**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **(Mark
        One)**
 **xQUARTERLY
        REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 **For
        the quarterly period ended** **March
        31, 2008**
  **OR**
 
 **oTRANSITION
        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.
 
 **xYES oNO**
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        (See
        definition of “large accelerated filer, accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act).
 
 **oLARGE
                  ACCELERATED
                  FILER**
              **oACCELERATED
                  FILER****oNON-ACCELERATED
                  FILER**
              **xSMALLER
                  REPORTING
                  COMPANY**
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule12b-2
        of the Exchange Act).
 
 **oYES xNO**
 ****
 As
        of May
        5, 2008, 10,018,442 shares of .01 par value Common Stock of the issuer were
        outstanding.
 
 
  **HAUPPAUGE
        DIGITAL, INC.****AND
        SUBSIDIARIES**
  **INDEX**
 
 **Page no.****PART
                I. FINANCIAL INFORMATION****Item
                  1. Financial Statements****Condensed
                  Consolidated Balance Sheets – March 31, 2008 (unaudited) and
                  September 30, 2007**
              **4****Condensed
                  Consolidated Statements of Operations - Three Months ended March
                  31, 2008
                  (unaudited) and 2007 (unaudited)**
              **5****Condensed
                  Consolidated Statements of Operations- Six Months ended March 31,
                  2008
                  (unaudited) and 2007 (unaudited)**
              **6****Condensed
                  Consolidated Statements of Other Comprehensive Income - Three Months
                  and
                  Six Months ended March 31, 2008 (unaudited) and 2007
                  (unaudited)******
              **7****Condensed
                  Consolidated Statements of Cash Flows-Six months ended March 31,
                  2008
                  (unaudited) and 2007 (unaudited)**
              **8****Notes
                  to Condensed Consolidated Financial Statements**
              **9-14****Item
                  2. Management's Discussion and Analysis of Financial Condition
                  and Results
                  of Operations**
              **15
                  -21****Item
                  3. Quantitative and Qualitative Disclosures about Market
                  Risks**
              **22****Item
                  4. Controls and Procedures**
              **22**
  2
 
 **PART
                II. OTHER INFORMATION****Item
                  1. Legal Proceedings**
              **23****Item
                  1A. Risk Factors**
              **23****Item
                  2.****Unregistered
                  Sales of Equity Securities and Use of Proceeds**
              **23****Item
                  4. Submission of matters to a vote of security
                  holders**
              **23****Item
                  6. Exhibits**
              **24****Signatures**
              **25****Certification
                  of Chief Executive Officer 31.1****Certification
                  of Chief Financial Officer 31.1****Certification
                  of Chief Executive Officer and Chief Financial Officer 32**
 
 3
  **PART
        I. FINANCIAL INFORMATION**
  **Item
        1. Financial** **Statements**
 
 **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 **March 31, 2008**
                **(unaudited)**
              
              **September 30, 2007****Assets:****Current
                  Assets:****Cash
                  and cash equivalents**
              
              **$**
              **11,309,504**
              
              **$**
              **11,581,657****Trade
                  receivables, net of various allowances**
              
              
              **6,792,353**
              
              
              **15,038,751****Other
                  non trade receivables**
              
              
              **1,686,803**
              
              
              **8,629,075****Inventories**
              
              
              **15,977,066**
              
              
              **13,521,864****Deferred
                  tax asset-current**
              
              
              **603,078**
              
              
              **603,078****Prepaid
                  expenses and other current assets**
              
              
              **1,327,783**
              
              
              **802,575****Total
                  current assets**
              
              
              **37,696,587**
              
              
              **50,177,000****Property,
                  plant and equipment, net**
              
              
              **813,770**
              
              
              **745,121****Security
                  deposits and other non current assets**
              
              
              **101,993**
              
              
              **110,165****Deferred
                  tax asset-non current**
              
              
              **887,611**
              
              
              **887,611****Total
                  assets**
              
              **$**
              **39,499,961**
              
              **$**
              **51,919,897****Liabilities
                  and Stockholders’ Equity:****Current
                  Liabilities:****Accounts
                  payable**
              
              **$**
              **7,219,741**
              
              **$**
              **20,635,137****Accrued
                  expenses – fees**
              
              
              **5,841,550**
              
              
              **5,827,356****Accrued
                  expenses – other**
              
              
              **2,030,580**
              
              
              **2,374,410****Income
                  taxes payable**
              
              
              **67,853**
              
              
              **141,913****Total
                  current liabilities**
              
              
              **15,159,724**
              
              
              **28,978,816****Stockholders'
                  Equity:****Common
                  stock, $.01 par value; 25,000,000 shares authorized, 10,773,630
                  and
                  10,597,002 issued, respectively**
              
              
              **107,736**
              
              
              **105,970****Additional
                  paid-in capital**
              
              
              **16,170,605**
              
              
              **15,497,703****Retained
                  earnings**
              
              
              **11,964,795**
              
              
              **11,026,884****Accumulated
                  other comprehensive loss**
              
              
              **(1,498,562**
              **)**
              
              **(1,325,971**
              **)****Treasury
                  Stock, at cost, 759,579 and 749,579 shares**
              
              
              **(2,404,337**
              **)**
              
              **(2,363,505**
              **)****Total
                  stockholders' equity**
              
              
              **24,340,237**
              
              
              **22,941,081****Total
                  liabilities and stockholders' equity**
              
              **$**
              **39,499,961**
              
              **$**
              **51,919,897**
  ** ***See
        accompanying notes to condensed consolidated financial
        statements***
  4
 
 **HAUPPAUGE
                  DIGITAL, INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF
                  OPERATIONS**
 **(UNAUDITED)**
 
 **Three months ended March 31,****2008**
              
              **2007****Net
                  sales**
              
              **$**
              **17,512,692**
              
              **$**
              **29,891,841****Cost
                  of sales**
              
              
              **14,173,271**
              
              
              **24,248,250****Gross
                  profit**
              
              
              **3,339,421**
              
              
              **5,643,591****Selling,
                  general and administrative expenses**
              
              
              **3,950,288**
              
              
              **3,550,240****Research
                  and development expenses**
              
              
              **978,939**
              
              
              **749,827****Income
                  (loss) from operations**
              
              
              **(1,589,806**
              **)**
              
              **1,343,524****Other
                  income (expense):****Interest
                  income**
              
              
              **10,623**
              
              
              **9,347****Foreign
                  currency**
              
              
              **(4,344**
              **)**
              
              **(18,245**
              **)****Other
                  income (expense)**
              
              
              **6,279**
              
              
              **(8,898**
              **)****Income
                  (loss) before taxes**
              
              
              **(1,583,527**
              **)**
              
              **1,334,626****Tax
                  provision (benefit)**
              
              
              **(58,449**
              **)**
              
              **57,693****Net
                  income (loss)**
              
              
              **($1,525,078**
              **)**
              **$**
              **1,276,933****Net
                  income (loss) per share:****Basic**
              
              **$**
              **(0.15**
              **)**
              **$**
              **0.13****Diluted**
              
              **$**
              **(0.15**
              **)**
              **$**
              **0.12**
 
 ***See
        accompanying notes to condensed consolidated financial
        statements***
 
 5
 
 **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 **Six months ended March 31,****2008**
              
              **2007****Net
                  sales**
              
              **$**
              **54,560,153**
              
              **$**
              **59,810,974****Cost
                  of sales**
              
              
              **43,079,671**
              
              
              **47,349,846****Gross
                  profit**
              
              
              **11,480,482**
              
              
              **12,461,128****Selling,
                  general and administrative expenses**
              
              
              **8,502,856**
              
              
              **7,352,463****Research
                  and development expenses**
              
              
              **1,892,696**
              
              
              **1,503,271****Income
                  from operations**
              
              
              **1,084,930**
              
              
              **3,605,394****Other
                  income (expense):****Interest
                  income**
              
              
              **16,817**
              
              
              **21,738****Foreign
                  currency**
              
              
              **(31,953**
              **)**
              
              **(6,218**
              **)****Other
                  income (expense)**
              
              
              **(15,136**
              **)**
              
              **15,520****Income
                  before taxes on income**
              
              
              **1,069,794**
              
              
              **3,620,914****Tax
                  provision**
              
              
              **131,883**
              
              
              **141,245****Net
                  income**
              
              **$**
              **937,911**
              
              **$**
              **3,479,669****Net
                  income per share:****Basic**
              
              **$**
              **0.09**
              
              **$**
              **0.36****Diluted**
              
              **$**
              **0.09**
              
              **$**
              **0.34**
 
 ***See
        accompanying notes to condensed consolidated financial
        statements***
 
 6
 
 **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
        (LOSS)**
 **(UNAUDITED)**
 
 **Three months ended March 31,****2008**
              
              **2007****Net
                  income (loss)**
              
              **$**
              **(1,525,078**
              **)**
              **$**
              **1,276,933****Foreign
                  currency translation (loss) gain**
              
              
              **337,240**
              
              
              **(644,215**
              **)****Forward
                  exchange contracts marked to market**
              
              
              **(85,617**
              **)**
              
              **31,403****Other
                  comprehensive income (loss)**
              
              **$**
              **(1,273,455**
              **)**
              **$**
              **664,121**
 
 **Six months ended March 31,****2008**
              
              **2007****Net
                  income**
              
              **$**
              **937,911**
              
              **$**
              **3,479,669****Foreign
                  currency translation (loss)**
              
              
              **(125,767**
              **)**
              
              **(587,950**
              **)****Forward
                  exchange contracts marked to market**
              
              
              **(46,824**
              **)**
              
              **(53,294**
              **)****Other
                  comprehensive income**
              
              **$**
              **765,320**
              
              **$**
              **2,838,425**
 
 ***See
        accompanying notes to condensed consolidated financial
        statements***
 
 7
  **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 ********
              
              **Six  months ended  March  31,****2008**
              
              **2007****Net
                  income**
              
              **$**
              **937,911**
              
              **$**
              **3,479,669****Adjustments
                  to reconcile net income to net cash provided****By
                  (used in) operating activities:****Depreciation
                  and amortization**
              
              
              **130,562**
              
              
              **105,051****Bad
                  debt**
              
              
              **120,000**
              
              
              **-****Inventory
                  reserve**
              
              
              **650,000**
              
              
              **236,584****Stock
                  compensation expense**
              
              
              **278,358**
              
              
              **(189**
              **)****Other
                  non cash items**
              
              
              **8,172****Changes
                  in current assets and liabilities:****Accounts
                  receivable**
              
              
              **15,068,670**
              
              
              **(12,503,221**
              **)****Inventories**
              
              
              **(3,105,202**
              **)**
              
              **(2,086,462**
              **)****Prepaid
                  expenses and other current assets**
              
              
              **(525,208**
              **)**
              
              **(113,948**
              **)****Accounts
                  payable**
              
              
              **(13,415,396**
              **)**
              
              **10,060,439****Accrued
                  expenses and other current liabilities**
              
              
              **(403,696**
              **)**
              
              **2,063,681****Total
                  adjustments**
              
              
              **(1,193,740**
              **)**
              
              **(2,238,065**
              **)****Net
                  cash provided by (used in) operating activities**
              
              
              **(255,829**
              **)**
              
              **1,241,604****Cash
                  Flows From Investing Activities:****Purchases
                  of property, plant and equipment**
              
              
              **(199,211**
              **)**
              
              **(187,178**
              **)****Net
                  cash used in investing activities**
              
              
              **(199,211**
              **)**
              
              **(187,178**
              **)****Cash
                  Flows From Financing Activities:****Purchase
                  of treasury stock**
              
              
              **(40,832**
              **)**
              
              **-****Proceeds
                  from the exercise of stock options and employee****stock
                  purchases**
              
              
              **396,310**
              
              
              **656,451****Net
                  cash provided by financing activities**
              
              
              **355,478**
              
              
              **656,451****Effect
                  of exchange rates on cash**
              
              
              **(172,591**
              **)**
              
              **(641,244**
              **)****Net
                  (decrease) increase in cash and cash equivalents**
              
              
              **(272,153**
              **)**
              
              **1,069,633****Cash
                  and cash equivalents, beginning of period**
              
              
              **11,581,657**
              
              
              **9,020,941****Cash
                  and cash equivalents, end of period**
              
              **$**
              **11,309,504**
              
              **$**
              **10,090,574****Supplemental
                  disclosures:****Income
                  taxes paid**
              
              **$**
              **188,094**
              
              **$**
              **123,211**
 
 ***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, 2007 Form 10-K.
 
 The
        operating results for the three months and six months ended March 31, 2008
        are
        not necessarily indicative of the results to be expected for the September
        30,
        2008 year end.
 
 Certain
        reclassifications have been made to prior condensed financial statements
        to
        conform to the current classifications.
  **Note
        2. Trade Accounts and other non trade receivables**
  Trade
        r eceivables
        consist of:
  ·
              Trade
                  receivables from sales to customers
  ·
              Allowances,
                  consisting of sales and bad debt
  Other
        non
        trade receivables consist of :
  ·
              Receivables
                  pertaining to component parts purchased from us at cost by our
                  contract
                  manufacturers which are excluded from sales
  ·
              General
                  services tax (GST) and value added tax (VAT) reclaimable on goods
                  purchased by our Asian and European
                  locations
  ·
              Other
                  minor non trade receivables
  Trade
        receivables and other non trade receivables as of March 31, 2008 and September
        30, 2007 consisted of :
 
 March 31,
                2008
              
              September 30,
                2007Trade
                  receivables
              
              $
              11,198,167
              
              $
              19,324,565Allowances
                  and reserves
              
              
              (4,405,814
              )
              
              (4,285,814
              )Total
                  trade receivables
              
              
              6,792,353
              
              $
              15,038,751Receivable
                  from contract manufacturers
              
              
              923,919
              
              
              6,673,021GST
                  and VAT taxes receivables
              
              
              717,781
              
              
              1,912,492Other
              
              
              45,103
              
              
              43,562Total
                  non trade receivables
              
              $
              1,686,803
              
              $
              8,629,075
  9
  **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **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. Translation adjustments arising from the translation to
        U.S.
        dollars at differing exchange rates are included in the accumulated other
        comprehensive 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 $1,257,917 recorded on the balance sheet as of September
        30,
        2007. For the six months ended March 31, 2008, the Company recorded on the
        balance sheet a deferred translation loss of $125,767, resulting in a
        translation loss of $1,383,684 recorded as a component of accumulated other
        comprehensive loss as of March 31, 2008.
  **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:
  March 31,
                2008
              
              September 30,
                2007Component
                  parts
              
              $
              6,439,213
              
              $
              6,298,489Finished
                  goods
              
              
              9,537,853
              
              
              7,223,375$
              15,977,066
              
              $
              13,521,864
  **Note
        5. Net income (loss) per share**
 Basic
        net
        income (loss) per share includes no dilution and is computed by dividing
        net
        income (loss) 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
                March 31,
              
              Six months ended
                March 31,2008
              
              2007
              
              2008
              
              2007Weighted
                  average shares outstanding-basic
              
              
              9,980,866
              
              
              9,885,419
              
              
              9,918,434
              
              
              9,781,009Number
                  of shares issued on the assumed exercise of stock options
              
              
              -
              
              
              671,985
              
              
              268,700
              
              
              586,553Weighted
                  average shares outstanding-diluted
              
              
              9,980,866
              
              
              10,557,404
              
              
              10,187,134
              
              
              10,367,562
 
 Options
        to purchase 1,631,244 and 2,668 shares of common stock, at prices ranging
        from
        $1.05 to $8.75 and at a price of $8.75 were outstanding for the three months
        ended March 31, 2008 and 2007, respectively, but were not included in the
        computation of diluted earnings per share because they were anti-dilutive.
 
 10
  HAUPPAUGE
        DIGITAL, INC.AND
        SUBSIDIARIES
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 Options
        to purchase 831,000 and 22,781 shares of common stock, at prices ranging
        from
        $3.56 to $8.75 and $7.45 to $8.75 were outstanding for the six months ended
        March 31, 2008 and 2007, respectively, but were not included in the computation
        of diluted earnings per share because they were anti-dilutive.
  **Note
        6. Accumulated other comprehensive loss**
 Accumulated
        other comprehensive loss consists of two components: translation gains and
        losses and FAS 133 mark to market gains and losses on the Company’s open foreign
        exchange contracts. As of March 31, 2008, appearing in the equity section
        under
“ Accumulated other comprehensive loss” was a loss of $1,498,562, which
        consisted of a deferred translation loss of $1,383,684 and a deferred loss
        of
        $114,878 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 $1,498,562 recorded the Company’s balance sheet as of
        March 31, 2008:
 
 Accumulated
                  other comprehensive income (loss)
              
              Balance as of
              
              Oct07 to Mar 08
              
              Balance as ofFiscal
                  2008 activity
              
              Sept 30, 2007
              
              Losses
              
              March 31, 2008Translation
                  gains and losses
              
              $
              (1,257,917
              )
              $
              (125,767
              )
              $
              (1,383,684
              )FAS
                  133 mark to market adjustment
              
              
              (68,054
              )
              
              (46,824
              )
              
              (114,878
              )$
              (1,325,971
              )
              $
              (172,591
              )
              $
              (1,498,562
              )
  **Note
        7. Revenue recognition**
 The
        Company sells through a sales channel which consist of retailers, PC
        manufacturers and distributors. The majority of the Company’s 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.
 
 11
  **HAUPPAUGE
        DIGITAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 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 tuner 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 the Company’s
        marketing channel. The Company also sells product directly to PC manufacturers.
        The Company evaluates its product lines under the functional categories of
        analog TV tuners, digital TV tuners and other non-TV tuner products.
 
 The
        Company’s products fall under three product categories:
 
 ·
              Analog
                  TV tuners
 ·
              Digital
                  TV tuners, and combination analog and digital TV tuners
 ·
              Other
                  non TV tuner products
 
 The
        Company’s analog TV tuner products are TV tuner modules which can be added to a
        PC and enable a PC user, among other things, to watch and record analog cable
        TV
        in a resizable window on a PC.
 
 The
        Company’s digital TV and combination analog and digital tuner products are TV
        tuner modules which enable a PC user, among other things, to watch and record
        analog cable TV and digital TV in a resizable window on a PC.
 
 The
        Company’s other non-TV tuner products enable a PC user, among other things, 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 March  31,
              
              Six months ended March 31,Product
                  line sales
              
              2008
              
              2007
              
              2008
              
              2007Analog
                  TV tuner sales
              
              $
              2,599,757
              
              $
              18,517,756
              
              $
              7,446,088
              
              $
              33,075,148Digital
                  and combination analog and digital TV tuner sales
              
              
              14,886,688
              
              
              10,786,065
              
              
              45,592,085
              
              
              25,639,367Other
                  non-TV tuner products
              
              
              26,247
              
              
              588,020
              
              
              1,521,980
              
              
              1,096,459Total
                  sales
              
              $
              17,512,692
              
              $
              29,891,841
              
              $
              54,560,153
              
              $
              59,810,974
  12
 
 HAUPPAUGE
        DIGITAL, INC.AND
        SUBSIDIARIES
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 The
        Company sells its products through a North American 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 March  31,
              
              Six months ended March  31,Geographic
                  region
              
              2008
              
              2007
              
              2008
              
              2007The
                  Americas
              
              
              50
              %
              
              60
              %
              
              50
              %
              
              51
              %Europe
              
              
              47
              %
              
              39
              %
              
              48
              %
              
              47
              %Asia
              
              
              3
              %
              
              1
              %
              
              2
              %
              
              2
              %Total
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %
 
 **Note
        9. Tax provision**
 
 Our
        tax
        provision for the three and six months ended March 31, 2008 and 2007 is as
        follows :
 
 Three months ended March  31,
              
              Six months ended March, 31,2008
              
              2007
              
              2008
              
              2007Federal
                  income tax expense
              
              $
              (100,000
              )
              $
              21,000
              
              $
              -
              
              $
              52,000Tax
                  expense on international operations
              
              
              36,551
              
              
              31,693
              
              
              114,883
              
              
              79,245State
                  taxes
              
              
              5,000
              
              
              5,000
              
              
              17,000
              
              
              10,000Tax
                  provision
              
              $
              (58,449
              )
              $
              57,693
              
              $
              131,883
              
              $
              141,245
 
 In
        June
        2006 the FASB issued FASB Interpretation (FIN) No. 48, Accounting for
        Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
        was
        issued. FIN 48 prescribes a comprehensive model for recognizing, measuring,
        presenting and disclosing in the financial statements tax positions taken
        or
        expected to be taken on a tax return. FIN No. 48 is effective for fiscal
        years
        beginning after December 15, 2006. The Company adopted FIN No. 48 on October
        1,
        2007 and determined that the adoption of FIN No. 48 did not have a material
        impact on its consolidated financial statements. In addition, there are no
        unrecognized tax benefits included in the in the consolidated balance sheet
        that
        would, if recognized, have a material effect on the Company’s effective tax
        rate. When applicable the Company is continuing the practice of recognizing
        interest and penalties related to income tax matters in income tax expense.
        The
        Company did not recognize interest or penalties related to income taxes during
        the three and six months ended March 31, 2008. The Company files U.S. federal,
        U.S. state and foreign tax returns, and is no longer subject to examinations
        for
        fiscal years prior to 2003.
 
 **Note
        10. Recent Accounting Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
        No. 157). SFAS No.157 establishes a common definition for fair value to be
        applied to U.S. GAAP guidance requiring use of fair value, establishes a
        framework for measuring fair value, and expands disclosure about such fair
        value
        measurements. SFAS no. 157 is effective for fiscal years beginning after
        November 15, 2007. In February 2008, the FASB provided a one year deferral
        for
        the implementation of SFAS No. 157 for nonfinancial assets and liabilities
        recognized and disclosed at fair value in the financial statements on a
        nonrecurring basis. Management is currently assessing the impact of SFAS
        No. 157
        on the consolidated financial position and results of operations.
  13
  In
        February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
        Financial Assets and Financial Liabilities—Including an Amendment of FASB
        Statement No. 115" (" SFAS No. 159"). SFAS No. 159 allows companies the choice
        to measure many financial instruments and certain other items at fair value.
        Unrealized gains and losses on items for which the fair value option has
        been
        elected will be recognized in earnings at each subsequent reporting date.
        The
        provisions of SFAS No. 159 will be effective for fiscal years beginning after
        November 15, 2007. Management is currently evaluating the impact of SFAS
        No. 159
        on the consolidated financial position and results of operations.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements, an amendment of Accounting Research Bulletin
        No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting
        standards for ownership interests in subsidiaries held by parties other than
        the
        parent, changes in a parent’s ownership of a noncontrolling interest,
        calculation and disclosure of the consolidated net income attributable to
        the
        parent and the noncontrolling interest, changes in a parent’s ownership interest
        while the parent retains its controlling financial interest and fair value
        measurement of any retained noncontrolling equity investment. SFAS No. 160
        is
        effective for financial statements issued for fiscal years beginning after
        December 15, 2008, and interim periods within those fiscal years. Early adoption
        is prohibited. The Company must adopt these new requirements in its first
        quarter of fiscal 2010. Management is currently evaluating the impact of
        SFAS
        No. 160 on the consolidated financial position and results of operations.
 
 In
        December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007)
        “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles
        and requirements for how the acquirer in a business combination recognizes
        and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, and any controlling interest; recognizes and measures
        the
        goodwill acquired in the business combination or a gain from a bargain purchase;
        and determines what information to disclose to enable users of the financial
        statements to evaluate the nature and financial effects of the business
        combination. The provisions for SFAS No. 141R are effective for fiscal years
        beginning after December 15, 2008 and are applied prospectively to business
        combinations completed on or after that date. Early adoption is not permitted.
        SFAS No. 141R is effective for the Company beginning in the first quarter
        of
        fiscal 2010. The Company is evaluating the impact of SFAS No. 141R on its
        results of operations and financial condition.
 
 In
        June
        2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
        No.
        06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
        Awards” (EITF No. 06-11). EITF No. 06-11 provides guidance regarding how an
        entity should recognize the tax benefit received as a result of dividends
        paid
        to holders of share-based compensation awards and charged to retained earnings
        according to SFAS No. 123(R), and will become effective in the first quarter
        of
        2009. Management does not expect EITF No. 06-11 to have a material impact
        on the
        Company’s consolidated financial statements.
 
 In
        March
        2008, the FASB issued SFAS No. 161,
        “Disclosures about Derivative Instruments and Hedging Activities— An Amendment
        of FASB Statement No. 133” (SFAS No. 161). SFAS 161 requires enhanced
        qualitative disclosures about objectives and strategies for using derivatives,
        quantitative disclosures about fair value amounts of and gains and losses
        on
        derivative instruments, and disclosures about credit-risk-related contingent
        features in derivative agreements. SFAS 161 is effective for financial
        statements issued for fiscal years and interim periods beginning after November
        15, 2008. The Company is currently evaluating the impact of SFAS 161 on its
        consolidated financial statements.
 
 14
  **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**
 
 **THREE
        MONTH PERIOD ENDED MARCH 31, 2008 COMPARED TO THREE MONTH**
 **PERIOD
        ENDED MARCH 31 , 2007**
 
 Results
        of operations for the three months ended March 31, 2008 compared to March
        31,
        2007 are as follows:
 
 Three
                Months
                Ended
              
              Three
                Months
                Ended
              
              Variance
              
              Percentage of sales3/31/08
              
              3/31/07
              
              $
              
              2008
              
              2007
              
              VarianceNet
                  sales
              
              $
              17,512,692
              
              $
              29,891,841
              
              $
              (12,379,149
              )
              
              100.00
              %
              
              100.00
              %
              
              -Cost
                  of sales
              
              
              14,173,271
              
              
              24,248,250
              
              
              (10,074,979
              )
              
              80.93
              %
              
              81.12
              %
              
              -0.19
              %Gross
                  profit
              
              
              3,339,421
              
              
              5,643,591
              
              
              (2,304,170
              )
              
              19.07
              %
              
              18.88
              %
              
              0.19
              %Gross
                  profit %
              
              
              19.07
              %
              
              18.88
              %
              
              0.19
              %Selling,
                  general and administrative expenses:Sales
                  and marketing
              
              
              2,672,798
              
              
              2,428,804
              
              
              243,994
              
              
              15.26
              %
              
              8.13
              %
              
              7.13
              %Technical
                  support
              
              
              152,760
              
              
              146,570
              
              
              6,190
              
              
              0.87
              %
              
              0.49
              %
              
              0.38
              %General
                  and administrative
              
              
              1,029,489
              
              
              894,179
              
              
              135,310
              
              
              5.88
              %
              
              2.99
              %
              
              2.89
              %Stock
                  compensation
              
              
              95,241
              
              
              80,687
              
              
              14,554
              
              
              0.54
              %
              
              0.27
              %
              
              0.27
              %Total
                  selling, general and administrative expenses
              
              
              3,950,288
              
              
              3,550,240
              
              
              400,048
              
              
              22.55
              %
              
              11.88
              %
              
              10.67
              %Research
                  and development expenses
              
              
              935,001
              
              
              702,798
              
              
              232,203
              
              
              5.34
              %
              
              2.35
              %
              
              2.99
              %Research
                  & development stock compensation
              
              
              43,938
              
              
              47,029
              
              
              (3,091
              )
              
              0.25
              %
              
              0.16
              %
              
              0.09
              %Total
                  expenses
              
              
              4,929,227
              
              
              4,300,067
              
              
              629,160
              
              
              28.14
              %
              
              14.39
              %
              
              13.75
              %Net
                  operating income (loss)
              
              
              (1,589,806
              )
              
              1,343,524
              
              
              (2,933,330
              )
              
              -9.07
              %
              
              4.49
              %
              
              -13.56
              %Other
                  income (expense) :Interest
                  income
              
              
              10,623
              
              
              9,347
              
              
              1,276
              
              
              0.06
              %
              
              0.03
              %
              
              0.03
              %Foreign
                  currency
              
              
              (4,344
              )
              
              (18,245
              )
              
              13,901
              
              
              -0.02
              %
              
              -0.06
              %
              
              0.04
              %Total
                  other income (expense)
              
              
              6,279
              
              
              (8,898
              )
              
              15,177
              
              
              0.04
              %
              
              -0.03
              %
              
              0.07
              %Income
                  (loss) before taxes
              
              
              (1,583,527
              )
              
              1,334,626
              
              
              (2,918,153
              )
              
              -9.03
              %
              
              4.46
              %
              
              -13.49
              %Taxes
                  (benefit) on income (loss)
              
              
              (58,449
              )
              
              57,693
              
              
              (116,142
              )
              
              -0.33
              %
              
              0.19
              %
              
              -0.52
              %Net
                  income (loss)
              
              $
              (1,525,078
              )
              $
              1,276,933
              
              $
              (2,802,011
              )
              
              -8.70
              %
              
              4.27
              %
              
              -12.97
              %
 
 Net
        sales
        for the three months ended March 31, 2008 decreased $12,379,149 compared
        to the
        three months ended March 31, 2007 as shown in the table below.
  Three  Months
              
              Three  Months
              
              Increase
                (decrease)
                dollar
              
              Increase
                (decrease)
              
              Percentage of sales by
                geographic regionLocation
              
              ended 3/31/08
              
              ended 3/31/07
              
              variance
              
              variance %
              
              2008
              
              2007The
                  Americas
              
              
              8,683,186
              
              
              17,927,014
              
              
              (9,243,828
              )
              
              -52
              %
              
              50
              %
              
              60
              %Europe
              
              
              8,215,667
              
              
              11,579,486
              
              
              (3,363,819
              )
              
              -29
              %
              
              47
              %
              
              39
              %Asia
              
              
              613,839
              
              
              385,341
              
              
              228,498
              
              
              59
              %
              
              3
              %
              
              1
              %Total
              
              $
              17,512,692
              
              $
              29,891,841
              
              $
              (12,379,149
              )
              
              -41
              %
              
              100
              %
              
              100
              %
 
 15
 
 Net
        sales
        to customers in The Americas were 50% and 60% of net sales for the three
        months
        ended March 31, 2008 and 2007, respectively. Net sales to customers in Europe
        were 47% and 39% of net sales for the three months ended March 31, 2008 and
        2007, respectively. Net sales to customers in Asia were 3% of net sales for
        the
        three months ended March 31, 2008 and 2007, respectively. We experienced
        a
        decrease in unit sales of about 29% while the dynamics of new production
        and
        changes in sales mix lowered the average sales price by about 17%.
 
 Several
        programs with personal computer manufacturers were discontinued in the quarter
        due to a shift in focus to lower cost PCs which do not include TV tuners.
        The
        termination of these programs resulted in lower sales to some of our largest
        customers. In addition, one of our retailers in the U.S., CompUSA, went into
        liquidation which resulted in lower sales in North America.
 
 **Gross
        profit**
 
 Gross
        profit decreased $2,304,170 for the three months ended March 31, 2008 compared
        to the three months ended March 31, 2007.
 
 The
        decrease in the gross profit are detailed below:
 
 Increase (decrease)Decreased
                    sales
              
              $
              (3,213,126
              )Higher
                  gross profit on sales mix
              
              
              802,770Production
                  and production related expenses
              
              
              106,186Total
                  decrease in gross profit
              
              $
              (2,304,170
              )
 
 Gross
        profit percentage for the three months ended March 31, 2008 was 19.07 % compared
        to 18.88% for the three months ended March 31, 2007, resulting in a gross
        profit
        increase of 0.19%.
 
 The
        increase in the gross profit percentage are detailed below:
  Increase (decrease)Higher
                  gross profit on sales mix
              
              
              4.59
              %Production
                  and production related expenses
              
              
              (4.40
              )%Net
                  increase in gross profit percentage
              
              
              0.19
              %
 
 The
        increase in the gross profit percentage of 0.19% for the three months ended
        March 31, 2008 compared to the three months ended March 31, 2007 was primarily
        due to:
  ·
              Larger
                  sales percentage of higher gross profit margin products contributed
                  to a
                  4.59% increase in the gross profit
                  percentage
  ·
              Due
                  to lower sales, production and shipping labor expenses as a percentage
                  of
                  sales increased which contributed to a 4.40% reduction in the gross
                  profit
                  percentage.
  **Selling,
        general and administrative expenses**
 
 The
        chart
        below illustrates the components of Selling, general and administrative expense.
 
 Three  months ended March  31,Dollar Costs
              
              Percentage of Sales2008
              
              2007
              
              Increase
              
              2008
              
              2007
              
              IncreaseSales
                  and marketing
              
              $
              2,672,798
              
              $
              2,428,804
              
              $
              243,994
              
              
              15.26
              %
              
              8.13
              %
              
              7.13
              %Technical
                  support
              
              
              152,760
              
              
              146,570
              
              
              6,190
              
              
              0.87
              %
              
              0.49
              %
              
              0.38
              %General
                  and administrative
              
              
              1,029,489
              
              
              894,179
              
              
              135,310
              
              
              5.88
              %
              
              2.99
              %
              
              2.89
              %Stock
                  compensation
              
              
              95,241
              
              
              80,687
              
              
              14,554
              
              
              0.54
              %
              
              0.27
              %
              
              0.27
              %Total
              
              $
              3,950,288
              
              $
              3,550,240
              
              $
              400,048
              
              
              22.55
              %
              
              11.88
              %
              
              10.67
              %
 
 16
  Selling,
        general and administrative expenses increased $400,048 from the prior year’s
        second quarter. The increase in the Euro against the U.S. Dollar of about
        14%
        from the three months ended March 31, 2007 was responsible for an increase
        in
        expenses of $225,778. Actual increases in expenses were $174,270 and were
        mainly
        due to higher personnel related expenses, higher sales office expenses, higher
        rent, higher professional fees and higher bad debt expense. The increase
        in
        stock compensation was due to the timing of the vesting of stock option grants.
  **Research
        and development expenses**
 
 Research
        and development expenses increased $229,112. Increased compensation due to
        the
        hiring of additional engineers coupled with a higher volume of product
        development programs were the forces driving the increase.
  **Tax
        provision**
 
 Our
        tax
        provision for the three months ended March 31, 2008 and 2007 is as
        follows :
 
 Three months ended March 31,2008
              
              2007Federal
                  income tax expense
              
              $
              (100,000
              )
              $
              21,000Tax
                  expense on international operations
              
              
              36,551
              
              
              31,693State
                  taxes
              
              
              5,000
              
              
              5,000Tax
                  provision
              
              $
              (58,449
              )
              $
              57,693
 
 We
        recorded a net loss of $1,525,078, for the three months ended March 31, 2008,
        which resulted in basic and diluted net loss per share of $0.15 on weighted
        average basic and diluted shares of 9,980,866 compared to a net income of
        $1,276,933 for the three months ended March 31, 2007, which resulted in basic
        net income per share of $0.13 and diluted net income per share of $0.12,
        respectively, on weighted average basic and diluted shares of 9,885,419 and
        10,557,404, respectively.
 
 Options
        to purchase 1,631,244 and 2,668 shares of common stock, at prices ranging
        from
        $1.05 to $8.75 and at a price of $8.75 were outstanding for the three months
        ended March 31, 2008 and 2007, respectively, but were not included in the
        computation of diluted earnings per share because they were anti-dilutive.
 
 17
  **SIX
        MONTH PERIOD ENDED MARCH 31, 2008 COMPARED TO SIX MONTH
        PERIOD**
 **ENDED
        MARCH 31 , 2007**
 
 Results
        of operations for the six months ended March 31, 2008 compared to March 31,
        2007
        are as follows:
 
 Six
                Months
                Ended
              
              Six
                Months
                Ended
              
              Variance
              
              Percentage of sales3/31/08
              
              3/31/07
              
              $
              
              2008
              
              2007
              
              VarianceNet
                  sales
              
              $
              54,560,153
              
              $
              59,810,974
              
              $
              (5,250,821
              )
              
              100.00
              %
              
              100.00
              %
              
              -Cost
                  of sales
              
              
              43,079,671
              
              
              47,349,846
              
              
              (4,270,175
              )
              
              78.96
              %
              
              79.17
              %
              
              -0.21
              %Gross
                  profit
              
              
              11,480,482
              
              
              12,461,128
              
              
              (980,646
              )
              
              21.04
              %
              
              20.83
              %
              
              0.21
              %Gross
                  profit %
              
              
              21.04
              %
              
              20.83
              %
              
              0.21
              %Selling
                  , general and administrative expenses:Sales
                  and marketing
              
              
              5,922,650
              
              
              5,136,025
              
              
              786,625
              
              
              10.86
              %
              
              8.59
              %
              
              2.27
              %Technical
                  support
              
              
              302,767
              
              
              282,975
              
              
              19,792
              
              
              0.55
              %
              
              0.47
              %
              
              0.08
              %General
                  and administrative
              
              
              2,086,957
              
              
              1,785,163
              
              
              301,794
              
              
              3.83
              %
              
              2.98
              %
              
              0.85
              %Stock
                  compensation
              
              
              190,482
              
              
              148,300
              
              
              42,182
              
              
              0.35
              %
              
              0.25
              %
              
              0.10
              %Total
                  selling, general and administrative expenses
              
              
              8,502,856
              
              
              7,352,463
              
              
              1,150,393
              
              
              15.59
              %
              
              12.29
              %
              
              3.30
              %Research
                  and development expenses
              
              
              1,804,820
              
              
              1,414,987
              
              
              389,833
              
              
              3.31
              %
              
              2.37
              %
              
              0.94
              %Research
                  & development stock compensation
              
              
              87,876
              
              
              88,284
              
              
              (408
              )
              
              0.15
              %
              
              0.14
              %
              
              0.01
              %Total
                  expenses
              
              
              10,395,552
              
              
              8,855,734
              
              
              1,539,818
              
              
              19.06
              %
              
              14.81
              %
              
              4.25
              %Net
                  operating income
              
              
              1,084,930
              
              
              3,605,394
              
              
              (2,520,464
              )
              
              1.98
              %
              
              6.02
              %
              
              -4.04
              %Other
                  income (expense) :Interest
                  income
              
              
              16,817
              
              
              21,738
              
              
              (4,921
              )
              
              0.03
              %
              
              0.04
              %
              
              -0.01
              %Foreign
                  currency
              
              
              (31,953
              )
              
              (6,218
              )
              
              (25,735
              )
              
              -0.06
              %
              
              -0.01
              %
              
              -0.05
              %Total
                  other income (expense)
              
              
              (15,136
              )
              
              15,520
              
              
              (30,656
              )
              
              -0.03
              %
              
              0.03
              %
              
              -0.06
              %Income
                  before taxes on income
              
              
              1,069,794
              
              
              3,620,914
              
              
              (2,551,120
              )
              
              1.95
              %
              
              6.05
              %
              
              -4.10
              %Taxes
                  on income
              
              
              131,883
              
              
              141,245
              
              
              (9,362
              )
              
              0.24
              %
              
              0.24
              %
              
              0.00
              %Net
                  income
              
              $
              937,911
              
              $
              3,479,669
              
              $
              (2,541,758
              )
              
              1.71
              %
              
              5.81
              %
              
              -4.10
              %
 
 Net
        sales
        for the six months ended March 31, 2008 decreased $5,250,821 compared to
        the six
        months ended March 31, 2007 as shown in the table below.
  Six
                  Months
              
              Six
                  Months
              
              Increase
                (decrease)
              
              Increase
                (decrease)
                dollar
              
              Percentage of sales by
                geographic regionLocation
              
              ended 3/31/08
              
              ended 3/31/07
              
              variance
              
              variance
                  %
              
              2008
              
              2007The
                  Americas
              
              $
              27,384,971
              
              $
              30,399,845
              
              $
              (3,014,874
              )
              
              -10
              %
              
              50
              %
              
              51
              %Europe
              
              
              25,998,787
              
              
              28,499,543
              
              
              (2,500,756
              )
              
              -9
              %
              
              48
              %
              
              47
              %Asia
              
              
              1,176,395
              
              
              911,586
              
              
              264,809
              
              
              29
              %
              
              2
              %
              
              2
              %Total
              
              $
              54,560,153
              
              $
              59,810,974
              
              $
              (5,250,821
              )
              
              -9
              %
              
              100
              %
              
              100
              %
 
 Net
        sales
        to customers in The Americas were 50% and 51% of net sales for the six months
        ended March 31, 2008 and 2007, respectively. Net sales to customers in Europe
        were 48% and 47% of net sales for the six months ended March 31, 2008 and
        2007,
        respectively. Net sales to customers in Asia were 2% of net sales for the
        six
        months ended March 31, 2008 and 2007, respectively. We experienced an increase
        in unit sales of about 8% while the dynamics of new production and changes
        in
        sales mix lowered the average sales price by about 15%.
  18
  Several
        programs with personal computer manufacturers were discontinued in the quarter
        due to a shift in focus to lower cost PCs which do not include TV tuners.
        The
        termination of these programs resulted in lower sales to some of our largest
        customers. In addition, one of our retailers in the U.S., CompUSA, went into
        liquidation which resulted in lower sales in North America.
 
 **Gross
        profit**
 
 Gross
        profit decreased $980,646 for the six months ended March 31, 2008 compared
        to
        the six months ended March 31, 2007.
 
 The
        decrease in the gross profit are detailed below:
  Increase (decrease)Decreased
                    sales
              
              $
              (1,469,705
              )Higher
                  gross profit on sales mix
              
              
              858,257Production
                  and production related expenses
              
              
              (369,198
              )Total
                  decrease in gross profit
              
              $
              (980,646
              )
 
 Gross
        profit percentage for the six months ended March 31, 2008 was 21.04 % compared
        to 20.83% for the six months ended March 31, 2007, resulting in a gross profit
        increase of 0.21%.
 
 The
        increase in the gross profit percentage are detailed below:
 
 Increase (decrease)Higher
                  gross profit on sales mix
              
              
              1.58
              %Production
                  and production related expenses
              
              
              (1.37
              )%Net
                  increase in gross profit percentage
              
              
              0.21
              %
 
 The
        increase in the gross profit percentage of 0.21% for the six months ended
        March
        31, 2008 compared to the six months ended March 31, 2007 was primarily due
        to:
  ·
              Larger
                  sales percentage of higher gross profit margin products contributed
                  to a
                  1.58% increase in the gross profit
                  percentage
  ·
              Due
                  to lower sales, production and shipping labor expenses as a percentage
                  of
                  sales increased which contributed to a 1.37% reduction in the gross
                  profit
                  percentage.
  **Selling,
        general and administrative expenses**
 
 The
        chart
        below illustrates the components of Selling, general and administrative expense.
 
 Six  months ended March 31,
                Dollar Costs
              
              Percentage of Sales2008
              
              2007
              
              Increase
              
              2008
              
              2007
              
              IncreaseSales
                  and marketing
              
              $
              5,922,650
              
              $
              5,136,025
              
              $
              786,625
              
              
              10.86
              %
              
              8.59
              %
              
              2.27
              %Technical
                  support
              
              
              302,767
              
              
              282,975
              
              
              19,792
              
              
              0.55
              %
              
              0.47
              %
              
              0.08
              %General
                  and administrative
              
              
              2,086,957
              
              
              1,785,163
              
              
              301,794
              
              
              3.83
              %
              
              2.98
              %
              
              0.85
              %Stock
                  compensation
              
              
              190,482
              
              
              148,300
              
              
              42,182
              
              
              0.35
              %
              
              0.25
              %
              
              0.10
              %Total
              
              $
              8,502,856
              
              $
              7,352,463
              
              $
              1,150,393
              
              
              15.59
              %
              
              12.29
              %
              
              3.30
              %
 
 Selling,
        general and administrative expenses increased $1,150,393 from same period
        in the
        prior year. The increase in the Euro against the U.S. Dollar of about 13%
        from
        the six months ended March 31, 2007 was responsible for an increase in expenses
        of $460,309. Actual increases in expenses were $690,085 and were mainly due
        to
        higher personnel related expenses, higher sales office expenses, higher rent,
        higher professional fees and higher bad debt expense. The increase in stock
        compensation was due to the timing of the vesting of stock option grants.
  19
  **Research
        and development expenses**
 
 Research
        and development expenses increased $389,424. Increased compensation due to
        the
        hiring of additional engineers coupled with a higher volume of product
        development programs were the forces driving the increase.
  **Tax
        provision**
 
 Our
        tax
        provision for the six months ended March 31, 2008 and 2007 is as
        follows :
 
 Six months ended March   31,2008
              
              2007Federal
                  income tax expense
              
              $
              -
              
              $
              52,000Tax
                  expense on international operations
              
              
              114,883
              
              
              79,245State
                  taxes
              
              
              17,000
              
              
              10,000Tax
                  provision
              
              $
              131,883
              
              $
              141,245
  We
        recorded a net income of $937,911, for the six months ended March 31, 2008,
        which resulted in basic and diluted net income per share of $0.09 on weighted
        average basic and diluted shares of 9,918,434 and 10,187,134, respectively,
        compared to a net income of $3,479,669 for the six months ended March 31,
        2007,
        which resulted in basic net income per share of $0.36 and diluted net income
        per
        share of $0.34, respectively, on weighted average basic and diluted shares
        of
        9,781,009 and 10,367,562, respectively.
 
 Options
        to purchase 831,000 and 22,781 shares of common stock, at prices ranging
        from
        $3.56 to $8.75 and $7.45 to $8.75 were outstanding for the six months ended
        March 31, 2008 and 2007, respectively, but were not included in the computation
        of diluted earnings per share because they were anti-dilutive.
  **S** **easonality**
 
 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
        second fiscal quarter (January to March). In addition, our international
        sales,
        mostly in the European market, were 46%, 54% and 54% of sales for the years
        ended September 30, 2007, 2006 and 2005, respectively. Part of our third
        and
        fourth quarters (April through June and July to September) can be potentially
        impacted by the reduction of activity experienced in Europe during the 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 March 31, 2008 and
        September 30, 2007 is set forth below:
  20
  March  31, 2008
              
              September 30, 2007Cash
              
              $
              11,309,504
              
              $
              11,581,657Working
                  Capital
              
              
              22,536,863
              
              
              21,198,184Stockholders’
                  Equity
              
              
              24,340,237
              
              
              22,941,081
 
 We
        had
        cash and cash equivalents as of March 31, 2008 of $11,309,504, a decrease
        of
        $272,153 from September 30, 2007.
 
 The
        decrease in cash was due to :
 
 Sources
                  of cash:***Net
                  income adjusted for non cash items***
              
              $
              2,125,003Decrease
                  in accounts receivables
              
              
              15,068,670Proceeds
                  from employee stock purchases
              
              
              396,310Less
                  cash used for:Decrease
                  in accounts payable and accrued expenses
              
              
              (13,819,092
              )Increase
                  in inventories
              
              
              (3,105,202
              )Increase
                  in prepaid expenses and other current assets
              
              
              (525,208
              )Capital
                  equipment purchases
              
              
              (199,211
              )Effect
                  of exchange rates on cash
              
              
              (172,591
              )Purchase
                  of treasury stock
              
              
              (40,832
              )Net
                  cash decrease
              
              $
              (272,153
              )
 
 Net
        cash
        of $255,829 used in operating activities was primarily due to decreases in
        accounts payable and accrued expenses of $13,819,092, increases in inventory
        of
        $3,105,202 due primarily to a build up in inventory as a result of slower
        second
        quarter sales and an increase of $525,208 in prepaid expense and other current
        assets. Offsetting these uses of cash was net income adjusted for non cash
        items
        of $2,125,003 and decreases in accounts receivable of $15,068,670, due primarily
        to the combination of collections of our December 31, 2007 receivables and
        a
        lower second quarter sales volume.
  Cash
        of
        $199,211 was used to purchase fixed assets. Proceeds from stock purchased
        by
        employees through the exercise of options and through purchases under the
        employee stock purchase plan provided additional cash of $396,310. The purchase
        of treasury stock used cash of $40,832 and the effect of changes in foreign
        exchange rates used cash of $ 172,591.
 
 We
        believe that our cash and cash equivalents as of March 31, 2008 and our
        $5,000,000 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 March 31, 2008:
 
 Payments due by periodTotal
              
              Less than 1 year
              
              1-3 years
              
              3 to 5 yearsOperating
                  lease obligations
              
              $
              1,915,910
              
              $
              594,541
              
              $
              1,180,679
              
              $
              140,690
  21
  **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 three fiscal years ended September 30, 2007, at least 40 % of our
        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 we
        predominantly deal with North American and Asian suppliers and contract
        manufacturers, approximately 90% of our 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,
        our financial results are subject to market risks resulting from the
        fluctuations in the Euro to U.S. Dollar exchange rates.
 
 We
        attempt 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.
  **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 March 31,
        2008
        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 our quarter ended March 31,
 2008
        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, 2007), 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.
 
 22
 
 **PART
        II. OTHER INFORMATION**
 
 **Item
        1. Legal proceedings**
 
 There
        have been no material changes with respect to legal proceedings disclosed
        in our
        Annual Report on Form 10-K for the fiscal year ended September 30,
        2007.
 
 **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,
        2007.
  **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. At our August 3, 2007 Board Meeting, our Board of Directors approved
        an
        increase in the number of shares which can be repurchased under the plan
        to
        1,200,000.
 
 The
        table
        below summarized repurchases of our common stock under our stock repurchase
        program:
 
 Period
              
              Total
                Number
                of Shares
                Purchased
              
              Average
                Price
                Paid per
                Share
              
              Total Number
                of Shares
                Purchased as
                Part of Publicly
                Announced Plan
              
              Maximum
                Number
                of Shares
                that May Yet
                Be Purchased
                Under the PlanPurchases
                  as of September 30, 2007
              
              
              749,579
              
              
              3.15
              
              
              749,579
              
              
              450,421October
                  1 to December 31, 2007
              
              
              10,000
              
              
              4.08
              
              
              10,000
              
              
              440,421Purchases
                  as of March 31, 2008
              
              
              759,579
              
              
              3.17
              
              
              759,579
  **Item
        4. Submission of matters to a vote of security holders** ****
 The
        following proposal was submitted to the stockholders for approval at the
        Annual
        Meeting of Stockholders held on February 28, 2008 but subsequently adjourned
        to
        March 27, 2008 at our offices:
 
 **Proposal
        No. 1: Election of directors**
 
 The
        following directors were elected by the votes indicated:
  **For**
              
              **Withheld**Kenneth
                  Plotkin
              
              
              8,876,716
              
              
              254,321Bernard
                  Herman
              
              
              7,953,020
              
              
              1,178,017Robert
                  S. Nadel
              
              
              8,098,400
              
              
              1,032,637Christopher
                  G. Payan
              
              
              8,252,081
              
              
              878,956Neal
                  Page
              
              
              8,099,200
              
              
              1,031,837Seymour
                  G. Siegel
              
              
              8,106,016
              
              
              1,025,021
  23
  **Item
        6. Exhibits**
 
 10.1
        Agreement, dated April 1, 2008, between Hauppauge Digital Inc. and Kenneth
        Plotkin. (1)
 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
 
 **(** 1)
        Denotes document filed as an exhibit to our current report on Form 8-K for
        an
        event dated April 10, 2008 and incorporated herein by reference **.**
  24
 
 **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:
                  May 14, 2008
              By
              /s/Kenneth
                  PlotkinKENNETH
                  PLOTKINChief
                  Executive Officer, Chairman of the Board,President
                  (Principal Executive Officer)Date:
                  May 14, 2008
              By
              /s/Gerald
                  TucciaroneGERALD
                  TUCCIARONETreasurer,
                  Chief Financial Officer,(Principal
                  Accounting officer) and Secretary
  25