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,  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)


                                       1

<PAGE>

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 January 31,  2005,  9,465,829  shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares.



                                       2


<PAGE>


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

                                      INDEX
                                      -----

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

Item 1.Financial Statements                                             Page No.
                                                                        --------

Condensed Consolidated Balance Sheets - December 31,  2004                  5
(unaudited) and September 30, 2004 (audited)

Condensed Consolidated Statements of Income - Three  Months ended           6
December 31 2004 (unaudited) and 2003  (unaudited)

Condensed  Consolidated  Statements of Other Comprehensive Income           7
- Three months ended December 31, 2004 (unaudited) and 2003
(unaudited)

Condensed Consolidated Statements of Cash Flows - Three  Months             8
ended December 31, 2004 (unaudited) and 2003 (unaudited)

Notes to Condensed Consolidated Financial Statements                       9-16

Item 2. Management's Discussion and Analysis of Financial Condition       17-28
and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risks       28-29

Item 4. Controls and Procedures                                            29



                                       3


<PAGE>



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

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds       30

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

SIGNATURES                                                                 32



                                       4


<PAGE>

<TABLE>

<CAPTION>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                        December 31, 2004   September 30, 2004
                                                                         (unaudited)             (audited)
                                                            --------------------------------------------------
Assets:

 Current Assets:
<S>                                                                         <C>                    <C>
     Cash and cash  equivalents                                             $8,427,585             $8,661,589
     Receivables, net of  various allowances                                15,206,815             13,593,907
     Inventories                                                            10,750,491              8,477,254
     Prepaid expenses and other current assets                                 782,410                770,745
                                                            --------------------------------------------------
                Total current assets                                        35,167,301             31,503,495

     Property, plant and equipment, net                                        517,769                489,370
     Security deposits and other non current assets                             77,934                 77,934
                                                            --------------------------------------------------
                                                                           $35,763,004            $32,070,799
                                                            ==================================================

 Liabilities and  Stockholders'  Equity:

 Current Liabilities:
    Accounts payable                                                       $14,694,814            $13,243,966
    Accrued expenses                                                         4,721,926              4,256,970
    Income taxes payable                                                       268,769                242,438
                                                            --------------------------------------------------
              Total current liabilities                                     19,685,509             17,743,374

 Stockholders' Equity
   Common stock $.01 par value; 25,000,000 shares
authorized, 9,875,666  and 9,759,465  issued, respectively                      98,757                 97,595
     Additional paid-in capital                                             13,111,694             12,913,497
     Retained earnings                                                       3,188,824              1,925,135
     Accumulated other comprehensive income                                  1,279,981                975,511
       Treasury Stock, at cost, 572,067 and 567,067 shares                  (1,601,761)            (1,584,313)
                                                            --------------------------------------------------
             Total stockholders' equity                                     16,077,495             14,327,425
                                                            --------------------------------------------------
                                                                           $35,763,004            $32,070,799
                                                            ==================================================
</TABLE>

  See accompanying notes to condensed consolidated financial statements




                                       5

<PAGE>

<TABLE>
<CAPTION>


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

                                                                               Three months ended December 31,
                                                                       --------------------------------------------
<S>                                                                                  <C>                 <C>
                                                                                     2004                2003
                                                                       --------------------------------------------


Net sales                                                                         $23,360,442          $18,230,298
Cost  of sales                                                                     18,049,079           13,648,675
                                                                       --------------------------------------------
    Gross profit                                                                    5,311,363            4,581,623

Selling, general and  administrative Expenses                                       3,427,055            3,120,616
Research & development expenses                                                       557,530              410,274
                                                                       --------------------------------------------
    Income  from operations                                                         1,326,778            1,050,733

Other  Income (expense):
  Interest   income                                                                     1,511                1,739
  Foreign currency                                                                     (8,600)             (11,333)
                                                                       --------------------------------------------
Other  (expense)                                                                       (7,089)              (9,594)
                                                                       --------------------------------------------
    Income  before taxes on income                                                  1,319,689            1,041,139

Tax provision                                                                          56,000               48,279
                                                                       --------------------------------------------
    Net income                                                                     $1,263,689             $992,860
                                                                       ============================================


Net income  per share:
    Basic                                                                               $0.14                $0.11
    Diluted                                                                             $0.13                $0.11
                                                                       --------------------------------------------
</TABLE>

See accompanying notes to condensed  consolidated financial statements



                                       6

<PAGE>



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


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

Net income                                   $1,263,689           $ 992,860
Forward exchange contracts marked to market    (279,791)            204,461
Foreign currency translation gain               584,261             849,969
                                             -----------------------------------

Other  comprehensive income                  $1,568,159          $2,047,290
                                             ==========          ==========



See accompanying notes to condensed consolidated financial statements






                                       7


<PAGE>

<TABLE>
<CAPTION>


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


                                                                                    Three  months ended December 31,
<S>                                                                                    <C>                    <C>
                                                                                       2004                   2003

                                                                    --------------------------------------------------
  Net income                                                                     $   1,263,689           $    992,860
                                                                    --------------------------------------------------
   Adjustments to reconcile net income to net cash
     used in operating activities:

     Depreciation and amortization                                                      54,324                 60,309
     Other non cash items                                                                    -                 10,079
     Changes in current assets and liabilities:
      Accounts receivable                                                           (1,308,438)            (3,562,789)
      Inventories                                                                   (2,273,237)            (4,474,774)
      Prepaid expenses and other current assets                                        (11,665)              (153,055)
     Accounts payable and other current liabilities                                  1,942,135              6,506,655
                                                                    -------------------------------------------------
        Total adjustments                                                           (1,596,681)            (1,613,575)
                                                                    --------------------------------------------------
    Net cash used in  operating activities                                            (333,192)              (620,715)
                                                                    --------------------------------------------------

Cash Flows From Investing Activities:

    Purchases of property, plant and equipment                                         (82,723)               (20,574)
                                                                    --------------------------------------------------
       Net cash used in investing activities                                           (82,723)               (20,574)
                                                                    --------------------------------------------------
Cash Flows From Financing Activities:

    Proceeds from employee stock purchases                                             199,359                  6,987

    Purchase of treasury stock                                                         (17,448)                     -
                                                                    --------------------------------------------------
       Net cash provided by  financing activities                                      181,911                  6,987
                                                                    --------------------------------------------------
       Net (decrease)  in cash and cash equivalents                                   (234,004)              (634,302)

Cash and cash equivalents, beginning of period                                       8,661,589              5,838,160
                                                                    --------------------------------------------------
Cash and cash equivalents, end of period                                         $   8,427,585           $  5,203,858
                                                                    ==================================================
Supplemental disclosures:

   Income taxes paid                                                             $      38,863           $     67,802
                                                                    ==================================================

</TABLE>

See accompanying notes to condensed consolidated financial statements



                                       8


<PAGE>

<TABLE>

                    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
period ended  December 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 the Company's September 30, 2004 Form 10-K.

The operating results for the three month period ended December 31, 2004 are not
necessarily  indicative of the results to be expected for the September 30, 2005
year end.

Note 2.    Receivables

Accounts and other receivables for the consisted of:

                                                                       December 31,      September 30,
                                                                           2004                2004
                                                                           ----                ----

<S>                                                                  <C>                 <C>
Trade receivables                                                    $ 11,486,260        $ 9,584,650
Receivable from contract manufacturers                                  6,350,272          6,568,968
GST and VAT taxes receivables                                             655,879            575,750
Allowances and reserves                                                (3,421,000)        (3,254,940)
Other                                                                     135,404            119,479
                                                                          -------         ----------
                                                                     $ 15,206,815        $13,593,907
                                                                     ============        ===========

</TABLE>

Note 3.    Derivative Financial   Instruments

For each of the past three fiscal years,  over 60% of the  Company's  sales were
generated by our European subsidiary and were:

     o    Invoiced in local currency-primarily the Euro

     o    Collected in local currency-primarily the Euro

On the supply side,  since we  predominantly  deal with North American and Asian
suppliers  and  contract  manufacturers,  approximately  75%  of  our  inventory
required to support our European  sales are purchased and paid in U.S.  Dollars.


                                       9

<PAGE>

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

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

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

We do not try to hedge against all possible foreign currency  exposures  because
of the  inherent  difficulty  in  estimating  the  volatility  of the Euro.  The
contracts  we  procure  are  specifically  entered  into to as a  hedge  against
forecasted  or  existing  or  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,  long term
strengthening  or  weakening  of the U.S.  dollar  against the Euro  impacts our
sales, our gross profit,  operating income and retained  earnings.  Factors that
could impact the effectiveness of our hedging program are:

     o    volatility of the currency markets

     o    availability of hedging instruments

     o    accuracy of our inventory forecasts

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

As of December  31,  2004,  we had foreign  currency  contracts  outstanding  of
approximately  $5,316,000 against the delivery of the Euro. The contracts expire
through May 2005. 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
loss of $279,791 for the three months  ended  December 31, 2004.  As of December
31, 2004, a deferred loss of $379,190  reflecting the cumulative  mark to market
loss of our  derivatives,  was  recorded on our balance  sheet as a component of
accumulated other comprehensive income in our equity section.


                                       10

<PAGE>

<TABLE>

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

We use the average monthly forward contract  exchange rate to translate our Euro
denominated sales into our U.S. dollar reporting  currency.  For the three month
period ended December 31, 2004, the use of the monthly average spot rate instead
of the average monthly forward contract  exchange rate to value Euro denominated
sales  would have  resulted  in an  increase  in sales of  $640,815.  This sales
increase is related to our  contracts  that closed  during these periods and the
changes  in the fair  value of our  derivative  contracts.  For the three  month
period  ending  December  31,  2003,  the use of the monthly  average  spot rate
instead of the average  monthly  forward  contract  exchange  rate to value Euro
denominated sales would have resulted in a sales increase of $805,553.

Note 4.  Inventories

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


                                December  31,       September 30,
                                    2004               2004
                                    ----               ----

     Component Parts              $ 4,542,686       $3,522,974
     Finished Goods                 6,207,805        4,954,280
                                  -----------       ----------
                                  $10,750,491       $8,477,254
                                  ===========       ==========

Note 5.  Net Income Per  Share

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

                                                                            Three Months Ended
                                                                              December 31,
                                                                          2004          2003
                                                                          ----          ----

<S>                                                                    <C>           <C>

Weighted average shares outstanding-basic                                 9,277,944     8,880,651
Number of shares issued on the assumed exercise of stock options            671,437       489,430
                                                                          ---------     ---------
 Weighted average shares outstanding-diluted                              9,949,381     9,370,081
                                                                          =========     =========

</TABLE>



                                       11

<PAGE>


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

Options to purchase  98,757 and 485,337 shares of common stock at prices ranging
$5.25 to $ 10.06 and $2.81 and $10.06,  respectively,  were  outstanding for the
three month periods ending  December 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 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 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 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.

As of December 31,  2004,  appearing in the equity  section  under  "Accumulated
other comprehensive  income" was a deferred gain of $1,279,981,  which consisted
of a deferred translation gain of $1,659,171 and a deferred loss of $379,190 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 rate.

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



                                       12

<PAGE>


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

Note 7. Revenue Recognition

The  Company  sells  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  product is shipped on open
account with the majority of our  customers  given 30 day payment  terms.  Those
customers  deemed as large  credit  risks  either  pay in  advance or issue us a
letter of credit.

The Company requires the customer to submit a purchase order to the Company. The
price of the product and payment  terms are fixed per the terms of the  purchase
order.  Upon  shipment of the order to the  customer,  the title to the goods is
passed to the customer.  The customer is legally  obligated to pay for the order
within the payment terms stated on the customer's purchase order. The obligation
to insure the 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 is 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

The Company  offers  several types of analog  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.

The Company  offers 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.



                                       13

<PAGE>

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

Note 8. Product segment and Geographic Information-continued

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.

Our  products  are  either  sold,  or can be  sold,  by the same  retailers  and
distributors  in our  marketing  channel.  We also sell product  directly to OEM
customers.  The  Company  evaluates  its  product  lines  under  the  functional
categories of analog and digital products.  Sales by functional  category are as
follows:

                                            Three months ended December 31,
                                                2004                 2003
                                                ----                 ----
Product line sales
------------------
Analog sales                                $18,401,809         $ 14,429,228
Digital sales                                 4,958,633            3,801,070
                                            -----------         ------------
                                            $23,360,442         $ 18,230,298
                                            ===========         ============

The Company sells its products through an international  network of distributors
and retailers.  European sales  accounted for 60% and 75% of sales for the three
moths ended December 31, 2004 and 2003.  Sales percent by geographic  region are
as follows:

                                              Three months ended December 31 ,
                                                  2003                2004
                                                  ----                ----
Sales percent by geographic region
----------------------------------
United States                                      38%                 24%
Europe                                             60%                 75%
Asia                                                2%                  1%
                                                  ----                ----
    Total                                         100%                100%
                                                  ====                ====


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 outstanding


                                       14

<PAGE>

<TABLE>

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

during the three months ended December 31, 2004 and December,  31 2003 was $1.15
to $1.39 and $0.43, 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 months ended December 31,
2004 and December 31, 2003: risk-free interest rates of 4.25%, volatility factor
of the expected  market  price of the  Company's  Common  Stock of 35%,  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:

                                                                             December 31,       December 31,
                                                                                     2004               2003

                                                                              -----------          ---------
<S>                                                                           <C>                  <C>
Net income  as reported.......................                                $ 1,263,689          $ 992,860

 Deduct:  Total stock-based employee compensation expense
  determined under fair value method, net of related taxes ...                     (8,924)           (24,788)
                                                                              -----------          ---------
Pro forma net income..........................                                $ 1,254,765          $ 968,072
                                                                              ===========          =========

Net income per  share - as reported:

Basic.........................................                                $      0.14          $    0.11
                                                                              ===========          =========

Diluted.......................................                                $      0.13          $    0.11
                                                                              ===========          =========
Net income per  share - pro forma:

Basic.........................................                                $      0.14          $    0.11
                                                                              ===========          =========

Diluted.......................................                                $      0.13          $    0.10
                                                                              ===========          =========

</TABLE>

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

FASB  Interpretation  No. 45 (FIN 45),  Guarantor's  Accounting  and  Disclosure
Requirements for Guarantees,  Including Indirect  Guarantees of the Indebtedness
of  Others,   clarified  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  and the Company has been released from
the one  guarantee  it was  subject to prior to  February  17,  2004.


                                       15

<PAGE>

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

The Company  occupies a facility located in Hauppauge New York which is used for
its executive offices and for the testing, storage and shipping of our products.
In February 1990,  Hauppauge Computer Works, Inc., a wholly-owned  subsidiary of
ours ("HCW"), entered into a lease (the "1990 Lease"), with Ladokk Realty Co., a
real estate  partnership  which is  principally  owned by Kenneth  Plotkin,  our
Chairman of the Board,  Chief  Executive  Officer,  President,  Chief  Operating
Officer and Vice President of Marketing and the holder of approximately  9.4% of
our Common Shares as of December 31, 2004, Dorothy Plotkin,  the wife of Kenneth
Plotkin,  holder of  approximately  6.1% of our Common Shares as of December 31,
2004 and Laura Aupperle,  believed by us to be the holder of approximately 12.8%
of our  Common  Shares,  including  Common  Shares  attributed  to the Estate of
Kenneth R.  Aupperle.  Ladokk  Realty Co., LLC is the successor to Ladokk Realty
Co.  As  of  February   2004,  the  1990  Lease  provided  for  annual  rent  of
approximately  $454,000,  payable  monthly,  and subject to 5% annual  increases
effective  February 1st of each year. We were also  obligated to pay real estate
taxes and operating costs of maintaining the premises subject to the 1990 Lease.
Until February 17, 2004, the premises  subject to such lease were subject to two
mortgages guaranteed by us.

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

Our Audit Committee is in the process of evaluating the 2004 Lease.




                                       16


<PAGE>

<TABLE>

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

Three Month Period ended December 31, 2004 Compared to December 31, 2003
------------------------------------------------------------------------

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

                                      Three        Three
                                     Months       Months
                                      Ended        Ended       Variance         Percentage of sales
                                    12/31/04      12/31/03            $       2004       2003      Variance
                                    --------     -----------          -       ----       ----      --------

<S>                              <C>           <C>           <C>            <C>        <C>            <C>
Net Sales                        $ 23,360,442  $18,230,298   $5,130,144     100.0%     100.0%          0
Cost of sales                      18,049,079   13,648,675    4,400,404     77.26%     74.87%      2.39%
                                 ------------  -----------   ----------     ------     ------      -----
Gross Profit                        5,311,363    4,581,623      729,740     22.74%     25.13%     -2.39%
Gross Profit %                         22.74%       25.13%       -2.39%

Costs:
Sales & Marketing                   2,431,591    2,125,709      305,882     10.41%     11.66%     -1.25%
Technical Support                     120,324      108,455       11,869      0.51%      0.59%     -0.08%
General & Administrative              875,140      886,452      (11,312)     3.75%      4.87%     -1.12%
                                 ------------    ---------   ----------     ------     ------      -----
Total Selling, General and
 Administrative costs               3,427,055    3,120,616      306,439     14.67%     17.12%     -2.45%
Research & Development                557,530      410,274      147,256      2.39%      2.25%      0.14%
                                 ------------    ---------   ----------     ------     ------      -----
Total operating costs               3,984,585    3,530,890      453,695     17.06%     19.37%     -2.31%
                                 ------------    ---------   ----------     ------     ------      -----
Net operating income                1,326,778    1,050,733      276,045      5.68%      5.76%     -0.08%

Other income (expense)
----------------------
Interest income                         1,511        1,739         (228)     0.01%      0.01%      0.00%
Foreign currency                       (8,600)     (11,333)       2,733     -0.04%     -0.06%      0.02%
                                 ------------    ---------   ----------     ------      -----      -----
  Total other income (expense)         (7,089)      (9,594)       2,505     -0.03%     -0.05%      0.02%
                                 ------------    ---------   ----------     ------      -----      -----
Income  before taxes                1,319,689    1,041,139      278,550      5.65%      5.71%     -0.06%
Taxes on income                        56,000       48,279        7,721      0.24%      0.26%     -0.02%
                                 ------------    ---------   ----------     ------      -----      -----
Net income                        $ 1,263,689  $   992,860   $  270,829      5.41%      5.45%     -0.04%
                                 ============  ===========   ==========      =====      =====     ======



Net sales for the three months  ended  December  31, 2004  increased  $5,130,144
compared  to the three  months  ended  December  31,  2003 as shown on the table
below.
                                                                        Increase
            Three  Months       Three Months     Increase (Decrease)   (Decrease)  Geographic region
Location    Ended 12/31/04      Ended 12/31/03   Dollar Variance       Variance %      2004   2003
--------    --------------      --------------   ------------------    ----------      ----   ----

Domestic    $ 8,853,575           $4,352,730       $4,500,845                103%       38%    24%

Europe       14,149,483           13,626,714          522,769                  4%       60%    75%

Asia            357,384              250,854          106,530                 42%        1%     1%
                -------              -------          -------                 ---      ----   ----
  Total     $23,360,442          $18,230,298       $5,130,144                 28%      100%   100%
            ===========          ===========       ==========                 ===      ====   ====

</TABLE>



                                       17

<PAGE>

Results of  operations-three  month period ended  December 31, 2004  compared to
December 31,2003-continued
--------------------------
The primary factors contributing the sales increase were:

     o    Increased volume of WinTV-PVR-150  (Amity2) OEM sales due to increased
          program volume

     o    Stronger demand for retail WinTV-PVR-150/350 products

     o    Increased DEC sales to UK and German customers for promotional rollout
          of terrestrial product and conversion to digital broadcasts

     o    Increased WinTV-PVR-USB2 sales due to introduction of lower cost model

     o    Higher WinTV-USB analog TV tuner sales for the laptop market

     o    Introduction of Portable MediaMVP portable media player in Europe

     o    Increase  in our  average  Euro to USD  contract  rate of about  10.9%
          (1.2199  versus  1.1002) for the three months ended  December 31, 2004
          compared to the three months ended  December 31, 2003,  which  yielded
          higher converted Euro to USD sales

The sales increases were offset by the following negative trends:

     o    Decrease in MediaMVP  sales  compared  with the year ago period  which
          included  the initial  product  rollout  shipments  to  retailers  and
          distributors

     o    Decrease in WinTV PCI board analog product sales

     o    Decrease in DVB satellite (DVB-S) sales in Europe

Net sales to domestic customers were 38% of net sales for the three months ended
December 31, 2004 compared to 24% for the three months ended  December 31, 2003.
Net sales to European  customers  were 60% of net sales  compared to 75% for the
same period of last year.  Net sales to Asian  customers  were 2% and 1% for the
three months ended December 1, 2004 and 2003.

Gross profit  increased  $729,740  for the three months ended  December 31, 2004
compared to the prior year's first quarter.

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

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

Due to increased sales                                 $1,676,725
Gross profit changes  due to product sales mix           (495,742)
Effect on gross profit due to lower margin OEM sales     (216,333)
Due to increases in labor related and other costs        (234,910)
                                                         --------
      Total  increase in gross profit                    $729,740
                                                         ========


                                       18



<PAGE>

<TABLE>

Results of  operations-three  month period ended  December 31, 2004  compared to
December 31,2003-continued
--------------------------
Gross profit  percentage for the three months ended December 31, 2004 was 22.74%
compared to 25.13% for the three months  ended  December 31, 2003, a decrease of
2.39%.

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

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

Gross profit changes  due to product sales mix                    (2.11)%
Effect on gross profit due to lower margin OEM sales              (0.93)%
Labor related and other costs                                      0.65 %
                                                                   -----
Net decrease in gross profit %                                    (2.39)%
                                                                   ======

The  decrease in the gross  profit  percent of 2.39% for the three  months ended
December  31, 2004  compared to the three  months  ended  December  31, 2003 was
primarily due to:

     o    Sales  growth of OEM product  sales:  Gross profit for OEM products is
          lower  than  our  retail  products,  but do  not  require  the  sales,
          promotion and customer support required of our retail sales.

     o    Digital  Entertainment  Center sales "DEC":  Due to the  transition in
          some parts of Europe to digital broadcasts,  certain DEC products were
          promotionally priced to coincide with the marketing opportunities that
          surfaced  during the  transition.  DEC  products  were priced with low
          profit margins to support these retail promotions.


     o    Labor related and other costs contributed to a 0.65% increase in gross
          profit  percent  compared to three months ended December 31, 2003. The
          increase in sales of 28.14% over last the three months ended  December
          31, 2003  coupled with a smaller  increase in labor  related and other
          costs of 17.06%  compared to the prior year was the  driving  force in
          the 0.65% increase.

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

                                  Three months ended December  31,
                                         Dollar Costs                                Percentage of Sales
                            ------------------------------------------------------------------------------------

                                                                     Increase                         Increase
                                                                    (Decrease)     2004      2003     (Decrease)
                                    2004             2003            --------      ----      ----      --------
                                    ----             ----

<S>                             <C>              <C>               <C>            <C>        <C>            <C>
Sales and Marketing             $2,431,591       $2,125,709        $ 305,882      10.41%     11.66%      -1.25%
Technical  Support                 120,324          108,455           11,869       0.51%      0.59%      -0.08%
General and Administrative         875,140          886,452          (11,312)      3.75%      4.87%      -1.12%
                                 ---------       ----------        ----------     -----      -----       ------
    Total                       $3,427,055       $3,120,616        $ 306,439      14.67%     17.12%      -2.45%
                                ==========       ==========        ==========     ======     ======      ======


</TABLE>

                                       19


<PAGE>

Results of  operations-three  month period ended  December 31, 2004  compared to
December 31,2003-continued
--------------------------
Selling,  General and Administrative  expenses increased $306,439 from the prior
year's  first  quarter.  As  a  percentage  of  sales,   Selling,   General  and
Administrative  expenses  decreased  by 2.45% when  compared to the three months
ended December 31, 2003.

The increase in Sales and  Marketing  expense of $305,882,  which  accounted for
approximately 99.8% of the total increase in Selling, General and Administrative
expenses, was mainly due to:

     o    Increases caused by the strengthening of the Euro to the U.S dollar of
          $132,173,  which accounted for about 43.2% of the total increase.  The
          average Euro to USD  conversion  rate was $1.2967 for the three months
          ended December 31, 2004 compared to $1.1909 for the three months ended
          December 31, 2003

     o    Higher  advertising  epxenses  of $105,552  due to higher  sales based
          co-operative advertising

     o    Increased commission expense of $78,111 due to higher sales

The decrease in General and Administrative expenses of $11,312 was primarily due
to:

     o    Lower  executive  compensation  of  $45,000,   mainly  due  to  vacant
          Officer's position

     o    Lower  legal  fees  as a  result  of  completion  of  arbitration  and
          litigation of $33,778

     o    Higher Directors fees of $28,323

     o    Higher  consulting fees of $31,000 due to start of 404 Compliance work
          and Transfer Price study

Research and Development  expenses increased  $147,256.  The increase was mainly
due to

     o    Higher   compensation   $41,215   attributable  to  the  research  and
          development  facility in Taiwan,  which began operations  during March
          2004

     o    Higher compensation costs of $55,136 due to additional engineers

     o    Increased  prototype  production costs of $20,956 due to higher volume
          of new product and product enhancement programs

Other income (expense)

Net other  expense  for the three  months  ended  December  31,  2004 was $7,089
compared to net other expense of $9,594 for the three months ended  December 31,
2003 as detailed below:

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

Interest income                                  $  1,511           $  1,739
Foreign currency transaction gains (losses)        (8,600)           (11,333)
                                                 ---------          --------
Total other income  (expense)                    $ (7,089)          $ (9,594)
                                                 =========          ========


                                       20



<PAGE>

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

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
entity's functional currency,  excluding  inter-company  accounts which are long
term in nature,  need to be re-measured into the entity's  functional  currency,
and any gain or loss from this  re-measurement are included in the determination
of net income and are booked as a component  of other  income  (loss)  under the
description "foreign currency".

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 $1,074,910  recorded on the balance  sheet as of September 30, 2004.  For the
three months ended December 31 2004,  the Company  recorded on the balance sheet
deferred   translation  gains  $584,261  resulting  in  a  translation  gain  of
$1,659,171 recorded as a component of accumulated other comprehensive  income as
of December 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 $99,399 recorded on the balance sheet as of
September 30, 2004.  For the three months ended  December 31, 2004,  the Company
recorded,  as component of other comprehensive  income, a mark to market loss of
$279,791,  resulting in a mark to market loss of $379,190 for contracts  open as
of December 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

                                       21

<PAGE>

<TABLE>

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

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


                                       Balance as         October to  December       Balance  as of
Accumulated other comprehensive income
-------------------------------------- of Sept. 30, 2004  2004 Gains (losses)        December 31, 2004
                                       -----------------  -------------------        -----------------
<S>                                        <C>                    <C>                  <C>
Translation  gains                         $1,074,910             $584,261             $1,659,171
FAS 133 mark to market adjustments            (99,399)            (279,791)              (379,190)
                                               ------              -------                -------
                                             $975,511             $304,470             $1,279,981
                                           ==========             ========             ==========
</TABLE>

Tax provision

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


                                            Three months ended December 31,
                                               2004              2003
                                               ------            ------
Tax  attributable to U.S operations          $ 127,000         $ (73,300)
Tax  expense  European operations               41,000            40,779
State taxes                                     15,000             7,500
Net operating loss utilization                (127,000)           73,300
                                             ---------         ---------
Net tax provision                            $  56,000         $  48,279
                                             =========         =========

For the last five fiscal years, our domestic  operation has incurred losses.  We
analyzed  the future  realization  of our deferred tax assets as of December 31,
2004, and although our domestic operation reported a profit for the three months
ended  December  31,  2004,  due to the  seasonal  nature of the  business it is
uncertain at this time whether our domestic operation will have a profit for the
full year.  It light of this, we did not make any  adjustments  to our valuation
allowance for the quarter ended December 31, 2004.

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  $1,263,689,  for the three  months ended  December  31,  2004,  which
resulted in basic net income per share of $0.14 and diluted net income per share
of $0.13  on  weighted  average  basic  and  diluted  shares  of  9,277,944  and
9,949,381,  respectively,  compared  to a net income of  $992,860  for the three
months ended  December 31, 2003,  which resulted in basic and diluted net income
per share of $0.11 on weighted average basic and diluted shares of 8,880,651 and
9,370,081, respectively.

Options to purchase  98,757 and 485,337 shares of common stock at prices ranging
$5.25 to $10.06 and $2.81 and $10.06,  respectively,  were  outstanding  for the
three month periods ending  December 31, 2004 and 2003,  respectively,  but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.


                                       22

<PAGE>

Results of  operations-three  month period ended  December 31, 2004  compared to
December 31,2003-continued
--------------------------
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 65%, 68% and 73 % of sales for the
years ended September 30, 2004, 2003 and 2002,  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:

                               December 31, 2004             September 30, 2004
                              -----------------              ------------------
Cash                              $8,427,585                      $8,661,589
Working Capital                   15,481,792                      13,760,121
Stockholders' Equity              16,077,495                      14,327,425

The Company had cash and cash equivalents as of December 31, 2004 of $8,427,585,
a decrease of $234,004 from September 30, 2004.

The decrease  in cash was due to:

Sources of cash:
Net income adjusted for non cash items                             $1,318,013
Increase in accounts payable other current liabilities              1,942,135
Proceeds from employee stock purchases                                199,359
Less cash used for:
Increase in accounts receivable                                    (1,308,438)
Increase in inventories                                            (2,273,237)
Capital equipment purchases                                           (82,723)
Purchase of treasury stock                                            (17,448)
Increase in prepaid expenses and other current assets                 (11,665)
                                                                     ---------
Net cash  decrease
                                                                    $(234 004)
                                                                    ==========


                                       23

<PAGE>

<TABLE>

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

Net  cash of  $333,192  used in  operating  activities  was  primarily  due to a
increases  in accounts  receivable,  inventory  and prepaid  expenses  and other
current assets of $1,308,438 , $2,273,237 and $11,665 respectively,  and reflect
increases  required to support the  seasonal  high of our first  fiscal  quarter
sales.  These uses of cash was offset by net income  adjusted for non cash items
of $1,318,013 and increases in accounts payable and other current liabilities of
$1,942,135.

Cash of $82,723 and $17,448 was used to  purchase  fixed  assets and  repurchase
treasury  stock.  Proceeds  from the stock  purchased by  employees  through the
employee stock purchase plan provided additional cash of $199,359.

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 December 31, 2004, we held 572,067
treasury  shares  purchased  for  $1,601,761  at an  average  purchase  price of
approximately $2.80 per share.

We believe  that our cash and cash  equivalents  as of December 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 December 31 , 2004:

                                                              Payments due by period
<S>                                                         <C>        <C>         <C>  <C>
Contractual obligations                Total       Less than 1 year     1-3 years   3 to 5 years
-----------------------                -----       ----------------     ----------  ------------

Operating lease obligations      $ 1,631,875             $ 406,967    $ 1,179,908      $ 45,000
                                 ===========             =========    ===========      ========
</TABLE>

Critical Accounting Policies and Estimates

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



                                       24

<PAGE>

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

Critical Accounting Policies and Estimates-continued

     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 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.

Hedging program for sales denominated in a foreign currency

For each of the past three fiscal years,  over 60% of the  Company's  sales were
generated by our European subsidiary and were:

     o    Invoiced in local currency-primarily the Euro

     o    Collected in local currency-primarily the Euro


                                       25

<PAGE>

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

Critical Accounting Policies and  Estimates-continued  On the supply side, since
we  predominantly  deal with North  American  and Asian  suppliers  and contract
manufacturers,  approximately  75% of our  inventory  required  to  support  our
European sales are purchased and paid in U.S. Dollars.

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

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

We do not try to hedge against all possible foreign currency  exposures  because
of the  inherent  difficulty  in  estimating  the  volatility  of the Euro.  The
contracts  we  procure  are  specifically  entered  into to as a  hedge  against
forecasted  or  existing  or  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,  long term
strengthening  or  weakening  of the U.S.  dollar  against the Euro  impacts our
sales, our gross profit,  operating income and retained  earnings.  Factors that
could impact the effectiveness of our hedging program are:

     o    volatility of the currency markets

     o    availability of hedging instruments

     o    accuracy of our inventory forecasts

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

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".


                                       26

<PAGE>

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

Critical Accounting Policies and Estimates-continued

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.

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
--------------------------------

On December 15, 2004 , the Financial  Accounting Standards Board ("FASB") issued
a revised  SFAS No. 123R "Share  Based  Payment"  This  statement  requires  the
company to measure all employee  stock based  compensation,  such as the options
granted under the Company's  stock options plans,  using a fair value method and
to recognize such expense in our


                                       27

<PAGE>


Recent Accounting Pronouncements-continued
------------------------------------------

consolidated financial statements. The adoption of SFAS No. 123R will reduce the
Company's  net  income,  but will not  affect  the  Company's  cash  flows.  The
statement is effective for interim or annual  periods  beginning  after June 15,
2005.

The Company is evaluating the effect this statement will have on its operations.

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

For each of the past three fiscal years,  over 60 % of the Company's  sales were
generated   by  our   European   subsidiary   and  were:

     o    Invoiced in local currency-primarily the Euro

     o    Collected in local currency-primarily the Euro

On the supply side,  since we  predominantly  deal with North American and Asian
suppliers  and  contract  manufacturers,  approximately  75%  of  our  inventory
required to support our European sales are purchased and paid in U.S. Dollars.

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

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

We do not try to hedge against all possible foreign currency  exposures  because
of the  inherent  difficulty  in  estimating  the  volatility  of the Euro.  The
contracts  we  procure  are  specifically  entered  into to as a  hedge  against
forecasted  or  existing  or  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,  long term
strengthening  or  weakening  of the U.S.  dollar  against the Euro  impacts our
sales, our gross profit,  operating income and retained  earnings.  Factors that
could impact the effectiveness of our hedging program are:


                                       28

<PAGE>

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

Derivatives and Hedging Activities-continued

     o    volatility of the currency markets

     o    availability of hedging instruments

     o    accuracy of our inventory forecasts

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

As of December  31,  2004,  we had foreign  currency  contracts  outstanding  of
approximately  $5,316,000 against the delivery of the Euro. The contracts expire
through May 2005. 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
loss of $279,791 for the three months  ended  December 31, 2004.  As of December
31, 2004, a deferred loss of $379,190,  reflecting the cumulative mark to market
loss of our  derivatives,  was  recorded on our balance  sheet as a component of
accumulated other comprehensive income in our equity section.

We use the average monthly forward contract  exchange rate to translate our Euro
denominated sales into our U.S. dollar reporting  currency.  For the three month
period  ending  December  31,  2004,  the use of the monthly  average  spot rate
instead of the average  monthly  forward  contract  exchange  rate to value Euro
denominated sales would have resulted in an increase in sales of $640,815.  This
sales  increase is related to our contracts that closed during these periods and
the changes in the fair value of our derivative  contracts.  For the three month
period  ending  December  31,  2003,  the use of the monthly  average  spot rate
instead of the average  monthly  forward  contract  exchange  rate to value Euro
denominated sales would have resulted in a sales increase of $805,553.

Item 4. Controls and Procedures
-------------------------------

Our Chief Executive  Officer and Chief Financial Officer conducted an evaluation
of the  effectiveness of our disclosure  controls and procedures.  Based on this
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that our disclosure  controls and  procedures  were effective as of December 31,
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 December 31, 2004
that has materially affected,  or is reasonably likely to materially affect, our
internal control over financial reporting.



                                       29

<PAGE>

<TABLE>

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,  2004),  many of which are  beyond our  control,  that may
influence  the accuracy of the  statements  and the  projections  upon which the
statements are based.  Any one or more of these  uncertainties,  risks and other
influences could materially affect our results of operations and whether forward
looking  statements  made by us  ultimately  prove to be  accurate.  Our  actual
results,  performance  and  achievements  could  differ  materially  from  those
expressed  or implied  in these  forward-looking  statements.  We  undertake  no
obligation to publicly update or revise any forward-looking statements,  whether
from new information, future events or otherwise.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table  below  summarized  repurchases  of our common  stock  under our stock
repurchase program:

                                                                                                        Maximum
                                                                                 Total Number            Number
                                                  Total          Average           of Shares            of Shares
                                                 Number           Price           Purchased as         that May Yet
                                                of Shares        Paid per       Part of Publicly       Be Purchased
                  Period                        Purchased         Share          Announced Plan       Under the Plan
                  ------                        ---------         -----          --------------       --------------
<S>                        <C> <C>                <C>            <C>                <C>                  <C>
Purchases as of  September 30, 2004               567,067        $ 2.79             567,067              282,933
October  1 to October 31                            5,000          3.49               5,000              277,933
                                                   -----           ----               -----              -------
Purchases as of  December 31, 2004                572,067        $ 2.80             572,067              277,933

</TABLE>

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



                                       30

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

Exhibits

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

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

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

(b) Reports on form 8-K
None






                                       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:  February 14, 2005             By    /s/ Kenneth Plotkin
       ------------------                  -------------------------------------
                                           KENNETH PLOTKIN
                                           Chief Executive Officer and Director


Date:  February 14, 2005              By   /s/ Gerald Tucciarone
       -----------------                   -------------------------------------
                                           GERALD TUCCIARONE
                                           Treasurer and Chief
                                           Financial Officer


                                       32