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



                                    FORM 10-Q

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



For the quarterly period ended:       December  31, 1998

                                       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)



                                 (516) 434-1600
                           (Issuer's telephone number)



Indicate by check mark  whether the issuer (1) filed all reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 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



As of February 9, 1999,  4,308,502  shares of .01 par value  Common Stock of the
registrant were Outstanding, not  including  treasury  shares








<PAGE>








                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES


                                      INDEX


PART I. FINANCIAL INFORMATION


Item 1.Financial Statements                                             Page No.

Condensed Consolidated Balance Sheets-                                  
   December 31, 1998 and September 30, 1998                                    3

Condensed Consolidated Statements of Income-                            
  Three Months ended December 31, 1998 and 1997                                4

Condensed Consolidated Statements of Cash Flows-                        
  Three Months ended December 31, 1998 and 1997                                5

Notes to Condensed Consolidated Financial Statements                         6-7

Item 2. Management's Discussion and Analysis of  Financial Condition        8-12
           and Results of Operations


PART II. OTHER INFORMATION

Item 5.  Legal proceedings                                                    13

Item 6.  Exhibits and Reports on form 8-K                                     13


SIGNATURES                                                                    14










<PAGE>









PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
ASSETS
                                                                                        December 31,
                                                                                            1998             September 30,
                                                                                        (Unaudited)               1998
                                                                                     ------------------    ------------------
 CURRENT ASSETS:                                                                                         
<S>                                                                                         <C>                   <C>       
     Cash and cash  equivalents                                                             $6,658,417            $6,281,852
     Accounts receivable, net of allowance for doubtful accounts                             4,939,399             6,497,163
     Inventories (Note 2)                                                                    8,916,120             8,552,097
     Prepaid expenses and other current assets                                                 415,197               468,763
     Deferred tax assets                                                                       655,519               597,131
                                                                                     ------------------    -----------------
                Total current assets                                                        21,584,652            22,397,006

     Property, plant and equipment-at cost                                                     901,678               805,953
     Less: Accumulated depreciation and amortization                                           397,759               362,343
                                                                                     ------------------    -----------------
                                                                                               503,919               443,610
     Security deposits and other non-current assets                                             56,180                56,838
                                                                                     ------------------    -----------------
                                                                                           $22,144,751           $22,897,454
                                                                                     ==================    =================
                                                                                     
 LIABILITIES AND SHAREHOLDERS' EQUITY :                                                                      

 CURRENT LIABILITIES:                                                                                        
    Accounts payable                                                                        $7,578,558            $9,497,003
    Accrued expenses                                                                         2,700,775             2,342,380
    Income taxes payable                                                                       846,569             1,021,173
                                                                                     ------------------    -----------------
              Total current liabilities                                                     11,125,902            12,860,556
                                                                                     ------------------    -----------------


 SHAREHOLDERS' EQUITY                                                                                        
    Common stock $.01 par value; 10,000,000 shares authorized, 4,511,702 and           
        4,501,402  issued as of December 31 , 1998  and September 30, 1998                      45,117                45,014
    Additional paid-in capital                                                              10,494,904            10,465,707
    Retained earnings                                                                        1,682,432               729,781
    Treasury Stock, at cost, 207,200 shares  (Note 5)                                      (1,203,604)           (1,203,604)
                                                                                     ------------------    -----------------
              Total stockholders' equity                                                    11,018,849            10,036,898
                                                                                     ------------------    -----------------
                                                                                           $22,144,751           $22,897,454
                                                                                     ==================    =================
</TABLE>




           See accompanying notes to consolidated financial statements




<PAGE>

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



<TABLE>
<CAPTION>
                                                                                      Three Months Ended December 31,
                                                                                        1998               1997
                                                                                     (Unaudited)       (Unaudited)
                                                                                --------------------------------------

<S>                                                                                     <C>                 <C>       
NET SALES                                                                               $15,056,999         $9,575,745

COST OF SALES                                                                            11,048,110          7,235,944
                                                                                --------------------------------------
    Gross Profit                                                                          4,008,889          2,339,801

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                              2,309,314          1,521,919

RESEARCH & DEVELOPMENT EXPENSES                                                             241,092            174,263
                                                                                --------------------------------------
    Income from operations                                                                1,458,483            643,619

OTHER INCOME :                                                                
  Interest income                                                                            49,405             60,546
                                                                                         
  Other, net                                                                                 41,763             40,729
                                                                                --------------------------------------
      Income before income tax provision                                                  1,549,651            744,894


INCOME TAX PROVISION (Note 4)                                                               597,000            245,815
                                                                                --------------------------------------
      Net income                                                                           $952,651           $499,079
                                                                                ======================================

Net income per share-basic (Note 3)                                                           $0.22              $0.11

Net income per share-diluted (Note 3)                                                         $0.21              $0.11
                                                                                ======================================

</TABLE>

   See accompanying notes to consolidated financial statements                  















<PAGE>





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





<TABLE>
<CAPTION>
                                                                                   Three Months Ended      December 31,
                                                                                          1998                 1997
                                                                                      (Unaudited)           (Unaudited)
                                                                                  -------------------   -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                         <C>                 <C>     
  Net income                                                                                $952,651            $499,079
                                                                                  -------------------   -----------------
   Adjustments  to  reconcile  net  income  to net cash  provided  by
    (used  in) operating activities:
     Depreciation and amortization                                                            36,072              15,037
     Provision for uncollectible accounts receivable                                          10,000              10,000
     Provision for system board obsolescence                                                  50,000              50,000
     Compensation paid in stock                                                                2,400                   -
     Deferred tax benefits                                                                   (58,388)                  -
         Changes in current assets and liabilities:
      Accounts receivable                                                                  1,547,764            (191,847)
      Inventories                                                                           (414,023)           (168,321)
      Prepaid expenses and other current assets                                               53,566              83,824
      Accounts payable                                                                    (1,918,443)            119,511
      Accrued expenses                                                                       183,791             609,517
                                                                                  -------------------   ----------------
                                                                                            (507,261)            527,721
                                                                                  -------------------   ----------------
        Net cash provided by  operating activities                                           445,390           1,026,800
                                                                                  -------------------   ----------------


CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property, plant and equipment                                              (95,725)           (103,347)
                                                                                  -------------------   -----------------
               Net cash used in investing activities                                        (95,725)           (103,347)
                                                                                  -------------------   -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:                                               
Purchase of treasury stock                                                                        -             (41,894)
Proceeds from the exercise of stock options                                                  26,900              20,950
                                                                                  -------------------   -----------------
        Net cash provided by (used in)  financing activities                                 26,900             (20,944)
                                                                                  -------------------   -----------------
        Net  increase in cash and cash equivalents                                          376,565             902,509
Cash and Cash Equivalents, beginning of period                                            6,281,852           5,602,412
                                                                                  -------------------   -----------------
Cash and Cash Equivalents, end of period                                                 $6,658,417          $6,504,921
                                                                                  ===================   =================
SUPPLEMENTAL DISCLOSURES:                                                                                 

   Income taxes paid                                                                       $829,992             $29,392
                                                                                  ===================   =================

</TABLE>
           See accompanying notes to consolidated financial statements



<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, and are subject to year-end adjustments. 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 months ended December 31, 1998 have been
included.  It is suggested that these interim  statements be read in conjunction
with the  financial  statements  and related  notes  included  in the  Company's
September 30, 1998 Form 10- KSB.

         The operating  results for the three months ended December 31, 1998 are
not  necessarily  indicative of the results to be expected for the September 30,
1999 year end.

NOTE 2.  INVENTORIES

         Inventories  have been  valued at the lower of average  cost or market.
The  components of inventory at December 31, 1998 and September 30, 1998 consist
of:

                            December  31,       September 30,
                               1998                 1998
                               ----                 ----

Component    Parts          $1,569,623            $1,445,811
Work in Progress               481,080               511,640
Finished Goods               6,865,417             6,594,646
                             ---------             ---------
                            $8,916,120            $8,552,097
                            ==========            ==========


NOTE 3.  NET INCOME PER SHARE

       Earnings  per share are computed  using  Financial  Accounting  Standards
Number 128,  ("SFAS 128")  "Earnings per Share." The statement  provides for the
calculation  of "basic" and  "diluted"  earnings per share.  Basic  earnings per
share is computed by dividing  income  available to common  shareholders  by the
weighted  average shares  outstanding for the period,  and excludes any dilutive
effects of stock options, warrants and convertible securities.  Diluted earnings
per share reflects the dilutive effect of additional shares of common stock that
could be issued  upon the  exercise  stock  options,  warrants  and  convertible
securities. Net income per share amounts for the three months ended December 31,
1998, and 1997 have been presented per the requirements of "SFAS 128".

<PAGE>

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

Net income per share - continued

         The table  below shows the number of  weighted  average  shares used in
determining basic and diluted earnings per share:

                                                     Three Months Ended
                                                          December 31,
                                                   1998                1997
                                                   ----                ----

Weighted average shares outstanding-basic        4,297,640           4,406,178
Number of shares issued on the assumed
    exercise of stock options                      301,857              89,720
                                                 ----------          ---------
Weighted average shares outstanding-diluted      4,599,497           4,495,898
                                                 ----------          ---------


On  November  8, 1996,  the  Company  approved a stock  repurchase  program.  On
December 17, 1997,  the buyback plan was extended  until  December 31, 1998 (See
note 5). Shares  outstanding  for the quarter ended  December 31, 1998 reflect a
reduction on a weighted average basis for the repurchased shares. As of December
31, 1998, the Company had repurchased 207,200 shares.

NOTE 4.  INCOME TAXES

     Income taxes are based on annualized  statutory rates for federal and state
income taxes.  The provision for income taxes  reflects an annualized  effective
tax rate after  deductions for the  utilization of restricted net operating loss
carry  forwards,  adjustments  for items  deductible  for book  purposes but not
currently  deductible  for tax purposes and the benefit  which  results from the
utilization of a foreign sales  corporation The benefits of these operating loss
carry forwards and deferred tax benefits had  previously  been subject to a 100%
valuation allowance.  However,  based on three years of profitability up through
the end of fiscal 1998 and  projected  fiscal 1999  taxable  income,  management
reduced  the  valuation  allowance  at  September  30,  1998  to  $127,000.   In
recognition  of  continued  profitability,  the Company  reduced  the  valuation
allowance  by $30,000  during the first fiscal  quarter of 1999 and  anticipates
total elimination of the valuation by the end of the fiscal year.


NOTE 5.  STOCK REPURCHASE PROGRAM

         On November 8, 1996, the Company  approved a stock  repurchase  program
for the repurchase of up to 300,000 shares of its own stock. The Company intends
to use the repurchased shares for certain employee benefit programs. On December
17, 1997, the stock repurchase program was extended by a resolution of the Board
of Directors until December 31, 1998. Through December 31, 1998, the Company had
repurchased  207,200  shares  for  $1,203,604  at an average  purchase  price of
approximately $5.81 per share.


<PAGE>


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

Results of Operations

Three Month Period ended December 31, 1998 versus December   30, 1997 
----------------------------------------------------------------------

     Sales  for the three  months  ended  December  31,  1998  were  $15,056,999
compared to $9,575,745 for the prior year's first fiscal  quarter,  resulting in
an increase of $5,481,254 or 57%. The increase in sales was primarily due to the
expansion  of the  Company's  domestic  distribution  and retail  channels  from
approximately   300  retail   locations   carrying  the  Company's   product  to
approximately  3,000 retail  locations,  sales growth in Europe due to expanding
sales from existing  customers plus  expansion  into new  geographic  markets in
Europe, plus a growth in sales to direct corporate customers.

     Unit sales of digital  video and  conferencing  boards for the three months
ended December 31, 1998 increased about 75% to approximately 166,000 as compared
to approximately  95,000 for the prior year. Sales to domestic customers for the
first fiscal  quarter were 26% of net sales for this year's first fiscal quarter
and 23% for the  prior  year's  first  fiscal  quarter.  Sales to  international
customers  were 74% of net  sales  compared  to 77% of net  sales  for the three
months ended December 31, 1997.

     Gross  profit  increased  to  $4,008,889  from  $2,339,801,  an increase of
$1,669,088 or 71% over the comparable quarterly period of the prior fiscal year.
The gross profit percentage was 27% for the three months ended December 31, 1998
compared to 24% for the prior  year's  first  fiscal  quarter.  The  increase in
margins was primarily due to the  absorption  of  manufacturing  overhead over a
greater number of units, a program of hedging  foreign sales currency  exposure,
primarily for German Marks and British Sterling, which has stabilized the effect
of foreign currency fluctuations, and the shifting of production for most of the
Company's European sales to a subcontractor in Scotland, which resulted in lower
unit production  costs,  the elimination of duty on completed boards and reduced
shipping costs.

     The  chart  below  illustrates  the  components  of  selling,  general  and
administrative expenses:

<TABLE>
<CAPTION>
                                            Three months ended December 31,
                                Dollar Costs                      Percentage of Sales
                                                                                Increase/
                            1998        1997      Increase     1998      1997   (Decrease)
                            ----        ----      --------     ----      ----   ----------

<S>                     <C>          <C>          <C>          <C>      <C>         <C>
Sales & Promotional     $1,460,838   $  881,706   $579,132     9.7%     9.2%        .5%
Customer Support            96,762       74,594     22,168      .6%      .8%      (.2%)
Product Handling           126,229      119,570      6,659      .8%     1.2%      (.4%)
General & Admin            625,485      446,049    179,436     4.2%     4.7%      (.5%)
                           -------      -------    -------     ---      ---       ---  
     Total              $2,309,314   $1,521,919   $787,395    15.3%    15.9%      (.6%)
</TABLE>

<PAGE>
Item 2.  Management's Discussion and Analysis -Continued 

As a percentage of sales, Selling,  General and Administrative expenses declined
by .6% when compared to the first fiscal  quarter of 1998.  Declines in Customer
Support,  Product Handling and General and Administrative  expenses of 1.1% were
offset  by a .5%  increase  in Sales and  Promotional  expense.  Represented  in
dollars, Selling General and Administrative expenses increased $787,395 over the
comparable  prior year's  fiscal first  quarter.  The largest  component of this
increase was Sales and Promotional  expenses whose increase of $579,132 over the
prior year's  first fiscal  quarter  represents  approximately  74% of the total
increase.  The increase in sales and  promotional  expenses was primarily due to
the  expansion  of  marketing  and  advertising  funds  required  to support the
increase in retail locations, which the Company believes stands at approximately
3,000 retail locations at the end of the first fiscal quarter of 1999 as opposed
to  approximately  300 retail  locations  at the end of the prior  year's  first
fiscal quarter,  increased outside sales staffing,  higher commissions resulting
from the 57% net sales increase and higher  marketing costs attributed to Europe
as the Company expands its European sales offices into new geographic locations.

         Customer  Support,  Product  Handling,  and General and  Administrative
expenses,  which  represents  approximately  26% of the increase  over the prior
year,  increased  $22,168,  $6,659 and $179,436  respectively.  Additional staff
required to consistently  maintain a high level of customer  support in light of
the  Company's  expanding  customer  base caused the Customer  Support  costs to
increase.  Increased  Product  Handling costs was a function of greater shipment
volume to customers. The increase in General and Administrative costs was mainly
for contractual  wage increases,  higher  professional  fees for consulting work
performed for the Company, and increased accruals for compensation that is based
on the profitability of the Company.

         Research and development  expenses  increased  $66,829 or approximately
38%. The increase was due to the addition of personnel which is in line with the
Company's   commitment  to  expand  its  engineering  research  and  development
resources to continually  enhance  current  products and further  develop future
product lines.

         The  Company  had net other  income of  $91,168  compared  to net other
income for the prior year's first  fiscal  quarter of $101,275.  The decrease in
net other income was primarily due to slightly lower returns on monies invested.

         Provision  for income taxes was  $597,000,  or an effective tax rate of
38% for the three  months  ended  December  31, 1998  compared to $245,815 or an
effective  tax rate of 33% for the three  months ended  December  31, 1997.  The
increase in the net  effective  rate is  primarily  due to the timing of certain
reserves which are deductible for book purposes but not currently deductible for
tax purposes, which resulted in an addition to the deferred tax asset account of
$28,388.

<PAGE>


Item 2.  Management's Discussion and Analysis -Continued 

     At the end of  fiscal  1998,  the  Company  had a  deferred  tax  valuation
allowance of $127,000. In recognition of the continued  profitability during the
first quarter of fiscal 1999, the valuation  allowance was reduced by $30,000 in
the first quarter of 1999.

     As a result of the above,  the Company  recorded net income after taxes for
the quarter  ended  December 31, 1998 of $952,651,  which  resulted in basic and
diluted earnings per share of $0.22 and $0.21, respectively, on weighted average
basic and diluted shares  outstanding of 4,297,640 and 4,599,497,  respectively,
compared  to net income  after  taxes of  $499,079  for the three  months  ended
December 31,  1997,  which  resulted in basic and diluted  earnings per share of
$0.11 on weighted  average basic and diluted  shares of 4,406,178 and 4,495,898,
respectively.

     In two of the  previous  four fiscal  years,  the  Company has  experienced
certain revenue trends.  Since the Company's products are primarily sold through
distributors and retailers, the Company has historically recorded stronger sales
results during the Company's first fiscal quarter  (October to December),  which
due to the holiday season, is a strong quarter for computer equipment sales. The
Company  experienced  this trend in each of the fiscal years ended September 30,
1998 and  September 30, 1997. In addition,  the Company's  international  sales,
mostly in the  European  market,  were 72 % and 66% of sales for fiscal 1998 and
1997,  respectively,  and 74% for the first fiscal  quarter  ended  December 31,
1998.  Due to this,  the Company's  sales for its fourth fiscal quarter (July to
September) can be potentially  impacted by the reduction of activity experienced
with Europe  during the July and August  summer  holiday  period.  To offset the
above  cycles,  the Company is  targeting  as wide a range of customer  types in
order to moderate the seasonality of retail sales.

Liquidity and Capital Resources

     The  Company  had a net cash  position  of  $6,658,417  working  capital of
$10,458,750  and  shareholders'  equity of  $11,018,849 as of December 31, 1998,
compared  to cash,  working  capital  and  shareholders'  equity of  $6,281,852,
$9,536,450  and  $10,036,898,  respectively,  as  of  September  30,  1998.  The
significant items of cash provided by and cash (consumed ) are detailed below:

<TABLE>
<CAPTION>
<S>                                                                        <C>       
Net income (adjusted for non cash items), excluding deferred tax benefits  $1,051,123
Additions to deferred tax assets                                           (   58,388)
Decrease in investment for current assets                                   1,187,307
Cash expended for reduction in current  liabilities-net                    (1,734,652)
Purchase of Property, Plant & Equipment                                    (   95,725)
Other                                                                          26,900
</TABLE>

<PAGE>

Liquidity and Capital Resources-continued

     Net cash of $ 445,390 provided by operating activities was primarily due to
cash generated from the Company's net income,  adjusted for non cash items,  and
cash provided by the reduction in the  company's  investment in current  assets,
mainly  receivables,  offset by cash consumed  attributable  to the reduction of
current liabilities, mainly vendor accounts payable and income taxes.


     Additional  cash  was  used to  purchase  fixed  assets.  Minimal  cash was
provided by the exercise of employee options.

     The Company's asset based credit facility expired on February 28, 1998. The
company has chosen not to renew the loan facility.  The Company feels it is in a
position to obtain new  financing at more  competitive  rates,  and is currently
negotiating with new institutions to replace the expired loan facility.

     On November 8, 1996, the Company  approved a stock  repurchase  program for
the  repurchase of up to 300,000  shares of its own stock.  The Company will use
the repurchased  shares for certain employee benefit  programs.  On December 17,
1997, the stock repurchase  program was extended by a resolution of the Board of
Directors  until December 31, 1998.  Through  December 31, 1998, the Company had
repurchased  207,200  shares  for  $1,203,604  at an average  purchase  price of
approximately $5.81 per share.

     The Company  believes  that its current cash  position  and its  internally
generated  cash flow will be  sufficient  to satisfy the  Company's  anticipated
operating needs for a least the ensuing twelve months.

Year 2000

     An  issue  affecting  most  companies  is  whether   computer  systems  and
applications will recognize and process the year 2000 and beyond.  Many computer
systems were not designed to handle dates beyond the year 1999.  The Company has
evaluated  the effect of year 2000  issues  relating  to its  internal  computer
systems (primarily used for accounting,  inventory control,  word processing and
certain other  administrative  functions) and has concluded that certain aspects
of its system are not year 2000  compliant.  In recognition of this, the Company
during 1998 studied the feasibility of upgrading its existing  computer software
or  purchasing  new  software.  The Company  concluded  that the purchase of new
software and the  upgrading of computer  hardware was the best course of action.
During the first fiscal  quarter of 1999, the Company has selected new software.
The  hardware  upgrades  and the  implementation  of new  software  began during
January  1999.  Testing will be performed  in house by Company  personnel,  with
assistance  from an outside  consultant.  The Company expects to have the system
operational by the middle of 1999. The Company estimates the cost to the Company
to remedy the year 2000 issue with regard to their internal computer system will
be  approximately  $150,000.  The company  expects to fund this project  through
internally  generated  cash flow, and will account for the project as prescribed
by the rules under generally accepted accounting principles.
<PAGE>

Year 2000-continued

     The  Company  plans to  initiate  communications  in early  1999 with third
parties the Company does  business with in order to identify,  if possible,  the
status of the third  parties' year 2000  readiness.  The Company will attempt to
have this completed by the middle of 1999.  However,  the Company has limited or
no control over the actions taken by these third parties. Accordingly, there can
be no assurance  that all the third  parties the Company does business with will
successfully  resolve all of their year 2000 issues.  The failure of these third
parties  to resolve  their year 2000  issues  could have a  potentially  adverse
affect on the  Company.  During  1999,  the Company  will attempt to monitor the
readiness of third parties it currently  does business with and look to transact
business  with third parties who are year 2000  compliant in an effort  minimize
the risk to the Company.

     It is the  Company's  intention  to address its year 2000  issues  prior to
being affected by them. If the Company  identifies  significant risks associated
with year 2000  compliance,  or if the Company's year 2000 project deviates from
its expected  completion  date, the Company will devise a contingency plan which
the Company intends to develop  concurrently with the  implementation of the new
computer system.  Management  believes that current plans and monitoring actions
will  provide  ample  response  time to avoid  material  adverse  affects on the
Company's business and financial results.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS

     From time to time, information provided by the company,  statements made by
its employees or information  provided in its Securities and Exchange Commission
filings,  such as  information  contained in this Form 10-Q,  including  certain
statements under  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" may contain forward  looking  information.  The words
"Estimate, "Plan", "Intend" "Believes, "Expect",  "Anticipates",  "Projects" and
similar  words  or  expressions   are  intended  to  identify   forward  looking
statements.  These  statements  speak only as of the date of this  report.  Such
forward looking  statements  involve and are subject to known and unknown risks,
uncertainties   and  other  factors  which  could  cause  the  actual   results,
performance and achievements of the Company to be materially  different from any
future results, performance ( financial or operating), or achievements expressed
or implied by such  forward  looking  statements.  Such factors  include,  among
others,  the following:  rapid changes in  technology;  lack of funds for future
research;  competition,  proprietary patents and rights of others; loss of major
customers;  loss of  sources  of supply  for  digital  video  processing  chips;
non-availability  of  management;  government  regulation;  domestic and foreign
economic  conditions;  currency  fluctuations;  the  inability of the Company to
profitably  sell its products and the impact of  complications  due to year 2000
compliance.  The market price of the  Company's  common stock may be volatile at
times in response to fluctuation in the company's  quarterly  operating results,
changes in  analysts'  earnings  estimates,  market  conditions  in the computer
hardware  industry,  seasonality  of the  business  cycle,  as well  as  general
conditions and other factors external to the Company.

<PAGE>
PART II.  OTHER INFORMATION

Item 1  Legal Proceedings

     In  January  1998,  Advanced  Interactive  Incorporated  ("AII")  contacted
Hauppauge Computer Works, Inc. ("HCW") and attempted to induce HCW to enter into
a patent  license or joint  venture  agreement  with AII  relative to certain of
HCW's products.  AII alleged that such products infringe U.S. Patent No. 4, 426,
698 (the "AII Patent").  At such time, HCW's  engineering staff analyzed the AII
Patent and  determined  that HCW's  products  did not  infringe any such patent.
Accordingly, HCW rejected AII's offer.

     On October 6, 1998,  HCW received  notice that AII had  commenced an action
against it and multiple other defendants in the United States District Court for
the Northern  District of Illinois,  alleging that the certain of HCW's products
infringe  on  certain  patent  rights  allegedly  owned  by the  plaintiff.  The
complaint seeks  unspecified  compensatory and statutory  damages with interest.
HCW denies such  allegations  and intends to vigorously  defend this action.  On
December  22, 1998,  HCW filed its Answer (the  "Answer").  Among other  things,
pursuant  to the Answer,  HCW denies that its  products  infringe  AII's  patent
rights and asserts  certain  affirmative  defenses,  including  challenging  the
validity of the Patent.

     Notwithstanding the foregoing,  because of the uncertainties of litigation,
no assurances can be given as to the outcome of the AII litigation. In the event
that HCW were not to prevail in this  litigation,  HCW could be  required to pay
significant  damages  to AII and  could be  enjoined  from  further  use of such
technology  as it  presently  exists.  Although  a  negative  outcome in the AII
litigation  would  have a material  adverse  affect on HCW,  including,  but not
limited to, its operations and financial condition,  HCW believes that, if it is
held that HCW's  products  infringe  AII's patent  rights,  HCW would attempt to
design  components  to replace the  infringing  components  or would  attempt to
negotiate  with AII to utilize its system,  although no assurances  can be given
that HCW would be successful in these attempts. At the present time, HCW can not
assess the possible cost of designing and implementing a new system or obtaining
rights from AII. As of December 31, 1998, the Company  estimated that legal fees
incurred up to December 31,1998 were approximately $10,000.

Item 6  Exhibits and Reports on Form 8-K

(a) Exhibits

        27. Financial Data Schedule

(b) Reports on form 8-K
           None


<PAGE>

                                   SIGNATURES


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


                                           HAUPPAUGE DIGITAL, INC.
                                               Registrant


Date: February 9, 1999                      By /s/ Kenneth Plotkin              
      -----------------                       ----------------------------------
                                              KENNETH  PLOTKIN
                                              Vice President and
                                              Chief Executive Officer




Date: February 9, 1999                     By  /s/ Gerald Tucciarone            
      -----------------                      -----------------------------------
                                             GERALD TUCCIARONE
                                             Treasurer and Chief
                                             Financial Officer