**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** **December
      31, 2006**




**OR**





**o
      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**  **1-13550**





**HAUPPAUGE
      DIGITAL, INC** **.**


**(Exact
      name of registrant as specified in its charter)**


**Delaware**
            
            **11-3227864****(State
                or other jurisdiction of**
            
            (**I.R.S.
                Employer****incorporation
                or organization)**
            
            **Identification
                No.)**





**91
      Cabot Court, Hauppauge, New York 11788**


**(Address
      of principal executive offices)**





**(631)
      434-1600**


**(Registrant’s
      telephone number, including area code)**





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





**x
      YES  o
      NO**




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (See definition of “accelerated
      filer and large accelerated filer’ in Rule 12b-2 of the Exchange
      Act).





**o
      LARGE ACCELERATED FILER  o
      ACCELERATED FILER  x
      NON-ACCELERATED
      FILER**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule12b-2
      of the Exchange act).


1








**o
      YES  x
      NO**




****


As
      of
      January 31, 2007, 9,823,181 shares of .01 par value Common Stock of the
      registrant were outstanding.


2







**HAUPPAUGE
      DIGITAL, INC.** **AND
      SUBSIDIARIES**




**INDEX**




**PART
      I. FINANCIAL INFORMATION**




**Item 1. Financial Statements**
            **Page
              no.****Condensed
                Consolidated Balance Sheets -**
              **December
                31, 2006 (unaudited) and September 30, 2006**
            **5****Condensed
                Consolidated Statements of Income -**
              **Three
                Months ended December 31, 2006 (unaudited) and 2005
                (unaudited)**
            **6****Condensed
                Consolidated Statements of Other Comprehensive Income -**
              **Three
                months ended December 31, 2006 (unaudited) and 2005 (unaudited)**
            **7****Condensed
                Consolidated Statements of Cash Flows -**
              **Three
                Months ended December 31 , 2006 (unaudited) and 2005
                (unaudited)**
            **8****Notes
                to Condensed Consolidated Financial Statements**
            **9
                -15****Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations**
            **16
                -20****Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk**
            **20-21****Item
                4. Controls and Procedures**
            **21**





3





**PART
                II. OTHER INFORMATION****Item
                2.****Unregistered
                Sales of Equity Securities and Use of Proceeds**
            **22****Item
                4. Submission of Matters to a Vote of Security
                Holders**
            **22****Item
                6. Exhibits**
            **23****Signatures**
            **24**





4


**PART
      I. FINANCIAL INFORMATION**




**Item
      1.Financial** **Statements**


**HAUPPAUGE
                DIGITAL, INC. AND SUBSIDIARIES**
              **HAUPPAUGE
                DIGITAL, INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED BALANCE
                SHEETS**





**December
                31, 2006 (unaudited)**
            
            **September
                30, 2006****Assets:****Cash
                and cash equivalents**
            
            **$**
            **9,857,227**
            
            **$**
            **9,020,941****Receivables,
                net of various allowances**
            
            
            **28,085,968**
            
            
            **16,132,928****Inventories**
            
            
            **12,649,471**
            
            
            **9,905,746****Prepaid
                expenses and other current assets**
            
            
            **839,848**
            
            
            **895,223****Total
                current assets**
            
            
            **51,432,514**
            
            
            **35,954,838****Property,
                plant and equipment, net**
            
            
            **616,760**
            
            
            **612,311****Security
                deposits and other non current assets**
            
            
            **84,491**
            
            
            **83,239****Total
                assets**
            
            **$**
            **52,133,765**
            
            **$**
            **36,650,388****Liabilities
                and Stockholders’ Equity:****Current
                Liabilities:****Accounts
                payable**
            
            **$**
            **23,518,087**
            
            **$**
            **12,011,232****Accrued
                expenses -licensing fees**
            
            
            **6,671,039**
            
            
            **5,481,005****Accrued
                expenses**
            
            
            **1,456,372**
            
            
            **1,174,323****Income
                taxes payable**
            
            
            **211,726**
            
            
            **204,103****Total
                current liabilities**
            
            
            **31,857,224**
            
            
            **18,870,663****Stockholders'
                Equity:****Common
                stock $.01 par value; 25,000,000 shares authorized,**
              **10,406,338
                and 10,260,464 issued, respectively**
            
            
            **104,063**
            
            
            **102,605****Additional
                paid-in capital**
            
            
            **14,543,945**
            
            
            **14,222,890****Retained
                earnings**
            
            
            **7,924,235**
            
            
            **5,721,500****Accumulated
                other comprehensive (loss)**
            
            
            **(537,751**
            **)**
            
            **(509,319**
            **)****Treasury
                Stock, at cost, 607,547 shares**
            
            
            **(1,757,951**
            **)**
            
            **(1,757,951**
            **)****Total
                stockholders' equity**
            
            
            **20,276,541**
            
            
            **17,779,725****Total
                liabilities and stockholders' equity**
            
            **$**
            **52,133,765**
            
            **$**
            **36,650,388**




** ***See
      accompanying notes to condensed consolidated financial
      statements***


5





**HAUPPAUGE
                DIGITAL, INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF
                INCOME**


**(UNAUDITED)**





**Three
                months ended December 31,****2006**
            
            **2005****Net
                sales**
            
            **$**
            **29,919,133**
            
            **$**
            **25,044,990****Cost
                of sales**
            
            
            **23,101,596**
            
            
            **19,813,206****Gross
                profit**
            
            
            **6,817,537**
            
            
            **5,231,784****Selling,
                general and administrative expenses**
            
            
            **3,802,223**
            
            
            **3,381,070****Research
                and development expenses**
            
            
            **753,445**
            
            
            **794,001****Income
                from operations**
            
            
            **2,261,869**
            
            
            **1,056,713****Other
                income:****Interest
                income**
            
            
            **12,391**
            
            
            **5,206****Foreign
                currency**
            
            
            **12,027**
            
            
            **964****Other
                income**
            
            
            **24,418**
            
            
            **6,170****Income
                before taxes on income**
            
            
            **2,286,287**
            
            
            **1,062,883****Tax
                provision**
            
            
            **83,552**
            
            
            **42,411****Net
                income**
            
            **$**
            **2,202,735**
            
            **$**
            **1,020,472****Net
                income per share:****Basic**
            
            **$**
            **0.23**
            
            **$**
            **0.11****Diluted**
            
            **$**
            **0.22**
            
            **$**
            **0.10**





***See
      accompanying notes to condensed consolidated financial
      statements***








6








**HAUPPAUGE
                DIGITAL, INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE
                INCOME**


**(UNAUDITED)**






**Three
                months ended December 31,****2006**
            
            **2005****Net
                income**
            
            **$**
            **2,202,735**
            
            **$**
            **1,020,472****Foreign
                currency translation gain (loss)**
            
            
            **56,265**
            
            
            **(743,271**
            **)****Forward
                exchange contracts marked to market**
            
            
            **(84,697**
            **)**
            
            **(104,138**
            **)****Other
                comprehensive income**
            
            **$**
            **2,174,303**
            
            **$**
            **173,063**





***See
      accompanying notes to condensed consolidated financial
      statements***


7




**HAUPPAUGE
                DIGITAL, INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH
                FLOWS**


**(UNAUDITED)**




********
            
            **Three
                months ended December 31,****2006**
            
            **2005****Net
                income**
            
            **$**
            **2,202,735**
            
            **$**
            **1,020,472****Adjustments
                to reconcile net income to net cash provided by (used in)**
              **operating
                activities:****Depreciation
                and amortization**
            
            
            **52,456**
            
            
            **45,070****Stock
                compensation expense**
            
            
            **108,868**
            
            
            **100,878****Other
                non cash items**
            
            
            **(1,252**
            **)**
            
            **1,387****Changes
                in current assets and liabilities:****Accounts
                receivable**
            
            
            **(11,953,040**
            **)**
            
            **(7,436,483**
            **)****Inventories**
            
            
            **(2,743,725**
            **)**
            
            **(591,450**
            **)****Prepaid
                expenses and other current assets**
            
            
            **55,375**
            
            
            **50,401****Accounts
                payable**
            
            
            **11,506,855**
            
            
            **5,312,183****Accrued
                expenses and other current liabilities**
            
            
            **1,479,706**
            
            
            **988,046****Total
                adjustments**
            
            
            **(1,494,757**
            **)**
            
            **(1,529,968**
            **)****Net
                cash provided by (used in) operating activities**
            
            
            **707,978**
            
            
            **(509,496**
            **)****Cash
                Flows From Investing Activities:****Purchases
                of property, plant and equipment**
            
            
            **(56,905**
            **)**
            
            **(41,580**
            **)****Net
                cash used in investing activities**
            
            
            **(56,905**
            **)**
            
            **(41,580**
            **)****Cash
                Flows From Financing Activities:****Proceeds
                from the exercise of stock options and employee**
              **stock
                purchases**
            
            
            **213,645**
            
            
            **24,081****Net
                cash provided by financing activities**
            
            
            **213,645**
            
            
            **24,081****Effect
                of exchange rates on cash**
            
            
            **(28,432**
            **)**
            
            **(847,409**
            **)****Net
                increase (decrease) in cash and cash equivalents**
            
            
            **836,286**
            
            
            **(1,374,404**
            **)****Cash
                and cash equivalents, beginning of period**
            
            
            **9,020,941**
            
            
            **7,567,393****Cash
                and cash equivalents, end of period**
            
            **$**
            **9,857,227**
            
            **$**
            **6,192,989****Supplemental
                disclosures:****Income
                taxes paid**
            
            **$**
            **84,451**
            
            **$**
            **16,776**





***See
      accompanying notes to condensed consolidated financial
      statements*** ******





8





HAUPPAUGE
      DIGITAL, INC. AND SUBSIDIARIES


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**Note
      1. Basis of presentation**





The
      accompanying unaudited condensed consolidated financial statements for Hauppauge
      Digital Inc. (the “Company”) included herein have been prepared in accordance
      with generally accepted accounting principles for interim period reporting
      in
      conjunction with the instructions to Form 10-Q. Accordingly, these statements
      do
      not include all of the information required by generally accepted accounting
      principles for annual financial statements. In the opinion of management, all
      known adjustments (consisting of normal recurring accruals and reserves)
      necessary to present fairly the Company’s consolidated financial position,
      results of operations and cash flows as of and for the interim periods have
      been
      included. It is suggested that these interim statements be read in conjunction
      with the financial statements and related notes included in the Company's
      September 30, 2006 Form 10-K.





The
      operating results for the three months ended December 31, 2006 are not
      necessarily indicative of the results to be expected for the September 30,
      2007
      year end.





Certain
      reclassifications have been made to the prior condensed consolidated financial
      statements to conform to the current presentation.




**Note
      2. Receivables**


Accounts
      and other receivables as of December 31, 2006 and September 30, 2006 consisted
      of :


**December
                31,**
            
            **September
                30,********2006**
            
            ******2006**Trade
                receivables
            
            $
            20,222,728
            
            $
            13,910,101Receivable
                from contract manufacturers
            
            
            10,478,797
            
            
            4,916,402GST
                and VAT taxes receivables
            
            
            815,421
            
            
            616,119Allowances
                and reserves
            
            
            (3,495,000
            )
            
            (3,377,000
            )Other
            
            
            64,022
            
            
            67,306$
            28,085,968
            
            $
            16,132,928




**Note
      3. Foreign currency translations and transactions**


The
      Company’s Asian subsidiary reports its financial position and results of
      operations in the reporting currency of the Company.





The
      financial position and results of operations of the Company’s European
      subsidiaries are determined using Euros as the functional currency. Assets
      and
      liabilities of these subsidiaries are translated at the exchange rate in effect
      at each period end. Income statement accounts are translated at the prevailing
      average spot rate. For periods prior to April 2006, the Company translated
      sales
      amounts at the average forward exchange contract rate. The change in this
      accounting treatment was immaterial to the Company’s current and prior financial
      statements. Translation adjustments arising from the translation to U.S. dollars
      at differing exchange rates are included in the accumulated other comprehensive
      income (loss) account in stockholders’ equity. Gains and losses resulting from
      transactions that are denominated in currencies other than Euros are included
      in
      earnings as a component of other income. The Company had a translation loss
      of
      $531,289 recorded on the balance sheet as of September 30, 2006. For the three
      months ended December 31, 2006, the Company recorded on the balance sheet
      deferred translation gains of $56,265, resulting in a translation loss of
      $475,024 recorded as a component of accumulated other comprehensive income
      as of
      December 31, 2006.


9





HAUPPAUGE
      DIGITAL, INC.AND
      SUBSIDIARIES


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**









**Note
      4. Inventories**


Inventories
      have been valued at the lower of average cost or market on a first in first
      out
      basis. The components of inventory consist of:


December
                31,
            
            September
                30,2006
            
            2006Component
                parts
            
            $
            7,294,806
            
            $
            4,868,483Finished
                goods
            
            
            5,354,665
            
            
            5,037,263$
            12,649,471
            
            $
            9,905,746




**Note
      5. Net income per share**


Basic
      net
      income per share includes no dilution and is computed by dividing net income
      by
      the weighted average number of shares of common stock outstanding for the
      period. Diluted net income per share reflects, in the periods in which they
      have
      a dilutive effect, the dilution which would occur upon the exercise of stock
      options. A reconciliation of the shares used in calculating basic and diluted
      net income per share is as follows:







Three
                months ended December 312006
            
            
            2005Weighted
                average shares outstanding-basic
            
            
            9,678,869
            
            
            9,508,100Number
                of shares issued on the assumed exercise of stock options
            
            
            555,762
            
            
            507,157Weighted
                average shares outstanding-diluted
            
            
            10,234,631
            
            
            10,015,257





Options
      to purchase 10,172 and 92,876 shares of common stock, at a price of $8.75 and
      ranging from $3.88 to $8.75, were outstanding for the three months ended
      December 31, 2006 and 2005, respectively, but were not included in the
      computation of diluted earnings per share because they were anti-dilutive.




**Note
      6. Accumulated other comprehensive income (loss)**


Accumulated
      other comprehensive income (loss) consists of two components: translation gains
      and losses and FAS 133 mark to market gains and losses on our open foreign
      exchange contracts. As of December 31, 2006, appearing in the equity section
      under “ Accumulated other comprehensive income (loss)” reflected a loss of
      $537,751, which consisted of a deferred translation loss of $475,024 and a
      deferred loss of $62,727 due to the mark to market differences between the
      value
      of the Company’s open forward exchange contracts at the contract rates versus
      the same contracts valued at the period ending forward rate.





The
      table
      below details the gains and losses that make up the accumulated other
      comprehensive loss of $537,751 recorded on our balance sheet as of December
      31,
      2006:





10








HAUPPAUGE
      DIGITAL, INC.AND
      SUBSIDIARIES


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




Accumulated
                  other comprehensive income (loss)
              
              Balance
                  as of
              
              Oct
                  06 to Dec 06
              
              Balance
                  as ofFiscal
                  2007 activity
              
              Sept
                  30 2006
              
              gains
                  (losses)
              
              Dec
                  31, 2006Translation
                  gains and losses
              
              $
              (531,289
              )
              $
              56,265
              
              $
              (475,024
              )FAS
                  133 mark to market adjustment
              
              
              21,970
              
              
              (84,697
              )
              
              (62,727
              )$
              (509,319
              )
              $
              (28,432
              )
              $
              (537,751
              )
  **Note
      7. Revenue recognition**


The
      Company sells through a sales channel which consist of retailers, PC
      manufacturers and distributors. The majority of our customers are granted lines
      of credit. The product is shipped on account with the majority of customers
      primarily given 30 to 60 day payment terms. Those customers deemed as large
      credit risks either pay in advance or issue us a letter of credit.





The
      Company requires the customer to submit a purchase order to the Company. The
      price of the product and payment terms are fixed per the terms of the purchase
      order. Upon shipment of the order to the customer, the title to the goods is
      passed to the customer. The customer is legally obligated to pay for the order
      within the payment terms stated on the customer’s purchase order. The obligation
      to insure the boards and the cost of any pilferage while in the customer’s
      possession is the responsibility of the customer. The Company sells analog,
      hybrid video recorders or digital computer boards that are stocked on the
      shelves of retailers and are subject to the
      normal consumer traffic that retail stores attract. Aside from normal store
      promotions such as advertisements in the store’s circular, the Company has no
      further obligation to assist in the resale of the products.





The
      Company offers some of its customers a right of return. The Company’s accounting
      complies with SFAS 48 Revenue Recognition when Right of Return Exists, as
      typically at the end of every quarter the Company, based on historical data,
      evaluates its sales reserve level based on the previous six months sales. Due
      to
      seasonal nature of the business coupled with the changing economic environment,
      management exercises some judgment with regard to the historical data to arrive
      at the reserve.





The
      Company offers mail-in rebates on certain products at certain times as
      determined by the Company. The rebates are recorded as a reduction to sales.
      The
      Company also participates in limited cooperative advertising **** programs
      with retailers and distributors and accounts for these in accordance with EITF
      01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including
      a Reseller of the Vendor’s Products)”.




**Note
      8. Product segment and geographic information**





The
      Company operates in one business segment, which is the development, marketing
      and manufacturing of analog and digital TV receiver products for the personal
      computer market. The products are similar in function and share commonality
      of
      component parts and manufacturing processes. The Company’s products are either sold,
      or
      can be sold, by the same retailers and distributors in our marketing channel.
      The Company also sells product directly to PC manufacturers. The Company
      evaluates its product lines under the functional categories of analog TV
      receivers, digital TV receivers and other non-TV tuner products.





11





HAUPPAUGE
      DIGITAL, INC. AND
      SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





The
      Company’s products fall under three product categories:





Analog
      TV
      receivers


Digital
      TV receivers


Other
      non-TV receiver products





The
      Company’s analog TV receiver products enable, among other things, a PC user to
      watch TV in a resizable window on a PC.





The
      Company’s digital TV receiver products enable, among other things, a PC user to
      watch digital TV in a resizable window on a PC.





The
      Company’s other non-TV receiver products enable, among other things, a PC user
      to video conference, watch and listen to PC based videos, music and pictures
      on
      a TV set through a home network, and record TV shows on a PC for playback on
      portable video players.





Sales
      by
      functional category are as follows:





Three
                months ended December 312006
            
            2005Product
                line salesAnalog
                sales
            
            $
            11,215,097
            
            $
            14,893,280Digital
                sales
            
            
            18,195,597
            
            
            9,542,040Other
                non-TV tuners products
            
            
            508,439
            
            
            609,670Total
                sales
            
            $
            29,919,133
            
            $
            25,044,990




The
      Company sells its products through a domestic and international network of
      distributors and retailers. It maintains sales offices in both Europe and Asia.
      Sales percent by geographic region are as follows:





Three
                  months ended December 31,Sales
                  percent by geographic region
              
              2006
              
              2005United
                  States
              
              
              42
              %
              
              41
              %Europe
              
              
              56
              %
              
              56
              %Asia
              
              
              2
              %
              
              3
              %Total
              
              
              100
              %
              
              100
              %




**** **Note
      9. Stock-based compensation**


Prior
      to
      October 1, 2005, the Company accounted for employee stock option plans based
      on
      the intrinsic value method in accordance with Accounting Principles Board (APB)
      Opinion No. 25, *"
      Accounting for Stock Issued to Employees,"* and
      related Interpretations and had adopted the disclosure requirements of SFAS
      No.
      123, *"
      Accounting for Stock-Based Compensation"* (SFAS
      No.123). Accordingly, compensation cost for stock options was measured as the
      excess, if any, of the quoted market price of the Company’s stock at the grant
      date over the amount an employee must pay to acquire the stock. The Company
      granted stock options with exercise prices equal to the market price of the
      underlying stock on the date of grant, therefore, the Company did not record
      stock-based compensation expense under APB Opinion No. 25.


12








HAUPPAUGE
      DIGITAL, INC.AND
      SUBSIDIARIES


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





Effective
      October 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payments” using
      the modified prospective method, which requires measurement of compensation
      cost
      for all stock-based awards at fair value on date of grant and recognition of
      compensation over the service period for awards expected to vest. Therefore,
      prior period financial statements have not been restated. The fair value of
      stock options were determined using the Black-Scholes valuation model, which
      is
      consistent with our valuation techniques previously utilized for stock options
      in footnote disclosures required under SFAS No. 123. Such fair value is
      recognized as expense over the service period, net of estimated forfeitures.
      The
      adoption of SFAS No.123R resulted in no cumulative change in accounting as
      of
      the date of adoption.




**Note
      10.  Arrangements with off-balance sheet risk - guarantees**


The
      Company occupies a facility located in Hauppauge New York which is used for
      its
      executive offices and for the testing, storage and shipping of the Company’s
      products. Hauppauge Computer Works, Inc. (“HCW’), a wholly owned subsidiary of
      Hauppauge Digital Inc., leases this facility from Ladokk Realty, LLC (“Ladokk”),
      the members of which are Kenneth Plotkin, the Company’s Chairman of the Board,
      Chief Executive Officer, President, Chief Operating Officer and Vice President
      of Marketing, Director and the holder of approximately 8.1% of the Company’s
      Common Stock as of December 31, 2006, Dorothy Plotkin, the wife of Kenneth
      Plotkin and holder of approximately 5.8% of the Company’s Common Stock as of
      December 31, 2006, and Laura Aupperle, believed by the Company to be the holder
      of approximately 9.5% of the Company’s Common Stock, including Common Stock
      attributed to the Estate of Kenneth R. Aupperle.





On
      February 17, 2004, HCW and Ladokk terminated the 1990 Lease and HCW entered
      into
      a new lease agreement with Ladokk (the “2004 Lease”). The 2004 Lease term was
      for five years and terminated on February 16, 2009. The annual rent under the
      2004 Lease was $360,000, payable monthly. The Company was also obligated to
      pay
      real estate taxes and operating costs of maintaining the premises subject to
      such lease. Concurrently with the new lease, Ladokk completed a refinancing
      of
      its mortgages, and the new lender did not require us to sign a guarantee.
      Accordingly, we no longer guarantee the landlord’s mortgages.





On
      October 17, 2006, HCW executed an amendment to the 2004 Lease with Ladokk for
      the premises (the “Lease Amendment”). The Lease Amendment commenced as of
      September 1, 2006 and ends on August 31, 2011. The base rent under the Lease
      Amendment for the first year of the term is $300,000, payable monthly in the
      amount of $25,000. Rent is subject to an annual increase of 3% over the term.
      The execution of the Lease Amendment was approved by the Company’s Board of
      Directors , following the recommendation of the Company’s Audit Committee.





The
      Lease
      Amendment provides for the payment of rent arrearages in the aggregate amount
      of
      $168,667 (the “Arrearage”) to be paid in the amount of $5,000 per month tendered
      with rent until the Arrearage is paid in full. Subject to the terms and
      conditions of the 2004 Lease, HCW is obligated to pay for utilities, repairs
      to
      the building, and taxes during the term.


13





HAUPPAUGE
      DIGITAL, INC.AND
      SUBSIDIARIES


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





The
      Lease Amendment provides that HCW has the option to renew the current lease
      term
      for an additional 5 year term after the expiration of the current lease term
      upon written notice given to Ladokk between six and twelve months prior to
      expiration of the current lease. Rent due during the first year of the renewal
      term is to be equal to the market rate at the end of the current lease, but
      not
      less than rent paid during the last year of the current lease, and is subject
      to
      rent increases for the second through fifth years of the renewal term by CPI
      plus 1% per annum .














14


ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





THREE
      MONTH PERIOD ENDED DECEMBER 31, 2006 COMPARED TO


DECEMBER
      31, 2005





Results
      of operations for the three months ended December 31, 2006 compared to December
      31, 2005 are as follows:




Three
            
            ThreeMonths
            
            MonthsEnded
            
            Ended
            
            Variance
            
            Percentage
                of sales12/31/06
            
            12/31/05
            
            $
            
            2006
            
            2005
            
            VarianceNet
                sales
            
            $
            29,919,133
            
            $
            25,044,990
            
            $
            4,874,143
            
            
            100.00
            %
            
            100.00
            %
            
            -Cost
                of sales
            
            
            23,101,596
            
            
            19,813,206
            
            
            3,288,390
            
            
            77.21
            %
            
            79.11
            %
            
            -1.90
            %Gross
                profit
            
            
            6,817,537
            
            
            5,231,784
            
            
            1,585,753
            
            
            22.79
            %
            
            20.89
            %
            
            1.90
            %Gross
                profit %
            
            
            22.79
            %
            
            20.89
            %
            
            1.90
            %Selling
                , general and administrative expenses:Sales
                and marketing
            
            
            2,707,222
            
            
            2,356,572
            
            
            350,650
            
            
            9.05
            %
            
            9.41
            %
            
            -0.36
            %Technical
                support
            
            
            136,405
            
            
            132,079
            
            
            4,326
            
            
            0.46
            %
            
            0.53
            %
            
            -0.07
            %General
                and administrative
            
            
            890,983
            
            
            824,818
            
            
            66,165
            
            
            2.98
            %
            
            3.29
            %
            
            -0.31
            %Stock
                compensation expense
            
            
            67,613
            
            
            67,601
            
            
            12
            
            
            0.23
            %
            
            0.27
            %
            
            -0.04
            %Total
                selling, general and administrative expense
            
            
            3,802,223
            
            
            3,381,070
            
            
            421,153
            
            
            12.72
            %
            
            13.50
            %
            
            -0.78
            %Research
                and development
            
            
            712,190
            
            
            760,724
            
            
            (48,534
            )
            
            2.38
            %
            
            3.04
            %
            
            -0.66
            %Research
                and stock compensation expense
            
            
            41,255
            
            
            33,277
            
            
            7,978
            
            
            0.14
            %
            
            0.13
            %
            
            0.01
            %Total
                expenses
            
            
            4,555,668
            
            
            4,175,071
            
            
            380,597
            
            
            15.24
            %
            
            16.67
            %
            
            -1.43
            %Net
                operating income
            
            
            2,261,869
            
            
            1,056,713
            
            
            1,205,156
            
            
            7.55
            %
            
            4.22
            %
            
            3.33
            %Other
                income :Interest
                income
            
            
            12,391
            
            
            5,206
            
            
            7,185
            
            
            0.04
            %
            
            0.02
            %
            
            0.02
            %Foreign
                currency
            
            
            12,027
            
            
            964
            
            
            11,063
            
            
            0.04
            %
            
            0.00
            %
            
            0.04
            %Total
                other income
            
            
            24,418
            
            
            6,170
            
            
            18,248
            
            
            0.08
            %
            
            0.02
            %
            
            0.06
            %Income
                before taxes on income
            
            
            2,286,287
            
            
            1,062,883
            
            
            1,223,404
            
            
            7.63
            %
            
            4.24
            %
            
            3.39
            %Taxes
                on income
            
            
            83,552
            
            
            42,411
            
            
            41,141
            
            
            0.28
            %
            
            0.17
            %
            
            0.11
            %Net
                income
            
            $
            2,202,735
            
            $
            1,020,472
            
            $
            1,182,263
            
            
            7.35
            %
            
            4.07
            %
            
            3.28
            %








Net
      sales
      for the three months ended December 31, 2006 increased $4,874,143 compared
      to
      the three months ended December 31, 2005 as shown in the table below.




Three
                Months
            
            Three
                Months
            
            Increase
                (decrease)
            
            Increase
            
            Percentage
                of sales byended
            
            ended
            
            Dollar
            
            (decrease)
            
            geographic
                regionLocation
            
            12/31/06
            
            12/31/05
            
            variance
            
            variance
                %
            
            2006
            
            2005Domestic
            
            $
            12,472,831
            
            $
            10,204,935
            
            $
            2,267,896
            
            
            22
            %
            
            42
            %
            
            41
            %Europe
            
            
            16,920,057
            
            
            14,176,926
            
            
            2,743,131
            
            
            19
            %
            
            56
            %
            
            56
            %Asia
            
            
            526,245
            
            
            663,129
            
            
            (136,884
            )
            
            -21
            %
            
            2
            %
            
            3
            %Total
            
            $
            29,919,133
            
            $
            25,044,990
            
            $
            4,874,143
            
            
            19
            %
            
            100
            %
            
            100
            %





15





Net
      sales
      to domestic customers were 42% and 41% of net sales for the three months ended
      December 31, 2006 and 2005, respectively. Net sales to European customers were
      56% of net sales for the three months ended December 31, 2006 and 2005,
      respectively. Net sales to Asian customers were 2% and 3% of net sales for
      the
      three months ended December 31, 2006 and 2005, respectively. We experienced
      an
      increase in unit sales of about 36% while the dynamics of new production and
      changes in sales mix lowered the average sales price by about 12%.





**Gross
      profit**





Gross
      profit increased $1,585,753 for the three months ended December 31, 2006
      compared to the three months ended December 31, 2005.





The
      increases and (decreases) in the gross profit are detailed below:


Increase(decrease)Increased
                sales
            
            $
            1,304,072Higher
                gross profit on sales mix
            
            
            572,700Production
                and production related costs
            
            
            (291,019
            )Total
                increase in gross profit
            
            $
            1,585,753





Gross
      profit percentage for the three months ended December 31, 2006 was 22.79%
      compared to 20.89% for the three months ended December 31, 2005, an increase
      of
      1.90%.





The
      increases and (decreases) in the gross profit percent are detailed
      below:





Increase(decrease)Higher
                gross profit on sales mix
            
            
            1.65
            %Production
                and production related costs
            
            
            0.25
            %Net
                decrease in gross profit percent
            
            
            1.90.
            %





The
      increase in the gross profit percent of 1.90 % for the three months ended
      December 31, 2006 compared to the three months ended December 31, 2005 was
      primarily due to:




·
            A
                higher sales percentage of higher gross profit margin products contributed
                to a 1.65% increase in gross profit




·
            Production
                and shipping costs declined as a percentage of sales which contributed
                to
                a 0.25% increase in gross profit percent. The increase in net sales
                was
                about 19% while the increase in production costs was about 16%







**Selling,
      general and administrative expenses**





The
      chart
      below illustrates the components of Selling, general and administrative expense.





Three
                months ended December 31,Dollar Costs
            
            Percentage
                  of SalesIncrease
            
            
            
            
            
            Increase2006
            
            2005
            
            (decrease)
            
            2006
            
            2005
            
            (decrease)Sales
                and marketing
            
            $
            2,707,222
            
            $
            2,356,572
            
            $
            350,650
            
            
            9.05
            %
            
            9.41
            %
            
            -0.36
            %Technical
                support
            
            
            136,405
            
            
            132,079
            
            
            4,326
            
            
            0.46
            %
            
            0.53
            %
            
            -0.07
            %General
                and administrative
            
            
            890,983
            
            
            824,818
            
            
            66,165
            
            
            2.98
            %
            
            3.29
            %
            
            -0.31
            %Stock
                compensation expense
            
            
            67,613
            
            
            67,601
            
            
            12
            
            
            0.23
            %
            
            0.27
            %
            
            -0.04
            %Total
            
            $
            3,802,223
            
            $
            3,381,070
            
            $
            421,153
            
            
            12.72
            %
            
            13.50
            %
            
            -0.78
            %





16





Selling,
      general and administrative expenses increased $421,153 from the prior year.
      As a
      percentage of sales, Selling, general and administrative expenses decreased
      by
      0.78% when compared to the three months ended December 31, 2005. The increase
      in
      sales and marketing expense of $350,650 was mainly due to higher sales based
      expenses such as commission, cooperative advertising and promotional expenses.
      The increase in technical support expenses of $4,326 was primarily due to
      compensation related costs. The increase in general and administrative expenses
      of $66,165 was primarily due to compensation increases for additional managerial
      and support staff and incentive related expenses.





**Research
      and development expenses**





Research
      and development expenses decreased $40,556. The decrease was mainly due
      decreased third party development costs offset somewhat by an increase in stock
      compensation expense.




**Other
      income**




Net
      other
      income for the three months ended December 31, 2006 was $24,418 compared to
      net
      other income of $6,170 for the three months ended December 31, 2005. The change
      was primarily driven by higher interest income and foreign currency transaction
      gains.




**Tax
      provision**


Our
      net
      tax provision for the three months ended December 31, 2006 and 2005 is as
      follows :





Three
                months ended
              December
                31,2006
            
            2005AMT
                Tax attributable to U.S operations
            
            $
            31,000
            
            $
            10,000Tax
                expense European operations
            
            
            47,552
            
            
            27,411State
                taxes
            
            
            5,000
            
            
            5,000Net
                tax provision
            
            $
            83,552
            
            $
            42,411




The
      deferred tax assets and the offsetting tax valuation allowance is attributable
      to the Company’s domestic operations. For three out of the last five fiscal
      years, the Company’s domestic operation incurred tax losses. Fiscal 2005 was the
      first year out of the last five years in which the Company’s domestic operations
      had pre tax income. As of December 31, 2006, we evaluated the future realization
      of our deferred tax assets and the corresponding valuation allowance. The
      Company took into consideration:





·
            the
                tax losses incurred by our domestic operations in three out of the
                last
                five years


·
            the
                seasonal nature and cyclical nature of the business, which makes
                it
                difficult to predict the future realization of the deferred tax
                asset


·
            the
                dynamic market and technological changes that occur in our
                industry





After
      evaluating the circumstances listed above, it was the Company’s opinion that as
      of December 31, 2006, the valuation allowance was still applicable.





We
      recorded net income of $2,202,735, for the three months ended December 31,
      2006,
      which resulted in basic net income per share of $0.23 and diluted net income
      per
      share of $0.22 on weighted average basic and diluted shares of 9,678,869 and
      10,234,631, respectively, compared to a net income of $1,020,472 for the three
      months ended December 31, 2005, which resulted in basic net income per share
      of
      $0.11 and diluted net income per share of $0.10, respectively, on weighted
      average basic and diluted shares of 9,508,100 and 10,015,257,
      respectively.


17








Options
      to purchase 10,172 and 92,876 shares of common stock, at a price of $8.75 and
      ranging from $3.88 to $8.75, were outstanding for the three months ended
      December 31, 2006 and 2005, respectively, but were not included in the
      computation of diluted earnings per share because they were anti-dilutive.





18




**Seasonality**


As
      our
      sales are primarily to the consumer market, we have experienced certain seasonal
      revenue trends. Our peak sales quarter, due to holiday season sales of computer
      equipment, is our first fiscal quarter (October to December), followed by our
      fourth fiscal quarter (July to September). In addition, our international sales,
      mostly in the European, market, were 54%, 54% and 66% of sales for the years
      ended September 30, 2006, 2005 and 2004, respectively. Our fiscal fourth quarter
      sales (July to September) can be potentially impacted by the reduction of
      activity experienced in Europe during the July and August summer holiday period.





To
      offset
      the above cycles, we target a wide range of customer types in order to moderate
      the seasonal nature of our retail sales.




**Liquidity
      and capital resources**


Our
      cash,
      working capital and stockholders’ equity position as of December 31, 2006 and
      September 30, 2006 is set forth below:




December
                31, 2006
            
            September
                30, 2006Cash
            
            $
            9,857,227
            
            $
            9,020,941Working
                Capital
            
            
            19,575,290
            
            
            17,084,175Stockholders’
                Equity
            
            
            20,276,541
            
            
            17,779,725








We
      had
      cash and cash equivalents as of December 31, 2006 of $9,857,227, a increase
      of
      $836,286 from September 30, 2006.





The
      increase in cash was due to :





Sources
                of cash:Net
                income adjusted for non cash items
            
            $
            2,362,807Increase
                in accounts payable and accrued expenses
            
            
            12,986,561Proceeds
                from employee stock purchases
            
            
            213,645Decrease
                in prepaid expenses and other current assets
            
            
            55,375Less
                cash used for:Increase
                in account receivables
            
            
            (11,953,040
            )Increase
                in inventories
            
            
            (2,743,725
            )Effect
                of exchange rates on cash
            
            
            (28,432
            )Capital
                equipment purchases
            
            
            (56,905
            )Net
                cash increase
            
            $
            836,286





Net
      cash
      of $707,978 provided by operating activities was primarily due to net income
      adjusted for non cash items of $2,362,807, increases in accounts payable and
      accrued expenses of $12,986,561 and a decrease of $55,375 in prepaid expenses
      and other current assets. Offsetting these increases in cash were increases
      in
      accounts receivable of $11,953,040, due primarily to a 35% sales increase for
      the first quarter of fiscal 2007 over the fourth quarter of fiscal 2006, and
      increases in inventory of $2,743,725 needed to fund the increase in sales.




Cash
      of
      $56,905 was used to purchase fixed assets. Proceeds from stock purchased by
      employees through the purchase of options and through the employee stock
      purchase plan provided additional cash of $213,645. The effect of exchange
      rates
      used cash of $ 28,432.


19











We
      believe that our cash and cash equivalents as of December 31, 2006, our
      internally generated cash flow and our $3,000,000 bank line of credit will
      provide us with sufficient liquidity to meet our currently foreseeable
      short-term and long-term capital needs.




**Future
      contractual obligations**


The
      following table shows our contractual obligations related to lease obligations
      as of December 31, 2006:





Payments
                due by periodTotal
            
            Less
                than 1 year
            
            1-3
                years
            
            3
                to 5 yearsOperating
                lease obligations
            
            $
            2,170,998
            
            $
            553,754
            
            $
            905,484
            
            $
            711,760







**Inflation**


While
      inflation has not had a material effect on our operations in the past, there
      can
      be no assurance that we will be able to continue to offset the effects of
      inflation on the costs of our products or services through price increases
      to
      our customers without experiencing a reduction in the demand for our products;
      or that inflation will not have an overall effect on the computer equipment
      market that would have a material affect on us.




**Item
      3. Quantitative and qualitative disclosures about market
      risks**


For
      each
      of the past three fiscal years, at least 50 % of the Company’s sales were
      generated by our European subsidiary and were invoiced and collected in local
      currency, which was primarily the Euro. On the supply side, since the Company
      predominantly deals with North American and Asian suppliers and contract
      manufacturers, approximately 90% of the Company’s inventory required to support
      our European sales are purchased and paid in U.S. Dollars.





The
      combination of sales billed in Euros supported by inventory purchased in U.S.
      dollars results in an absence of a natural local currency hedge. Consequently,
      the Company’s financial results are subject to market risks resulting from the
      fluctuations in the Euro to U.S. Dollar exchange rates.





The
      Company attempts to reduce these risks by entering into foreign exchange forward
      contracts with financial institutions. The purpose of these forward contracts
      is
      to hedge the foreign currency market exposures underlying the U.S. Dollar
      denominated inventory purchases required to support our European sales.





The
      Company does not try to hedge against all possible foreign currency exposures
      because of the inherent difficulty in estimating the volatility of the Euro,
      the
      contracts the Company procures are specifically entered into to as a hedge
      against forecasted or existing foreign currency exposure. The Company does
      not
      enter into contracts for speculative purposes. Although the Company maintains
      these programs to reduce the short term impact of changes in currency exchange
      rates, long term strengthening or weakening of the U.S. dollar against the
      Euro
      impacts the Company’s sales, gross profit, operating income and retained
      earnings. Factors that could impact the effectiveness of our hedging program
      are:





·
            volatility
                of the currency markets


·
            availability
                of hedging instruments


·
            accuracy
                of our inventory forecasts




Additionally,
      there is the risk that foreign exchange
      fluctuations will make our products less competitive in foreign markets, which
      would substantially reduce the Company’s sales.




20




As
      of
      December 31, 2006, we had foreign currency contracts outstanding of
      approximately $2,051,000 against the delivery of the Euro. These contracts
      expire from January 2007 through February 2007. Our accounting policies for
      these instruments designate such instruments as cash flow hedging transactions.
      We do not enter into such contracts for speculative purposes. We record all
      derivative gains and losses on the balance sheet as a component of stockholders’
equity under the caption “Accumulated other comprehensive income (loss)”. We
      recorded a deferred loss of $84,697 for the three months ended December 31
      2006.
      As of December 31, 2006, a deferred loss of $62,727, reflecting the cumulative
      mark to market gains of our derivatives, was recorded on our balance sheet
      as a
      component of accumulated other comprehensive income in our equity section.




**Item
      4. Controls and procedures**


Our
      Chief
      Executive Officer and Chief Financial Officer conducted an evaluation of the
      effectiveness of our disclosure controls and procedures. Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective as of December 31,
      2006 in alerting them in a timely manner to material information required to
      be
      included in our SEC reports. In addition, no change in our internal control
      over
      financial reporting occurred during the fiscal quarter ended December 31, 2006
      that has materially affected, or is reasonably likely to materially affect,
      our
      internal control over financial reporting.




**Special
      note regarding forward looking statements**


This
      Quarterly Report contains forward-looking statements as that term is defined
      in
      the federal securities laws. The events described in forward-looking statements
      contained in this Quarterly Report may not occur. Generally these statements
      relate to business plans or strategies, projected or anticipated benefits or
      other consequences of our plans or strategies, projected or anticipated benefits
      from acquisitions to be made by us, or projections involving anticipated
      revenues, earnings or other aspects of our operating results. The words “may,”
“will,” “expect,” “believe,” “anticipated,” “project,” “plan,” “intend,”
“estimate,” and “continue,” and their opposites and similar expressions are
      intended to identify forward-looking statements. We caution you that these
      statements are not guarantees of future performance or events and are subject
      to
      a number of uncertainties, risks and other influences (including, but not
      limited to, those set forth in our Annual Report on Form 10-K for the year
      ended
      September 30, 2006), many of which are beyond our control, that may influence
      the accuracy of the statements and the projections upon which the statements
      are
      based. Any one or more of these uncertainties, risks and other influences could
      materially affect our results of operations and whether forward looking
      statements made by us ultimately prove to be accurate. Our actual results,
      performance and achievements could differ materially from those expressed or
      implied in these forward-looking statements. We undertake no obligation to
      publicly update or revise any forward-looking statements, whether from new
      information, future events or otherwise. All cautionary statements made in
      this
      Quarterly Report should be read as being applicable to all related
      forward-looking statements wherever they appear.





21


**PART
      II. OTHER INFORMATION**





**Item
      1A. Risk factors**


There
      have been no material changes with respect to the risk factors disclosed in
      our
      Annual Report on Form 10-K for the fiscal year ended September 30,
      2006.




**Item
      2. Unregistered sales of equity securities and use of
      proceeds** ****


On
      November 8, 1996, we approved a stock repurchase program. The program authorizes
      us to repurchase up to 850,000 shares of our own stock. The stock repurchase
      program was extended by a resolution of our Board of Directors on December
      17,
      1997.





The
      Company did not repurchase any of its common stock our stock repurchase program
      during the quarter ended December 31, 2006.




**Item
      4. Submission of matters to a vote of security holders** ****


The
      following proposals were submitted to the stockholders for approval at the
      Annual Meeting of Stockholders held on October 17, 2006 at our offices:





**Proposal
      No. 1: Election of directors**





The
      following directors were elected by the votes indicated:




**For******
            
            **Withheld**Kenneth
                Plotkin
            
            
            8,857,136
            
            
            105,519Bernard
                Herman
            
            
            8,650,220
            
            
            311,435Robert
                S. Nadel
            
            
            8,149,821
            
            
            811,834Christopher
                G. Payan
            
            
            8,871,379
            
            
            90,276Neal
                Page
            
            
            8,863,129
            
            
            98,526Seymour
                G. Siegel
            
            
            8,780,100
            
            
            181,555





**Proposal
      No. 2: Proposal to ratify the amendment to the Company’s 2003 Performance and
      Equity Plan**





The
      proposal to ratify the amendment to the Company’s 2003 Performance and Equity to
      increase the number of shares of Common Stock authorized under the plan by
      an
      additional 1,000,000 shares was ratified by the Company’s stockholders’ per the
      following vote:




**For**
            **Against**
            **Abstain**
            **Broker
                non-votes**3,233,193
            772,049
            73,640
            4,876,953




**Proposal
      No. 3: Proposal to ratify the amendment to the Company’s Employee Stock Purchase
      Plan**





The
      proposal to ratify the amendment to the Company’s Employee Stock Purchase Plan
      to increase the number shares of Common Stock available under the plan from
      260,000 to 420,000 and to change the termination date of the Company’s Employee
      Stock Purchase Plan to December 31, 2010 from December 31, 2006 was ratified
      by
      the Company’s stockholders’ per the following vote: ****




**For**
            **Against**
            **Abstain**
            **Broker
                non-votes**3,794,521
            206,345
            78,016
            4,876,953







22


**Item
      6. Exhibits**







31.1
      Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


31.2
      Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or
      Rule
      15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002


32.
      Certification of Chief Executive Officer and Chief Financial Officer pursuant
      to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002










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**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.





HAUPPAUGE
                DIGITAL INC.
              RegistrantDate:February
                9, 2007
            By
            /s/ 
                Kenneth PlotkinKENNETH
                PLOTKINChief
                Executive Officer, Chairman of the Board,President
                (Principal Executive Officer) and DirectorDate:February
                9, 2007
            By
            /s/Gerald
                TucciaroneGERALD
                TUCCIARONETreasurer,
                Chief Financial Officer,(Principal
                Accounting officer) and Secretary










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