   successful  in   maintaining   or  improving  its
profitability  or avoiding  losses in any future period.  Further,  it is likely
that in some future period the Company's net revenues or operating  results will
be below the expectations of public market securities analysts and investors. In
such event,  the price of the Company's  Common Stock would likely be materially
adversely affected. See "Factors Affecting Future Operating Results."





























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PART II.  OTHER INFORMATION



Item 6:  Exhibits and Reports on Form 8-K/A

         (a) Exhibits.

                  Exhibit 27 - Financial Data Schedule (page 16)

                  The  exhibit  listed  on the  accompanying  index  immediately
         following the signature page is filed as part of this report.

         (b) Reports on Form 8-K
                  None.
























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SIGNATURES


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



Euphonix, Inc.






Date:    May 15, 1999                         By: /s/ BARRY L. MARGERUM
                                              -------------------------
                                              Barry L. Margerum, Chief Executive
                                              Officer, President















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