UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended March 31, 2004

                                       OR

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

For the transition period from _______ to ________

        Commission file number 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.

                                    Yes X     No
                                       ---      ---

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act)

                                    Yes       No X
                                       ---      ---


As of May 6,  2004,  9,027,331  shares  of .01 par  value  Common  Stock  of the
registrant were outstanding, not including treasury shares.


                                       1

<PAGE>
<TABLE>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                    ----------------------------------------

                                      INDEX
                                      -----


PART I. FINANCIAL INFORMATION
-----------------------------
<S>                                                                                 <C>
Item 1.Financial Statements                                                       Page No.
                                                                                  --------

Condensed Consolidated Balance Sheets-
 March 31,  2004 (unaudited) and September 30, 2003 (audited)                        3

Condensed Consolidated Statements of Income-
 Six  months ended March  31 2004 (unaudited) and 2003 (unaudited)                   4

Condensed Consolidated Statements  Income -
 Three months ended  March  31, 2004 (unaudited) and 2003 (unaudited)                5

Condensed Consolidated Statements of  Other Comprehensive Income -
 Three months and six months  ended  March 31, 2004 (unaudited) and 2003
 (unaudited)                                                                         6

Condensed Consolidated Statements of Cash Flows-
 Six  Months ended March   31, 2004 (unaudited) and 2003 (unaudited)                 7

Notes to Condensed Consolidated Financial Statements                                 8-12

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
  of Operations                                                                      13-27

Item 3. Quantitative and Qualitative Disclosures about Market Risks                  27-29

Item 4. Controls and Procedures                                                      29

PART II.  OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings                                                            30

Item 5. Other information                                                            30

Item 6. Exhibits and Reports on form 8-K                                             31

SIGNATURES                                                                           32

</TABLE>

                                       2

<PAGE>

PART I. FINANCIAL INFORMATION
-----------------------------

Item 1. Financial Statements



                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                             March 31      September 30,
                                                                               2004            2003
                                                                           (Unaudited)       (Audited)
                                                                           -----------------------------
<S>                                                                             <C>    <C>    <C>    <C>

Assets:

 Current Assets:
  Cash and cash  equivalents                                               $ 6,535,122      $ 5,838,160
  Receivables, net of  various allowances                                    9,717,906        9,182,758
  Inventories                                                                9,557,603        5,474,374
  Prepaid expenses and other current assets                                    679,503          546,328
                                                                           -----------------------------
        Total current assets                                                26,490,134       21,041,620

  Property, plant and equipment, net                                           458,310          532,516
  Security deposits and other non current assets                                76,216           76,216
                                                                           -----------------------------
                                                                           $27,024,660      $21,650,352
                                                                           -----------------------------
                                                                           -----------------------------

Liabilities and  Stockholders' Equity :

 Current Liabilities:

  Accounts payable                                                         $ 8,806,754      $ 7,452,867
  Accrued expenses                                                           4,019,145        2,539,678
  Income taxes payable                                                         187,730          189,122
                                                                           ----------------------------
        Total current liabilities                                           13,013,629       10,181,667

 Stockholders' Equity

  Common stock $.01 par value; 25,000,000 shares authorized, 9,476,669
   And 9,420,315  issued, respectively                                          94,767           94,203
  Additional paid-in capital                                                12,410,791       12,302,119
  Retained earnings                                                          1,637,237           99,987
  Accumulated other comprehensive income                                     1,365,452          469,592
  Treasury Stock, at cost, 542,067 shares                                   (1,497,216)      (1,497,216)
                                                                           ----------------------------
        Total stockholders' equity                                          14,011,031       11,468,685
                                                                           ----------------------------
                                                                           $27,024,660      $21,650,352
                                                                           ----------------------------
                                                                           ----------------------------

</TABLE>

     See accompanying notes to condensed consolidated financial statements


                                       3

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)


                                                     Six months ended March  31,
                                                    ----------------------------
                                                         2004            2003
                                                    ----------------------------


Net Sales                                           $35,034,581      $29,439,344
Cost of Sales                                        25,521,988       22,148,910
                                                    ----------------------------
  Gross Profit                                        9,512,593        7,290,434

Selling, General and  Administrative Expenses         6,344,385        5,430,774
Research & Development Expenses                         854,664          941,324
Arbitration proceeding                                  206,250                -
Litigation proceeding                                   500,000                -
                                                    ----------------------------
  Income from operations                              1,607,294          918,336

Other Income:
  Interest income                                         3,136           10,005
  Foreign currency                                       21,899           27,646
                                                    ----------------------------
Other income                                             25,035           37,651
                                                    ----------------------------
  Income  before taxes on income                      1,632,329          955,987
Tax  provision                                           95,079           39,000
                                                    ----------------------------
  Net income                                         $1,537,250         $916,987
                                                    ----------------------------
                                                    ----------------------------

Net income  per share:
  Basic                                                   $0.17            $0.10
  Diluted                                                 $0.16            $0.10
                                                    ----------------------------
                                                    ----------------------------


      See accompanying notes to condensed consolidated financial statements


                                       4

<PAGE>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)


                                                   Three months ended March  31,
                                                   -----------------------------
                                                        2004            2003
                                                   -----------------------------

Net Sales                                            $16,804,283     $13,918,858
Cost of Sales                                         11,873,313      10,549,386
                                                   -----------------------------
 Gross Profit                                          4,930,970       3,369,472

Selling, General and  Administrative Expenses          3,223,769       2,724,472
Research & Development Expenses                          444,390         448,251
Arbitration proceeding                                   206,250               -
Litigation proceeding                                    500,000               -
                                                   -----------------------------
  Income from operations                                 556,561         196,749

Other Income:
  Interest income                                          1,397           4,034
  Foreign currency                                        33,232          72,249
                                                   -----------------------------
Other income                                              34,629          76,283
                                                   -----------------------------
  Income before taxes on income                          591,190         272,032
Tax provision                                             46,800          12,517
                                                   -----------------------------
  Net income                                         $   544,390      $  260,515
                                                   -----------------------------
                                                   -----------------------------

Net income  per share:
  Basic and Diluted                                        $0.06           $0.03
                                                   -----------------------------
                                                   -----------------------------


      See accompanying notes to condensed consolidated financial statements



                                       5

<PAGE>


                     HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
                                   (UNAUDITED)


                                                Three months  ended March  31,
                                                   2004              2003
                                                   ----              ----

Net income                                      $  544,390        $  260,515
Forward exchange contracts marked to market        (16,483)          163,879
Foreign currency translation (loss) gain          (142,087)           13,318
                                                ----------------------------
Other comprehensive income                      $  385,820        $  437,712
                                                ----------------------------
                                                ----------------------------

                                                Six months  ended  March 31,
                                                   2004             2003
                                                   ----             ----

Net income                                      $1,537,250        $  916,987
Forward exchange contracts marked to market        187,978          (355,095)
Foreign currency translation gain                  707,882           164,046
                                                ----------------------------
Other comprehensive income                      $2,433,110        $  725,938
                                                ----------------------------
                                                ----------------------------


     See accompanying notes to condensed consolidated financial statements


                                       6

<PAGE>

<TABLE>
<CAPTION>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<S>                                                             <C>     <C>    <C>    <C>    <C>    <C>

                                                                         Six months ended March  31,
                                                                           2004                2003
                                                                    ----------------------------------
Net income                                                           $   1,537,250          $  916,987
                                                                    ----------------------------------
    Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                          121,054             137,530
    Other non cash items                                                    12,667              19,241
Changes in current assets and liabilities:
    Accounts receivable                                                    360,712          (2,064,815)
    Inventories                                                         (4,083,229)           (806,167)
    Prepaid expenses and other current assets                             (133,175)           (195,544)
    Accounts payable and other current liabilities                       2,831,962           1,836,731
                                                                    ----------------------------------
    Total adjustments                                                     (890,009)         (1,073,024)
                                                                    ----------------------------------
Net cash  provided by (used in)  operating activities                      647,241            (156,037)
                                                                    ----------------------------------

Cash Flows From Investing Activities:
 Purchases of property, plant and equipment                                (46,848)           (125,569)
                                                                    ----------------------------------
    Net cash used in investing activities                                  (46,848)           (125,569)
                                                                    ----------------------------------


Cash Flows From Financing Activities:
Proceeds from employee stock and stock option  purchases                    96,569              13,501
Purchase of treasury stock                                                       -             (35,642)
                                                                    ----------------------------------
    Net cash provided by (used in) financing activities                     96,569             (22,141)
                                                                    ----------------------------------
    Net increase (decrease)  in cash and cash equivalents                  696,962            (303,747)
Cash and cash equivalents, beginning of period                           5,838,160           4,964,522
                                                                    ----------------------------------
Cash and cash equivalents, end of period                             $   6,535,122         $ 4,660,775
                                                                    ----------------------------------
                                                                    ----------------------------------
Supplemental disclosures:
 Income taxes paid                                                   $      81,616         $     4,945
                                                                    ----------------------------------
                                                                    ----------------------------------

</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       7

<PAGE>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1.  Basis of  Presentation

The accompanying  unaudited condensed consolidated financial statements 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
financial position, results of operations and cash flows for the three month and
six month period ended March 31, 2004 have been  included.  It is suggested that
these interim  statements be read in conjunction  with the financial  statements
and related  notes  included in  Hauppauge  Digital  Inc.  ("the  Company")  the
Company's September 30, 2003 Form 10-K.

The  operating  results for the three month and six month period ended March 31,
2004 are not  necessarily  indicative  of the  results  to be  expected  for the
September 30, 2004 year end.

Note 2. Receivables
Accounts and other receivables consisted of the following as of March 31, 2004:

                                               March 31,           September 30,
                                                 2004                   2003
                                             ------------          ------------
Trade receivables                             $ 8,882,829           $ 7,435,539
Receivable from contract manufacturers          3,514,622             4,134,456
GST and VAT taxes receivables                     245,019               289,700
Allowances and reserves                        (3,232,184)           (2,887,184)
Income tax receivable                             175,000               175,000
Other                                             132,620                35,247
                                             ------------          ------------
                                              $ 9,717,906           $ 9,182,758
                                             ============          ============

Note 3. Derivative Financial Instruments

Sales to our European customers are invoiced in local currencies, and subsequent
payments received from our customers are in local currencies (primarily the Euro
and Great British Pound).  On the supply side, since we predominantly  deal with
North  American  and  Asian  suppliers,   approximately  75%  of  our  inventory
supporting our Euro and Great British Pound sales are purchased and paid in U.S.
Dollars.  Consequently,  changes in exchange  rates expose our U.S.  denominated
inventory on the books of our European subsidiary to market risks resulting from
the fluctuations in the foreign currency  exchange rates to the U.S. Dollar.  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 forecasted U.S.
Dollar denominated inventory purchases required to support our European sales.

As of  March  31,  2004,  we  had  foreign  currency  contracts  outstanding  of
approximately  $3,257,700 against the delivery of the Euro. The contracts expire
through September 2004. Our accounting policies for these instruments  designate
such  instruments as cash flow hedging  transactions.  We do not enter into such
contracts for speculative purposes. We record all derivative gains and losses on
the  balance  sheet as a component  of  stockholders'  equity  under the caption
"Accumulated other comprehensive income (loss)". The Company recorded a deferred
gain of $187,978 for the six months ended March 31, 2004.  As of March 31, 2004,
a deferred loss of $46,613  reflecting the cumulative mark to market loss of our
derivatives,  was recorded as a component  of  accumulated  other  comprehensive
income on the balance sheet.

For the three months and six months ended March 31, 2004, we recorded a decrease
in sales of $103,835 and $909,368,  respectively,  related to our contracts that
closed during these periods and the changes in the fair value of our  derivative
contracts. For the three months and six months ended March 31, 2003, we recorded
a decrease in sales of $609,100  and  $1,158,700,  respectively,  related to our
contracts  that closed during these periods and the changes in the fair value of
our derivative  contracts.


                                       8

<PAGE>

<TABLE>
<CAPTION>

                HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

Note 4. Inventories

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

                                                  March 31,     September 30,
                                                    2004            2003
                                                    ----            ----

  Component Parts                                $4,275,738      $1,446,670
  Finished Goods                                  5,281,865       4,027,704
                                                 ----------      ----------
                                                 $9,557,603      $5,474,374
                                                 ==========      ==========


Note 5. Net Income Per Share

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

<S>                                                                     <C>    <C>    <C>    <C>    <C>    <C>

                                                                        Three Months Ended         Six Months Ended
                                                                            March 31,                  March 31
                                                                         2004        2003          2004         2003
                                                                        ---------   ---------    ----------     -----
 Weighted average shares outstanding-basic                              8,901,734   8,862,774    8,891,135    8,860,578
 Number of shares issued on the assumed exercise of stock options         848,173      97,047      684,964       57,357
                                                                        ---------   ---------   ----------    ---------
 Weighted average shares outstanding-diluted                            9,749,907   8,959,821    9,576,099    8,917,935
                                                                        =========   ==========   =========    =========
</TABLE>


Options to  purchase  120,513  and  1,240,122  shares of common  stock at prices
ranging $5.25 to $10.06 and $1.47 and $10.06, respectively, were outstanding for
the three month period  ending March 31, 2004 and 2003,  respectively,  but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Options to  purchase  228,905  and  1,455,425  shares of common  stock at prices
ranging $3.88 to $10.06 and $1.35 and $10.06, respectively, were outstanding for
the six month period ending March 31, 2004 and 2003, respectively,  but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive

Note 6. Accumulated other comprehensive income

The  Euro is the  functional  currency  of the  Company's  European  subsidiary,
Hauppauge  Digital Europe Sarl.  Assets and  liabilities of this  subsidiary are
translated  to U.S.  Dollars at the spot  exchange rate in effect at end of each
reporting  period,  while equity accounts are translated to U.S.  Dollars at the
historical rate in effect at the date of the contribution. Operating results are
translated  to U.S.  Dollars at the  average  prevailing  exchange  rate for the
period,  with the exception of sales which are translated to U.S. Dollars at the
average monthly forward exchange contract rate. The use of translating  accounts
at the spot,  historical and average  exchange rates results in foreign currency
translation  gains or losses.  These translation gains or losses are recorded on
the balance sheet under accumulated other comprehensive income.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same  contracts  translated at the month end forward spot rate.  The Company
qualifies  for cash flow hedge  accounting as  prescribed  under FAS 133,  which
allows the  Company to record the mark to market  gains and losses in the equity
section of our balance sheet under accumulated other comprehensive income.

                                       9
<PAGE>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

As of March 31, 2004,  appearing in the equity section under " Accumulated other
comprehensive  income" was a deferred gain of $1,365,452,  which  consisted of a
deferred  translation  gain of $1,412,065  and a deferred loss of $46,613 due to
the mark to  market  losses  on the  difference  between  the  value of our open
forward  exchange  contracts  at the contract  rates  versus the same  contracts
valued at the period ending forward spot rate.

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

Note 7. Revenue Recognition
We sell through a sales channel which  consist of retailers ,  distributors  and
original equipment  manufacturers  ("OEM's").  Our prices are fixed consistently
over the entire sales  channel.  The majority of our  customers are granted open
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 products  and the cost of any  pilferage  while in the  customer's
possession  is the  responsibility  of the  customer.  Our retail  products  are
typically  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 end-caps and advertisements in the store's circular,  the Company has no
further obligation to assist in the resale of the product.

The  Company  offers it  customers  a right of return,  but does not offer stock
balancing. Our accounting complies with SFAS 48 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 our
business coupled with the changing economic  environment,  management  exercises
some judgement with regard to the historical data to arrive at the reserve.

Note 8. Product segment and Geographic Information

We engineer, develop, subcontract for manufacture,  market and sell products for
the personal computer ("PC") market and the Apple(R) Macintosh(R) market.

We also offer products for the home  entertainment  market.  We have two primary
product  categories:  analog TV products and digital TV  products.  Our WinTV(R)
analog TV receivers  allow PC users to watch  television on their PC screen in a
resizable  window,  and also enable  recording  of TV shows to a hard disk.  Our
WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders,
which improve the performance of TV recording and add instant replay and program
pause functions,  plus also enable the `burning' of TV recordings onto DVD or CD
media.  Our  Eskape(TM)  Labs  products  allow  users  of   Apple(R)Macintosh(R)
computers to watch television on their computer screen.

We offer three types of digital TV receivers. Our WinTV(R) digital receivers can
receive  digital  TV  transmissions  and  display  the  digital  TV  show  in  a
re-sizeable  window on a user's PC  screen.  Our  Digital  Entertainment  Center
products  ("DEC") allow users to receive  digital TV broadcasts  and display the
digital  TV on either a TV set or a PC  screen.  Our  MediaMVP(TM)  product  was
designed to allow PC users to play digital media such as digital music,  digital
pictures and digital videos on a TV set via a home network.


                                       10


<PAGE>

<TABLE>
<CAPTION>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 8. Product segment and Geographic Information-continued

We sell  our  products  through  computer  and  electronic  retailers,  computer
products  distributors and original equipment  manufacturers  "OEM's".  Sales by
functional category are as follows:

<S>                                     <C>                     <C>    <C>    <C>    <C>


                                     Three months ended           Six months ended
                                         March  31,                   March  31,
                                    2004          2003             2004         2003
Product line sales                  ----          ----             ----         ----
------------------
Analog sales                   $ 13,724,007   $ 10,245,978     $28,153,235    $21,539,440
Digital sales                     3,080,276      3,672,880       6,881,346      7,899,904
                               ------------   ------------     -----------    -----------
                               $ 16,804,283   $ 13,918,858     $35,034,581    $29,439,344
                               ============   ============     ===========    ===========

</TABLE>

The Company sells its products through an international  network of distributors
and retailers. European sales accounted for 65% and 68% and 70% and 69% of sales
for the three and six months  ended  March 31, 2004 and 2003.  Sales  percent by
geographic region are as follows:

<TABLE>
<CAPTION>

<S>                                    <C>              <C>                     <C>     <C>    <C>    <C>

                                       Three months ended March 31,         Six months ended March 31
                                       ----------------------------         -------------------------
Sales percent by geographic region      2004                 2003             2004            2003
----------------------------------      ----                 ----             ----            ----
United States                            33%                  30%              28%             29%
Europe                                   65%                  68%              70%             69%
Asia                                      2%                   2%               2%              2%
                                        ----                 ----             ----            ----
  Total                                 100%                 100%             100%            100%
                                        ====                 ====             ====            ====


</TABLE>

Note 9. Stock-Based Compensation

The Company applies Accounting  Principles Board Opinion No. 25, "Accounting for
Stock  Issued  to  Employees",   ("APB  25"),  and  related  interpretations  in
accounting for its employee stock options. Under APB 25, no compensation expense
is recorded so long as the quoted  market  price of the stock at the date of the
grant is equal to the exercise price.

Pro forma  information  regarding  net  income and  earnings  per share has been
determined as if the Company had accounted for its employee  stock options under
the fair value method of Financial  Accounting Standards Board Statement No. 123
"Accounting for Stock-Based  Compensation",  ("FAS 123").  The weighted  average
fair value of options  granted  during the three and six months  ended March 31,
2004 and March,  31 2003 was $0.43 and $0.42,  respectively.  The fair value for
these  options was estimated at the date of grant using a  Black-Scholes  option
pricing model with the following weighted average  assumptions for the three and
six months ended March 31, 2004 and March 31, 2003:  risk-free interest rates of
3.25%,  volatility  factor of the expected market price of the Company's  Common
Stock of 40%, assumed dividend yield of 0%, and a weighted-average expected life
of the option of 5 years.

Under the  accounting  provisions  of FAS 123, the  Company's net income and net
income per share  would have been  adjusted to the pro forma  amounts  indicated
below:


                                       11

<PAGE>

<TABLE>
<CAPTION>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

<S>                                                             <C>      <C>    <C>    <C>    <C>    <C>

                                                                     Three months ended             Six months ended
                                                                  ---------------------------------------------------------
                                                                   March 31,     March 31,         March 31,      March 31,
                                                                     2004           2003              2004           2003
                                                                     ----           ----              ----           ----
Net income as reported ..........................................  $ 544,390    $ 260,515         $ 1,537,250     $916,987

   Deduct:  Total stock-based employee compensation expense
     determined under fair value method, net of related taxes ...    (24,788)     (11,626)            (49,576)     (23,252)
                                                                   ---------    ---------         -----------     --------
Pro forma net income ............................................  $ 519,602    $ 248,889         $ 1,487,674     $893,735
                                                                   =========    =========         ===========     ========
Net income per  share - as reported:

Basic............................................................  $    0.06    $    0.03         $      0.17     $   0.10
                                                                   =========    =========         ===========     ========
Diluted..........................................................  $    0.06    $    0.03         $      0.16     $   0.10
                                                                   =========    =========         ===========     ========

Net income per  share - pro forma:

Basic............................................................  $    0.06    $    0.03         $      0.17     $   0.10
                                                                   =========    =========         ===========     ========
Diluted..........................................................  $    0.05    $    0.03         $      0.16     $   0.10
                                                                   =========    =========         ===========     ========

</TABLE>

Note 10. Arrangements with Off-Balance Sheet Risk - Guarantees

In November 2002, the FASB issued  Interpretation  No. 45 (FIN 45),  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of the  Indebtedness of Others,  which clarifies the  requirements of
SFAS No. 5, Accounting for Contingencies,  relating to a guarantor's  accounting
for and  disclosures  of certain  guarantees  issued.  FIN 45 requires  enhanced
disclosures for certain guarantees. It also requires certain guarantees that are
issued or modified  after  December  31,  2002,  including  certain  third-party
guarantees,  to be initially  recorded on the balance  sheet at fair value.  For
guarantees issued on or before December 31, 2002,  liabilities are recorded when
and if payments become probable and estimable.  FIN 45 has the general effect of
delaying  recognition  for a portion of the revenue  for product  sales that are
accompanied  by  certain   third-party   guarantees.   The  financial  statement
recognition provisions became effective prospectively beginning January 1, 2003.
The Company  has not entered  into any new  guarantees,  nor have they  ammended
their existing guarantee since the effective date.

We occupy a facility  located  in  Hauppauge  New York and use it for  executive
offices and for the testing,  storage and shipping of our products.  In February
1990,  Hauppauge Computer Works, Inc., a wholly-owned  subsidiary of the Company
("HCW"),  entered into a lease,  as amended,  with Ladokk Realty Co.  (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive   Officer,   and  Vice  President  of  Marketing  and  the  holder  of
approximately 6% of the Company's  outstanding  Common Stock as of May 14, 2003,
Dorothy Plotkin,  the wife of Kenneth  Plotkin,  a holder of approximately 6% of
the Company's Common Stock as of May 14, 2004 and Laura Auppele, believed by the
Company to be the holder of  approximately  12% of the Company's Common Stock as
of May 14, 2004.  Until  February 17, 2004,  the premises  subject to such lease
were subject to two mortgages  guaranteed  by the Company.  On February 17, 2004
HCW and  Ladokk  terminated  the old  lease  and HCW  entered  into a new  lease
agreement  with  Ladokk  Realty Co.,  LLC.  The lease term is for five years and
terminates on February 16, 2009.  Concurrently  with the new lease, our landlord
completed a refinancing of its mortgages,  and the new lender did not require us
to sign a  guarantee.  In  recognition  of this,  we are no longer  obligated to
guarantee the landlord's mortgages.

The Company's  Audit  Committee is in the process of evaluating the February 17,
2004 lease.


                                       12

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 11. Settlement of Arbitration and Litigation Proceedings
-------------------------------------------------------------

Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owing to the Estate based on various corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second  quarter of fiscal year 2004 to cover
the award.

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt  with the sales  representative  for  several  years  with  respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.  The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.


                                       13

<PAGE>

<TABLE>
<CAPTION>

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

Six Month Period ended March 31, 2004 Compared to March 31, 2003
------------------------------------------------------------------------------

Results of operations  for the six months ended March 31, 2004 compared to March
31, 2003 are as follows:

<S>                                                     <C>             <C>             <C>             <C>             <C>     <C>

                                                                Six         Six
                                                               Months      Months
                                                               Ended        Ended      Variance         Percentage of sales
                                                              3/31/04      3/31/03        $            2004    2003  Variance
                                                              -------      -------        -            ----    ----  --------
Net Sales                                                 $ 35,034,581   $ 29,439,344 $5,595,237      100.0%  100.0%      0
Cost of sales                                               25,521,988     22,148,910  3,373,078      72.85%  75.24%  -2.39%
                                                          ------------   ------------  ---------      -----   -----    ----
Gross Profit                                                 9,512,593      7,290,434  2,222,159      27.15%  24.76%   2.39%
Gross Profit %                                                  27.15%         24.76%      2.39%
Costs:
Sales & Marketing                                            4,167,323      3,701,409    465,914      11.89%  12.57%  -0.68%
Technical Support                                              215,944        199,775     16,169       0.62%   0.68%  -0.06%
General & Administrative                                     1,961,118      1,529,590    431,528       5.60%   5.20%   0.40%
                                                          ------------   ------------  ---------      -----   -----    ----
Total Selling, General and Administrative costs              6,344,385      5,430,774    913,611      18.11%  18.45%  -0.34%
Research & Development                                         854,664        941,324    (86,660       2.44%   3.20%  -0.76%
                                                          ------------   ------------  ---------      -----   -----    ----
Total Costs                                                  7,199,049      6,372,098    826,951      20.55%  21.65%  -1.10%
                                                          ------------   ------------  ---------      -----   -----    ----
Net operating income  before arbitration & litigation        2,313,544        918,336  1,395,208       6.60%   3.11%   3.49%

Arbitration & litigation items:

Arbitration proceeding                                         206,250              -    206,250       0.59%   0.00%   0.59%
Litigation proceeding                                          500,000              -    500,000       1.43%   0.00%   1.43%
                                                          ------------   ------------  ---------       -----   -----    ----
Net operating income                                         1,607,294        918,336    688,958       4.58%   3.11%   1.47%

Other income
------------
Interest income                                                  3,136         10,005     (6,869)      0.01%   0.03%  -0.02%
Foreign currency                                                21,899         27,646     (5,747)      0.06%   0.10%  -0.04%
                                                          ------------   ------------   --------       -----   -----    ----
 Total other income                                             25,035         37,651    (12,616)      0.07%   0.13%  -0.06%
                                                          ------------   ------------   --------       -----   -----    ----
Income  before taxes on income                               1,632,329        955,987    676,342       4.65%   3.24%   1.41%
Taxes on income                                                 95,079         39,000     56,079       0.26%   0.13%   0.13%
                                                          ------------   ------------   --------       ----    ----    ----
Net income                                                $  1,537,250    $   916,987   $620,263       4.39%   3.11%   1.28%
                                                          ============   ============   ========       ====    ====    ====



Net sales for the six months ended March 31, 2004 increased  $5,595,237 compared
to the six months ended March 31, 2003 as shown on the table below.

                                                      Increase
                                                      (decrease)     Increase       Percentage of sales by
Location          Six Months         Six Months        Dollar       (decrease)        Geographic region
--------         ended 3/31/04      ended 3/31/03     Variance       Variance %      2004           2003
                 -------------      -------------     --------      ----------       ----           ----
Domestic         $   9,956,307      $   8,675,369   $ 1,280,938        15%            28%            29%
Europe              24,610,163         20,381,092     4,229,071        21%            70%            69%
Asia                   468,111            382,883        85,228        22%             2%             2%
                 -------------      -------------   -----------     ----------       ---            ---
 Total           $  35,034,581      $  29,439,344   $ 5,595,237        19%           100%           100%
                 =============      =============   ===========     ==========       ===            ===

</TABLE>

The primary factors contributing the sales increase were:

o    Stronger demand for retail PVR-250 products due to exposure  generated from
     media center awareness
o    Increased sales of OEM PVR-250 for media center products
o    Introduction in early fiscal 2004 of Media MVP product
o    Increase  PVR-USB  sales due to  introduction  of lower cost  model  during
     fiscal 2003 and media center awareness
o    Higher sales of USB analog product
o    Increased DVB sales
o    Increase in our average  Euro to USD contract  rate of about 21.0%  (1.2359
     versus  0.9650)  for the six months  ended March 31, 2004 over the same six
     months of last year , which yielded higher converted Euro to USD sales
The increases were offset somewhat by:
o    Decrease in Digital Entertainment Center (DEC) sales
o    Decrease in the analog family sales
o    Increase in sales return reserve of $320,000 to reflect increased prior six
     month sales level and residual  Media MVP returns for  improper  production
     placement of resistor

                                       14

<PAGE>

Results of  operations-six  month period ended March 31, 2004  compared to March
31,2003-continued
-----------------
Net sales to domestic  customers  were 28% of net sales for the six months ended
March 31, 2004  compared to 29% for the six months  ended  March 31,  2003.  Net
sales to European  customers  were 70% of net sales compared to 69% for the same
period of last year. Net sales to Asian customers were 2% for both periods.


Gross  profit  increased  $2,222,159  for the six months  ended  March 31,  2004
compared to the same six month period of the prior year.

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


                                                                      Increase
                                                                     (decrease)
                                                                      --------

Due to increased   sales                                             $1,772,136
Higher  margins on non OEM sales                                      1,672,669
Effect on margin due to lower margin  OEM sales                        (635,188)
Due to increases in labor related and other costs                      (587,458)
                                                                    -----------
  Total  increase in gross profit                                    $2,222,159
                                                                    ===========

Gross  profit  percentage  for the six months  ended  March 31,  2004 was 27.15%
compared  to 24.76% for the six months  ended  March 31,  2004,  an  increase of
2.39%.

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


                                                                      Increase
                                                                     (decrease)
                                                                      --------

Higher  margins on non OEM sales                                        4.78%
Effect on margin due to lower margin OEM sales                         (1.82)%
Labor related and other costs                                          (0.57)%
                                                                       -----
Net increase in gross profit %                                          2.39%
                                                                       =====

The increase in gross profit percent of 2.39% for non-OEM products was primarily
due to:

o    Cost reductions attained during fiscal 2003 and the first quarter of fiscal
     2004
o    Cost reduced versions of the PVR-250 and PVR-USB  introduced  during fiscal
     2003
o    Increase in our average  Euro to USD contract  rates,  used to convert Euro
     sales to U.S. dollar sales, of about 21% (1.1681 versus 0.9650) for the six
     months  ended March 31,  2004 over the same six month  period of last year.
     Since about 75% of our European  inventory  is  purchased in U.S.  dollars,
     while most of the  European  sales are  invoiced in Euros or Great  British
     Pounds,  the Company benefits from the higher converted Euro to U.S. dollar
     sales,  which are sold against either stable or declining U.S.  dollar unit
     inventory cost
o    Sales of lower  margin DEC boards  declined as a  percentage  of sales from
     last year

The decrementing  effect of OEM sales on our gross profit percentage for the six
months ended March 31, 2004 due to the following factors:

Sales of our OEM  PVR-250  boards for the six months  ended  March 31, 2004 were
$4,242,227 and 12.11% of sales compared to $1,851,997 and 6.29% of sales for the
six months ended March 31, 2003. The larger mix of lower margin OEM sales during
the first six months of fiscal 2004 compared to fiscal 2003 caused a decrease in
gross profit percent of 1.82% over the prior year.

The decrease in the gross margin percent of 0.57%  attributable to labor related
and  other  costs  for  the six  months  ended  March  31,  2004  was due to the
percentage  increase in labor  related and other costs for the six months  ended
March 31, 2004 over the six months ended March 31, 2003 of 28.89%  exceeding the
percentage increase in sales of 19.01%.


                                       15

<PAGE>

<TABLE>


Results of  operations-six  month period ended March 31, 2004  compared to March
31,2003-continued
-----------------

The  chart  below   illustrates   the   components   of  Selling,   General  and
Administrative costs:

<S>                                     <C>             <C>             <C>             <C>             <C>    <C>

                                      Six months ended March  31,
                                               Dollar Costs                            Percentage of Sales
                                      ------------------------------------------------------------------------
                                                                    Increase                          Increase
                                           2004        2003        (Decrease)         2004     2003  (Decrease)
                                           ----        ----         --------          ----     ----   --------
Sales and Marketing                   $ 4,167,323   $3,701,409    $  465,914         11.89%   12.57%   -0.68%
Technical  Support                        215,944      199,775        16,169          0.62%    0.68%   -0.06%
General and Administrative              1,961,118    1,529,590       431,528          5.60%    5.20%    0.40%
                                      -----------   ----------    ----------         -----    -----    -----
  Total                               $ 6,344,385   $5,430,774    $  913,611         18.11%   18.45%   -0.34%
  -----                               ===========   ==========    ==========         =====    ======   =====

</TABLE>

Selling,  General and Administrative  expenses increased $913,611 from the prior
year. As a percentage of sales,  Selling,  General and  Administrative  expenses
decreased by 0.34% when compared to the six months ended March 31, 2003.

The increase in Sales and  Marketing  expense of $465,914,  which  accounted for
approximately 51% of the total increase in Selling,  General and  Administrative
expenses, was mainly due to:

o    Higher advertising costs of $124,975 due to higher sales based co-operative
     advertising and increased special promotions
o    Higher  advertising  costs of $151,298 due to higher translated Euro to U.S
     dollar amounts due to the strengthening of the Euro against the USD
o    Increased commission expense of $18,554 due to higher sales
o    Increased  commission  expense of $41,353 due to higher  translated Euro to
     U.S dollar amounts due to the strengthening of the Euro against the USD
o    Increased  European sales office costs of $162,056 due to higher translated
     Euro to U.S dollar amounts due to the strengthening of the Euro against the
     USD
o    Increased third party European merchandising program of $80,470
o    Increased UK in store promotions of $70,326
o    Increased public relation costs for launch of Media MVP product of $31,722
o    Lower merchandise material promotions of $77,178
o    Lower sales office expenses of $157,044 due to personnel shift and stricter
     budget controls

The increase in General and  Administrative  expenses of $431,528 was  primarily
due to:
o    Higher  legal and legal  related  costs of $330,229 due to  litigation  and
     arbitration cases
o    Directors fees of $48,625
o    European accounting service fees $26,079
o    Increment  to account  receivables  reserves  of $25,000 in  reflection  of
     higher sales

Research and Development expenses decreased $86,660. The decrease was mainly due
to lower  compensation  costs attributable to open positions not filled and less
use of third party software development in fiscal 2004 compared to fiscal 2003


                                       16

<PAGE>

Results of  operations-six  month period ended March 31, 2004  compared to March
31,2003 continued
-----------------
Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owing to the Estate based on various corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second  quarter of fiscal year 2004 to cover
the award.

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt with the said sales  representative  for several years with respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.  The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.

Other income

Net other income for the six months ended March 31, 2004 was $25,035 compared to
net other  income of $37,651 for the six months ended March 31, 2003 as detailed
below:


                                                Six months ended March  31,
                                                   2004              2003
                                                   ----              ----

Interest income                                 $  3,136           $10, 005
Foreign currency transaction gains (losses)       21,899             27,646
                                                --------           --------
Total other income  (expense)                   $ 25,035           $ 37,651
                                                ========           ========



Re-measurement of accounts denominated in currencies other than the Euro

We follow the rules  prescribed  in  paragraph  16 of SFAS 52 "Foreign  Currency
Translation", which states that accounts denominated in a currency other than an
entities functional currency,  excluding  inter-company  accounts which are long
term in nature,  need to be re-measured into the entities  functional  currency,
and any gain or loss from this  re-measurement are included in the determination
of net income.


                                       17

<PAGE>

<TABLE>



Results of  operations-six  month period ended March 31, 2004  compared to March
31,2003 continued
-----------------

Re-measurement   of  accounts   denominated   in   currencies   other  than  the
Euro-continued

Since the functional  currency of Hauppauge  Digital Europe Sarl ("HDE Sarl") is
the Euro,  any asset,  liability  or equity  accounts  which are  invested in or
purchased  using U.S.  Dollars or Great British  Pounds by HDE Sarl are revalued
into Euros at the end of each  period.  The gains or losses on HDE Sarl's  books
resulting from the  revaluation of U.S.  Dollar and Great British Pound accounts
into Euros are booked in the  Company's  profit and loss  statement in the other
income (loss) section under the description  foreign currency  transaction gains
(losses).

Accumulated other comprehensive income (loss)
The Euro is the functional  currency of the Company's European  subsidiary,  HDE
Sarl.  Assets and liabilities of this subsidiary are translated to U.S.  Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S.  Dollars at the historical rate in effect at the
date of the  contribution.  Operating  results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S.  Dollars at the average  monthly  forward  exchange
contract rate. The use of differing  exchange rates results in foreign  currency
translation gains or losses.  Since the Euro denominated  accounts on HDE Sarl's
books  result in a net asset  position  (total Euro assets are in excess of Euro
liabilities),  an increase in the Euro value  results in a deferred gain for the
translation of Euro accounts to U.S. Dollars. The Company had a translation gain
of $704,183  recorded on the balance sheet as of September 30, 2003. For the six
months ended March 31 2004,  the Company  recorded on the balance sheet deferred
translation  gains  $707,882  resulting  in a  translation  gain  of  $1,412,065
recorded as a component of accumulated  other  comprehensive  income as of March
31, 2004.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same  contracts  translated  at the  month end  forward  rate.  The  Company
qualifies for cash flow hedge  accounting as  prescribed  under SFAS 133,  which
allows the  Company to record the mark to market  gains and losses in the equity
section of our balance sheet under accumulated other  comprehensive  income. The
Company had mark to market  losses of $234,591  recorded on the balance sheet as
of  September  30, 2003.  For the six months  ended March 31, 2004,  the Company
recorded,  as component of other comprehensive  income, a mark to market gain of
$187,978, resulting in a mark to market loss of $46,613 for contracts open as of
March 31, 2004.

As stated above,  accumulated other comprehensive  income (loss) consists of two
components:

o    Translations gains and losses
o    FAS 133 mark to  market  gains  and  losses  on our open  foreign  exchange
     contracts

The table below details the gains and losses  recorded for the  components  that
make up accumulated other comprehensive income (loss):

<S>                                             <C>             <C>             <C>             <C>              <C>    <C>

                                                Balance        October to       Balance       January 04 to         Balance
Accumulated  other  comprehensive  income        as of         December 2003     As of             March 04           As of
---------------------------------------         September 30,     Gains        December 31,           Gains       March 31,
                                                  2003           (losses)        2002               (losses)        2004
                                                  ----        ------------       ----         -------------       ---------

Translation gains                               $ 704,183     $   849,969      $ 1,554,152    $    (142,087)     $1,412,065
FAS 133 mark to market adjustments               (234,581)        204,461          (30,130)         (16,483)        (46,613)
                                                ---------     -----------      -----------    -------------      ----------
                                                $ 469,592     $ 1,054,430      $ 1,524,022    $    (158,570)     $1,365,452
                                                =========     ===========      ===========    =============      ==========

</TABLE>


                                       18

<PAGE>

Results of  operations-six  month period ended March 31, 2004  compared to March
31,2003 continued
-----------------
Tax provision

Our net tax  provision  for the six months  ended  March 31, 2004 and 2003 is as
follows:

                                                     Six months ended March  31,
                                                        2004           2003
                                                        ----           ----

Tax (benefit) attributable to U.S operations         $ (434,100)    $ (226,000)
Tax  expense  European operations                        80,079         39,000
State taxes                                              15,000         14,000
Deferred tax asset valuation allowance                  434,100        212,000
                                                     ----------     ----------
Net tax provision                                    $   95,079     $   39,000
                                                     ==========     ==========

For the last four fiscal years, our domestic  operation has incurred losses.  We
analyzed the future  realization of our deferred tax assets as of March 31, 2004
and we concluded that under the present  circumstances,  it would be appropriate
for us to record a valuation  allowance against the increase in the deferred tax
asset  attributable  to the loss  incurred  in the first and second  quarters of
fiscal 2004 from domestic operations.

As a result of all of the above items mentioned in the  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations,  we recorded net
income of $1,537,250 for the six months ended March 31, 2004,  which resulted in
basic net income per share of $0.17 and diluted net income per share of $0.16 on
weighted   average  basic  and  diluted   shares  of  8,891,135  and  9,576,099,
respectively,  compared  to a net income of  $916,987  for the six months  ended
March 31,  2003,  which  resulted  in basic and  diluted net income per share of
$0.10 on weighted  average basic and diluted  shares of 8,860,578 and 8,917,935,
respectively.

Options to  purchase  228,905  and  1,455,425  shares of common  stock at prices
ranging $3.88 to $10.06 and $1.35 and $10.06, respectively, were outstanding for
the six month period ending March 31, 2004 and 2003, respectively,  but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive.

                                       19


<PAGE>
<TABLE>
Three Month Period ended March 31, 2004 Compared to March 31, 2003
------------------------------------------------------------------
Results of  operations  for the three  months  ended March 31, 2004  compared to
March 31, 2003 are as follows:

<S>                                                     <C>             <C>             <C>                     <C>    <C>    <C>

                                                             Three            Three
                                                            Months           Months
                                                             Ended            Ended     Variance          Percentage of sales
                                                           3/31/04          3/31/03       $             2004    2003   Variance
                                                           -------          -------       -             ----    ----   --------

Net Sales                                              $ 16,804,283     $ 13,918,858    2,885,425    100.00%   100.00%    0.00%
Cost of sales                                            11,873,313       10,549,386    1,323,927     70.66%    75.79%   -5.13%
                                                       ------------     ------------    ---------    ------    ------     ----
Gross Profit                                              4,930,970        3,369,472    1,561,498     29.34%    24.21%    5.13%
Gross Profit %                                               29.34%           24.21%        5.13%

Costs:
Sales & Marketing                                         2,041,614        1,838,397      203,217     12.15%    13.21%   -1.06%
Technical Support                                           107,489          101,415        6,074      0.64%     0.73%   -0.09%
General & Administrative                                  1,074,666          784,660      290,006      6.40%     5.64%    0.76%
                                                       ------------     ------------    ---------    ------    ------     ----
Total Selling, General and Administrative costs           3,223,769        2,724,472      499,297     19.19%    19.58%   -0.39%
Research & Development                                      444,390          448,251       (3,861)     2.64%     3.22%   -0.58%
                                                       ------------     ------------    ---------    ------    ------     ----
Total Costs                                               3,668,159        3,172,723      495,436     21.83%    22.80%   -0.97%
                                                       ------------     ------------    ---------    ------    ------     ----
Net operating income                                      1,262,811          196,749    1,066,062      7.51%     1.41%    6.10%

Arbitration & litigation items:
Arbitration proceeding                                      206,250                -      206,250      1.23%     0.00%    1.23%
Litigation proceeding                                       500,000                -      500,000      2.98%     0.00%    2.98%
                                                       ------------     ------------    ---------    ------    ------     ----
Net operating income                                        556,561          196,749      359,812      3.31%     1.41%    1.90%

Other income
------------
Interest income                                               1,397            4,034       (2,637)     0.01%     0.03%   -0.02%
Foreign currency                                             33,232           72,249      (39,017)     0.20%     0.52%   -0.32%
                                                       ------------     ------------    ---------    ------    ------     ----
 Total other income                                          34,629           76,283      (41,654)     0.21%     0.55%   -0.34%
                                                       ------------     ------------    ---------    ------    ------     ----
Income  before taxes on income                              591,190          273,032      318,158      3.52%     1.96%    1.56%
Taxes on income                                              46,800           12,517       34,283      0.27%     0.09%    0.18%
                                                       ------------     ------------    ---------    ------    ------     ----
Net income                                             $    544,390     $    260,515    $ 283,875      3.25%     1.87%    1.38%
                                                       ============     ============    =========    ======    ======     ====

Net  sales for the three  months  ended  March  31,  2004  increased  $2,885,425
compared to the three months ended March 31, 2003 as shown on the table below.

                                                                   Increase
                                                                   (decrease)    Increase     Percentage of sales by
Location                       Three Months      Three  Months      Dollar       (decrease)     Geographic region
--------                       ended 3/31/04      ended 3/31/03     Variance      Variance %     2004       2003
                               -------------     --------------    ---------     -----------  ----------------------

Domestic                       $ 5,603,577       $  4,195,241       $ 1,408,336      34%         33%         30%
Europe                          10,983,449          9,526,393         1,457,056      15%         65%         68%
Asia                               217,257            197,224            20,033      10%          2%          2%
                               -------------     --------------     -----------      --         ---         ---
 Total                         $16,804,283       $ 13,918,858       $ 2,885,425      21%        100%        100%
                               ===========       ==============     ===========      ==         ===         ===

</TABLE>

The primary factors contributing the sales increase were:

o    Stronger demand for retail PVR-250 products due to exposure  generated from
     media center awareness
o    Increase  PVR-USB  sales due to  introduction  of lower cost  model  during
     fiscal 2003 and media center awareness
o    Higher sales of USB analog product
o    Introduction in early fiscal 2004 of Media MVP product
o    Increased sales of OEM PVR-250 for media center products
o    Increased sales if digital satellite DVB product
o    Increase  in our  average  Euro to USD  contract  rate of about 24% (1.2359
     versus  .9938)  for the  three  months  ended  March 31 2004 over the three
     months ended March 31, 2003,  which yielded  higher  converted  Euro to USD
     sales

The sales increases were offset by the following negative trends:

o    Decrease in Digital Entertainment Center (DEC) sales
o    Decrease in the analog family sales

                                       20

<PAGE>

Results of operations-three  month period ended March 31, 2004 compared to March
31,2003-continued
-----------------

Net sales to domestic customers were 33% of net sales for the three months ended
March 31, 2004  compared to 30% for the three months  ended March 31, 2003.  Net
sales to European  customers  were 65% of net sales compared to 68% for the same
quarter of last year. Net sales to Asian customers were 2% for both periods.


Gross profit increased $1,561,498 for the three months ended March 31, 2004
compared to the prior year's second quarter.

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

                                                                  Increase
                                                                 (decrease)
                                                                  --------

Due to increased sales                                          $  929,330
Higher  margins on non-OEM sales                                   758,180
Effect on margin due to  lower margin OEM sales                      4,906
Due to increases in labor related and other costs                 (130,918)
                                                                ----------
  Total increase in gross profit                                $1,561,498
                                                                ==========

Gross  profit  percentage  for the three  months ended March 31, 2004 was 29.34%
compared to 24.21% for the three  months  ended March 31,  2003,  an increase of
5.13%.

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

                                                                       Increase
                                                                      (decrease)
                                                                        --------

Higher  gross profit percent due to product mix of non-OEM products      4.52%
Effect on margin due to  lower margin OEM sales                          0.03%
Labor related and other costs                                            0.58%
                                                                         -----
Net increase in gross profit %                                           5.13%
                                                                         ====


The  increase  in the gross  profit  margin  percent for  non-OEM  products  was
primarily due to:

o    Cost reductions attained during fiscal 2003 and the first quarter of fiscal
     2004
o    Cost reduced versions of the PVR-250 and PVR-USB  introduced  during fiscal
     2003
o    Increase in our average  Euro to USD contract  rates,  used to convert Euro
     sales to U.S.  dollar sales,  of about 24% for the three months ended March
     31, 2004 (1.2359 versus 0.99938). Since about 75% of our European inventory
     is purchased in U.S. dollars, while most of the European sales are invoiced
     in Euros or Great  British  Pounds,  the Company  benefits  from the higher
     converted Euro to U.S.  dollar sales,  which are sold against either stable
     or declining U.S. dollar unit inventory cost
o    Sales of lower  margin DEC boards  declined as a  percentage  of sales from
     last year

The  decrementing  effect  of OEM  sales  on our  gross  profit  percentage  was
negligible  for the  three  months  ended  March 31,  2004 due to the  following
factors:

Sales of our OEM PVR-250  boards for the three  months ended March 31, 2004 were
$1,488,977 and 8.86% of sales compared to sales of $1,331,866 and 9.57% of sales
for the three months ended March 31, 2003.  The gross profit  percent was 12.21%
on OEM sales for the three  months  ended  March 31,  2004  compared  to a gross
profit  percent of 9.38% for the three months ended March 31, 2003. The decrease
in OEM sales as a percent of sales  coupled with a higher gross profit  resulted
in an increase in the gross profit percent attributable to OEM sales of 0.03%.

The increase in the gross margin percent of 0.58%  attributable to labor related
and other costs for the three months ended March 31, 2004 is due to the increase
in net sales for the three  months  ended March 31,  2004 over the three  months
ended March 31, 2003 of 20.73% exceeding the increase in labor related and other
costs for the three  months  ended  March 31, 2004 over the three  months  ended
March 31, 2003 of 11.76%.


                                       21

<PAGE>
<TABLE>


Results of operations-three  month period ended March 31, 2004 compared to March
31,2003-continued
-----------------
The  chart  below   illustrates   the   components   of  Selling,   General  and
Administrative costs:

<S>                                             <C>                     <C>    <C>              <C>             <C>    <C>

                                                      Three months ended March  31,
                                                           Dollar Costs                   Percentage of Sales
                                                      ---------------------------------------------------------------
                                                                              Increase                       Increase
                                                         2004      2003      (Decrease)     2004     2003   (Decrease)
                                                         ----      ----       --------      ----     ----    --------

Sales and Marketing                                $ 2,041,614  $ 1,838,397   $ 203,217    12.15%    13.21%   -1.06%
Technical  Support                                     107,489      101,415       6,074     0.64%     0.73%   -0.09%
General and Administrative                           1,074,666      784,660     290,006     6.40%     5.64%    0.76%
                                                   -----------  -----------   ---------    -----     -----     -----
  Total                                            $ 3,223,769  $ 2,724,472   $ 499,297    19.19%    19.58%   -0.39%
  -----                                            ===========  ===========   =========    =====     =====     ====

</TABLE>

Selling,  General and Administrative  expenses increased $499,297 from the prior
year's  second  quarter.  As  a  percentage  of  sales,  Selling,   General  and
Administrative  expenses  decreased  by 0.39% when  compared to the three months
ended March 31, 2003.

The increase in Sales and  Marketing  expense of $203,217,  which  accounted for
approximately 41% of the total increase in Selling,  General and  Administrative
expenses, was mainly due to:

o    Higher advertising costs of $110,278 due to higher sales based co-operative
     advertising and increased special promotions
o    Higher  advertising  costs of $64,606 due to higher  translated Euro to U.S
     dollar amounts due to the strengthening of the Euro against the USD
o    Increased  commission  expense of $19,181 due to higher  translated Euro to
     U.S dollar amounts due to the strengthening of the Euro against the USD
o    Increased  European sales office costs of $80,916 due to higher  translated
     Euro to U.S dollar amounts due to the strengthening of the Euro against the
     USD
o    Increased third party European merchandising program of $11,111
o    Increased public relation costs for launch of Media MVP product of $20,806
o    Lower sales office  expenses of $60,877 due to personnel shift and stricter
     budget controls
o    Lower catalogue placement costs of $26,692

The increase in General and  Administrative  expenses of $290,006 was  primarily
due to:

o    Higher  legal and legal  related  costs of  $272,629
o    Directors fees of $18,875
o    European accounting service fees $8,597
o    Lower bank and credit card fees of $6,307

Research and Development expenses decreased $3,861 . The decrease was mainly due
to lower  compensation  costs  attributable  to less staff and less third  party
software development services used in the second quarter of fiscal 2004.

Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owing to the Estate based on various corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded.

The Company  accrued a charge of  $206,250 in the second  quarter of fiscal year
2004 to cover the award.


                                       22

<PAGE>

Results of operations-three  month period ended March 31, 2004 compared to March
31,2003-continued
-----------------

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt with the said sales  representative  for several years with respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.  The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.

Other income

Net other income for the three months ended March 31, 2004 was $34,629  compared
to net other  income of $76,283  for the three  months  ended  March 31, 2003 as
detailed below:

                                                    Three months ended March 31,
                                                       2003              2004
                                                       ----              ----

Interest income                                     $  1,397           $ 4,034
Foreign currency transaction gains                    33,232            72,249
                                                    --------           -------
Total other income                                  $ 34,629           $76,283
                                                    --------           -------

Re-measurement of accounts denominated in currencies other than the Euro

We follow the rules  prescribed  in  paragraph  16 of SFAS 52 "Foreign  Currency
Translation", which states that accounts denominated in a currency other than an
entities functional currency,  excluding  inter-company  accounts which are long
term in nature,  need to be re-measured into the entities  functional  currency,
and any gain or loss from this  re-measurement are included in the determination
of net income.

Since the functional  currency of Hauppauge  Digital Europe Sarl ("HDE Sarl") is
the Euro,  any asset,  liability  or equity  accounts  which are  invested in or
purchased  using U.S.  Dollars or Great British  Pounds by HDE Sarl are revalued
into Euros at the end of each  period.  The gains or losses on HDE Sarl's  books
resulting from the  revaluation of U.S.  Dollar and Great British Pound accounts
into Euros are booked in the  Company's  profit and loss  statement in the other
income (loss) section under the description  foreign currency  transaction gains
(losses).

Accumulated other comprehensive income (loss)

The Euro is the functional  currency of the Company's European  subsidiary,  HDE
Sarl.  Assets and liabilities of this subsidiary are translated to U.S.  Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S.  Dollars at the historical rate in effect at the
date of the  contribution.  Operating  results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S.  Dollars at the average  monthly  forward  exchange
contract rate.


                                       23

<PAGE>

<TABLE>

Results of operations-three  month period ended March 31, 2004 compared to March
31,2003-continued
-----------------
Accumulated other comprehensive income (loss)-continued

The use of differing  exchange  rates  results in foreign  currency  translation
gains or losses.  Since the Euro denominated accounts on HDE Sarl's books result
in a net asset position  (total Euro assets are in excess of Euro  liabilities),
an increase in the Euro value results in a deferred gain for the  translation of
Euro accounts to U.S.  Dollars.  The Company had a translation  gain of $704,183
recorded on the balance  sheet as of September  30,  2003.  For the three months
ended March 31,  2004,  the Company  recorded on the balance  sheet  translation
losses of $142,087. For the six months ended March 31 2004, the Company recorded
on  the  balance  sheet  deferred  translation  gains  $707,882  resulting  in a
translation  gain of  $1,412,065  recorded as a component of  accumulated  other
comprehensive income as of March 31, 2004.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same  contracts  translated  at the  month end  forward  rate.  The  Company
qualifies for cash flow hedge  accounting as  prescribed  under SFAS 133,  which
allows the  Company to record the mark to market  gains and losses in the equity
section of our balance sheet under accumulated other  comprehensive  income. The
Company had mark to market  losses of $234,591  recorded on the balance sheet as
of September  30, 2003.  For the three months ended March 31, 2004,  the Company
recorded as a component of other  comprehensive  income a mark to market loss of
$16,483.  For the six months  ended March 31,  2004,  the Company  recorded,  as
component  of other  comprehensive  income,  a mark to market gain of  $187,978,
resulting in a mark to market loss of $46,613 for contracts open as of March 31,
As stated above,  accumulated other comprehensive  income (loss) consists of two
components:

o    Translations  gains and losses
o    FAS 133 mark to  market  gains  and  losses  on our open  foreign  exchange
     contracts

The table below details the gains and losses  recorded for the  components  that
make up accumulated other comprehensive income (loss):

<S>                                     <C>                     <C>             <C>             <C>     <C>    <C>


                                             Balance         October to           Balance      January 04      Balance
Accumulated other comprehensive income        as of         December 2003          As of       to March 04       As of
---------------------------------------    September 30,       Gains            December 31,     Gains         March 31,
                                              2003           (losses)               2002       (losses)            2004
                                              ----            ------                ----        -------            ----

Translation  gains                         $  704,183       $  849,969         $ 1,554,152    $(142,087)      1,412,065
FAS 133 mark to market adjustments           (234,591)         204,461             (30,130)     (16,483)        (46,613)
                                           ----------       ----------         -----------    ---------      ----------
                                           $  469,592       $1,054,430         $ 1,524,022    $(158,570)     $1,365,452
                                           ==========       ==========         ===========    =========      ==========

</TABLE>

Tax provision

Our net tax  provision  for the three months ended March 31, 2004 and 2003 is as
follows:

                                                   Three months ended March  31,
                                                      2004              2003
                                                     ------            ------
Tax (benefit) attributable to U.S operations       $(360,800)       $ (162,300)
Tax  expense  European operations                     39,300            12,517
State taxes                                            7,500             7,000
Deferred tax asset valuation allowance               360,800           155,300
                                                   ---------        ----------
Net tax provision                                  $  46,800        $   12,517
                                                   =========        ==========

For the last four fiscal years, our domestic  operation has incurred losses.  We
analyzed the future  realization of our deferred tax assets as of March 31, 2004
and we concluded that under the present  circumstances,  it would be appropriate
for us to record a valuation  allowance against the increase in the deferred tax
asset  attributable  to the loss  incurred in the second  quarter of fiscal 2004
from domestic operations.


                                       24

<PAGE>

Results of operations-three  month period ended March 31, 2004 compared to March
31,2003-continued
-----------------
As a result of all of the above items mentioned in the  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations,  we recorded net
income of $544,390, for the three months ended March 31, 2004, which resulted in
basic and diluted net income per share of $0.06 on  weighted  average  basic and
diluted  shares of  8,901,734  and  9,749,907,  respectively,  compared to a net
income of $260,515 for the three months ended March 31, 2003,  which resulted in
basic and diluted net income per share of $0.03 on  weighted  average  basic and
diluted shares of 8,862,774 and 8,959,821, respectively.

Options to  purchase  120,513  and  1,240,122  shares of common  stock at prices
ranging $5.25 to $10.06 and $1.47 and $10.06, respectively, were outstanding for
the three month period  ending March 31, 2004 and 2003,  respectively,  but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Seasonality

As our sales are primarily to the consumer market,  we have experienced  certain
seasonal revenue trends. Our peak sales quarter,  due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December),  followed
by our fourth fiscal quarter (July to September). In addition, our international
sales,  mostly in the European,  market,  were 68%, 73% and 77% of sales for the
years ended September 30, 2003, 2002 and 2003,  respectively.  Our fiscal fourth
quarter sales (July to September) can be  potentially  impacted by the reduction
of activity  experienced  in Europe  during the July and August  summer  holiday
period.

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

Liquidity and Capital Resources

Our cash, working capital and stockholders' equity position is disclosed below:

                                       March 31,      September 30,
                                          2004            2003
                                        -------           ----

Cash                                $   6,535,122    $   5,838,160
Working Capital                        13,476,505       10,859,953
Stockholders' Equity                   14,011,031       11,468,685


We had cash and cash equivalents as of March 31, 2004 of $6,535,122, an increase
of $696,952 from September 30, 2003.

The increase was due to:

Net income adjusted for non cash items                        $ 1,670,971
Increase in accounts payable other current liabilities          2,831,962
Decrease in accounts receivable                                   360,712
Proceeds from employee stock purchases                             96,569
Less cash used for:
Increase in inventories                                        (4,083,229)
Increase in prepaid expenses and other current assets            (133,175)
Capital equipment purchases                                       (46,848)
 Net cash  increase                                              $696,962
                                                                =========

Net cash of $647,241  provided by  operating  activities  was  primarily  due to
increases in accounts payables and accrued expenses of $2,831,962, a decrease in
accounts  receivable  of $360,712 and net income  adjusted for non cash items of
$1,670,971  offset somewhat by increases in inventories and prepaid expenses and
other current assets of $4,083,229 and $133,175 respectively.


                                       25

<PAGE>


Liquidity and Capital Resources-continued

Cash of $46,848  was used to  purchase  fixed  assets.  Proceeds  from the stock
purchased  by  employees  through the  employee  stock  purchase  plan  provided
additional cash of $96,569.

On November 8, 1996, we approved a stock  repurchase  program.  The program,  as
amended,  authorizes  the Company to repurchase up to 850,000  shares of our own
stock.  We intend to use the  repurchased  shares for certain  employee  benefit
programs.  On December 17, 1997, the stock repurchase  program was extended by a
resolution  of our Board of  Directors.  As of March 31,  2004,  we held 542,067
treasury  shares  purchased  for  $1,497,216  at an  average  purchase  price of
approximately $2.76 per share.

We  believe  that our cash and cash  equivalents  as of March  31,  2004 and our
internally generated cash flow 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 the Company's contractual obligations related to lease
obligations  as  of  March  31, 2004:

                                                Payments  due  by  period
Contractual obligations          Total     1 year     1-3 years    Over 3 years
-----------------------          -----     ------     ---------    ------------
Operating lease obligations    $ 2,120,166 $ 381,567  $ 1,333,599  $ 405,000
                               =========== =========  ===========  =========

Critical Accounting Policies and Estimates

Financial  Reporting  Release  No.  60,  requires  all  companies  to  include a
discussion of critical accounting policies or methods used in the preparation of
financial statements.

We believe the following  critical  accounting  policies  affect the significant
judgments and estimates used in the preparation of the our financial statements:

o    Revenue Recognition
o    Management's estimates
o    Hedging program for European subsidiary inventory purchases  denominated in
     U.S. dollars
o    Translation  of  assets  and  liabilities  denominated  in  non  functional
     currencies on our European financial statements

Revenue Recognition

Our revenues are primarily derived from the sale of computer boards which enable
you to view  television  programs on your personal  computer.  Sales of computer
boards are commonly classified as computer hardware.  Our sales are primarily to
retailers,  distributors  and  original  equipment  manufacturers.  Sales to our
customers are documented by a purchase  order which  describes the conditions of
sale. Sales are recorded when products are shipped to our customers, the product
price is fixed and  determinable,  collection  of the  resulting  receivable  is
probable  and product  returns are  reasonably  estimable.  Revenue from freight
charged to customers is  recognized  when products are shipped.  Provisions  for
customer  returns  and other  adjustments  are  provided  for in the  period the
related sales are recorded based upon historical data.

Management's Estimates

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with accounting  principles  generally accepted in the United States.
The  preparation  of these  financial  statements  requires  management  to make
estimates and


                                       26

<PAGE>

Management's Estimates-continued

judgments that affect the reported  amounts of assets,  liabilities  and related
disclosure of contingent  assets and liabilities at the date of the consolidated
financial  statements and the reported  amounts for revenues and expenses during
the reporting  period.  On an ongoing  basis,  management  evaluates  estimates,
including those related to sales provisions,  as described above,  income taxes,
bad debts,  inventory  reserves  and  contingencies.  We base our  estimates  on
historical data, when available,  experience,  and on various other  assumptions
that are believed to be reasonable under the circumstances, the combined results
of which form the basis for making judgments  approximately  the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates.

Our European subsidiary accounted for approximately 67% and 71% of our net sales
for fiscal 2003 and fiscal 2002,  respectively.  All of our  European  sales are
denominated in local currencies,  primarily the Euro and Great British Pound. On
the supply  side,  since we  predominantly  deal with North  American  and Asian
suppliers,  approximately  75% of our  inventory  supporting  our Euro and Great
British  Pound  sales  are  purchased  and paid in U.S.  Dollars.  Consequently,
changes in exchange rates expose our U.S. denominated  inventory on the books of
our European  subsidiary to market risks resulting from the  fluctuations in the
foreign currency  exchange rates to the U.S.  Dollar.  In an attempt to minimize
these  risks,   we  enter  into  forward   exchange   contracts  with  financial
institutions.

We do not enter into contracts for speculative  purposes.  We enter into monthly
window contracts covering an average period of three months based on existing or
anticipated future inventory  purchases.  Although we enter into these contracts
to reduce the short term impact of currency  rate changes,  the following  risks
are still inherent in hedging the Euro:

o    Actual inventory  purchases may fluctuate from our estimates,  resulting in
     contracts in an excess of contracts
o    Short term  volatility of currency  markets has the potential to reduce the
     effectiveness of our hedging program
o    Historical  volatility  of the Euro has the  potential  to impact our gross
     margins and operating income
o    The  magnitude  of the success of our  hedging  program is  dependent  upon
     movements in the Euro  exchange  rates.  These  movements  are difficult to
     predict over an extended period of time.

Translation of assets and liabilities  denominated in non functional  currencies
on our European financial statements

The functional currency of our European subsidiary is the Euro. In preparing our
consolidated  financial  statements,  we are  required to  translate  assets and
liabilities  denominated in a non functional  currency,  mainly U.S. Dollars, to
Euros on the books of our European subsidiary.  This process results in exchange
gains and losses  depending on the changes in the Euro to U.S.  Dollar  exchange
rate. Under the relevant  accounting  guidance,  with the exception of gains and
losses that are  attributable to  inter-company  accounts which are long term in
nature,  we are  obligated to include these gains and losses on our statement of
operations,  which we report in other  income or expense  under the  description
foreign currency transaction gains (losses).

The extent of these gains and losses can  fluctuate  greatly from month to month
depending on the change in the exchange  rate,  causing  results to vary widely.
Due to the past  volatility  of the Euro,  it is  difficult to forecast the long
term trend of these gains and losses.


                                       27

<PAGE>

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.

Euro

On January 1, 1999,  the Euro was adopted in Europe as the common legal currency
among 11 of the 15 member countries of the European Community. On that date, the
participating  countries  established  fixed Euro  conversion  rates  (i.e.  the
conversion  exchange rate between their existing  currencies and the Euro).  The
Euro  now  trades  on  currency   exchanges   and  is  available   for  non-cash
transactions.  A new European  Central Bank was  established to direct  monetary
policy for the participating countries.

Prior to the adoption of the Euro,  we billed our  European  customers in German
Marks or British Pounds, depending upon which currency the customer preferred to
be billed in.  Effective  January 1, 1999, we began  invoicing our customers who
are  located  in the eleven  member  countries  in Euros.  We  continue  to bill
customers  located in the United  Kingdom in British  Pounds.  The  benefits  to
billing customers in Euros were twofold:

     o    Our foreign  currency  hedging program was streamlined to the Euro and
          the British Pound
     o    The pricing from country to country was harmonized,  eliminating price
          differences between countries due to the fluctuating local currencies

We handled the  conversion to the Euro without any material  disruptions  to our
operations.

Recent Accounting Pronouncements

In January 2003,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Interpretation  Number 46,  "Consolidation of Variable Interest  Entities" ("FIN
46").  This  interpretation  of  Accounting  Research  Bulletin  ("ARB") No. 51,
"Consolidated   Financial  Statements,"  provides  guidance  for  identifying  a
controlling  interest in a variable interest entity ("VIE") established by means
other than voting interests.  FIN 46 also requires  consolidation of a VIE by an
enterprise  that holds such a controlling  interest.  In December 2003, the FASB
completed its  deliberations  regarding the proposed  modification to FIN 46 and
issued Interpretation Number 46R, "Consolidation of Variable Interest Entities -
an  Interpretation  of ARB No. 51" ("FIN 46R"). The decisions reached included a
deferral of the effective date and provisions  for additional  scope  exceptions
for certain types of variable  interests.  Application of FIN 46R is required in
financial statements of public entities that have interests in VIEs or potential
VIEs commonly referred to as  special-purpose  entities for periods ending after
December 15, 2003.  Application  by public  entities  (other than small business
issuers) for all other types of entities is required in financial statements for
periods  ending  after March 15,  2004.  The  adoption of FIN 46R did not have a
material impact on our financial position, results of operations or cash flows.

Item 3.  Quantitative and Qualitative Disclosures about Market Risks
--------------------------------------------------------------------

Derivatives and Hedging Activities

Product is invoiced to our European  customers in local  currencies and payments
from our  customers  are received in local  currencies  (primarily  the Euro and
Great British Pound). On the supply side, since we predominantly deal with North
American and Asian suppliers,  approximately 75% of our inventory supporting our
Euro and Great  British  Pound  sales are  purchased  and paid in U.S.  Dollars.
Consequently, changes in exchange rates expose our U.S. denominated inventory on
the  books  of our  European  subsidiary  to  market  risks  resulting  from the
fluctuations  in the foreign  currency  exchange  rates to the U.S.  Dollar.  We
attempt to reduce


                                       28

<PAGE>

Derivatives and Hedging Activities-continued

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 forecasted  U.S.  Dollar  denominated
inventory purchases required to support our European sales.

Although we do not try to hedge against all possible foreign currency  exposures
because we can not fully  estimate the size of our  exposure,  the  contracts we
procure  are  specifically  entered  into  to as a  hedge  against  existing  or
anticipated  foreign  currency  exposure.  We do not enter  into  contracts  for
speculative  purposes.  Although we maintain  these programs to reduce the short
term impact of changes in currency exchange rates, when the U.S. Dollar sustains
a long term  strengthening  position against the foreign currencies in countries
where we sell our products,  our gross  margins,  operating  income and retained
earnings can be adversely affected.  Factors that could impact the effectiveness
of  our  hedging  program  include   volatility  of  the  currency  markets  and
availability of hedging instruments.

As  of  March  31  2004,  we  had  foreign  currency  contracts  outstanding  of
approximately  $3,257,726 against the delivery of the Euro. The contracts expire
through September 2004. Our accounting  policies for these instruments are based
on its designation of such instruments as cash flow hedging transactions.  We do
not enter into such contracts for speculative purposes. We record all derivative
gains and losses on the balance  sheet as a component  of  stockholders'  equity
under the caption  "Accumulated other comprehensive  income (loss)". As of March
31, 2004, a deferred loss of $46,613  reflecting  the net mark to market loss of
our derivatives was recorded as a component of accumulated  other  comprehensive
income on our balance sheet.

For the three months and six months ended March 31, 2004, we recorded a decrease
in sales of $103,835 and $909,368,  respectively,  related to our contracts that
closed during these periods and the changes in the fair value of our  derivative
contracts. For the three months and six months ended March 31, 2003, we recorded
a decrease in sales of $609,100  and  $1,158,700,  respectively,  related to our
contracts  that closed during these periods and the changes in the fair value of
our derivative contracts.

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, 2004
in  alerting  them in a timely  manner to  material  information  required to be
included in our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended March 31, 2004 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,"  "anticipate," "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,  2003),  many of which are  beyond our  control,  that may
influence  the accuracy of the  statements  and the  projections  upon which the
statements are based. Our actual results, performance and


                                       29

<PAGE>

Special Note Regarding Forward Looking Statements-continued

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.

PART II.  OTHER INFORMATION
---------------------------
Item 1.  Legal Proceedings

We were  involved in  arbitration  proceedings  before the American  Arbitration
Association,  which had been  brought  against  the Company by the estate of the
late Mr. Kenneth Aupperle  ("Estate").  The Estate was claiming  property rights
and interest in the Company,  certain  amounts due and owing to the Estate based
on  various  corporate  agreements  with  Mr.  Aupperle  and  certain  insurance
policies, such amount to be no less than $2,500,000.

On April 19, 2004, the arbitration panel awarded the estate of Kenneth Aupperle,
one of the  Company's  founders and former  President,  a total of $206,250.  No
other fees or expenses were awarded.

The Company  accrued a charge of  $206,250 in the second  quarter of fiscal year
2004 to cover the award.

See Note 11 in the "NOTES TO CONDENSED  CONSOLIDATED  FINANCIAL  STATEMENTS" and
"Managements  discussion  and  analysis of  financial  results"  with respect to
certain litigation with Polywell International, Inc.

Item 5.  Other information

This  information  shall not be deemed "filed" for purposes of Section 18 of the
Securities   Exchange  Act  of  1934,  as  amended  (the  "Exchange   Act"),  or
incorporated  by reference in any filing under the  Securities  Act of 1933,  as
amended or the Exchange  Act except as shall be expressly  set forth by specific
reference in such a filing.

We occupy a facility  located  in  Hauppauge  New York and use it for  executive
offices and for the testing,  storage and shipping of our products.  In February
1990,  Hauppauge Computer Works, Inc., a wholly-owned  subsidiary of the Company
("HCW"),  entered into a lease,  as amended,  with Ladokk Realty Co.  (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive   Officer,   and  Vice  President  of  Marketing  and  the  holder  of
approximately 6% of the Company's  outstanding  Common Stock as of May 14, 2003,
Dorothy Plotkin,  the wife of Kenneth  Plotkin,  a holder of approximately 6% of
the Company's Common Stock as of May 14, 2004 and Laura Auppele, believed by the
Company to be the holder of  approximately  12% of the Company's Common Stock as
of May 14, 2004.  Until  February 17, 2004,  the premises  subject to such lease
were subject to two mortgages  guaranteed  by the Company.  On February 17, 2004
HCW and  Ladokk  terminated  the old  lease  and HCW  entered  into a new  lease
agreement  with  Ladokk  Realty Co.,  LLC.  The lease term is for five years and
terminates on February 16, 2009.  Concurrently  with the new lease, our landlord
completed a refinancing of its mortgages,  and the new lender did not require us
to sign a  guarantee.  In  recognition  of this,  we are no longer  obligated to
guarantee the landlord's mortgages.

The Company's  Audit  Committee is in the process of evaluating the February 17,
2004 lease.

On May 13, 2004,  HAUPPAUGE DIGITAL,  INC. issued a press release announcing its
financial  results for the fiscal  quarter  ended March 31, 2004. A copy of this
press release is furnished as Exhibit 99.1 to this Report.


                                       30

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 Lease,  dated  February  17,  2004,  between  Ladokk  Realty  Co.,  LLC and
Hauppauge Computer Works, Inc.

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

99.1 Press Release, dated May 13, 2004 issued by HAUPPAUGE DIGITAL, INC.

(b) Reports on form 8-K

The Company filed one current Report on Form 8-K during the fiscal quarter ended
March 31, 2004 as follows:

Date of report:  January  12, 2004
Item reported : 5, 7 and 12


                                       31

<PAGE>

                                   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.
                                           -----------------------
                                           Registrant


Date:  May 14, 2004                        By:/s/ Kenneth Plotkin
       ------------                          -----------------------------------
                                             KENNETH  PLOTKIN
                                             Chief Executive Officer, Director,
                                             Vice President of Marketing
                                            (Principal Executive Officer)
                                             and Director


Date:  May 14, 2004                        By:/s/ Gerald Tucciarone
       ------------                          ----------------------------------
                                             GERALD TUCCIARONE
                                             Treasurer and Chief
                                             Financial Officer

                                       32