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  June
30,  2009





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.
      Employerincorporation
      or organization)
              Identification
      No.)





91 Cabot Court, Hauppauge,
New York  11788


(Address
of principal executive offices)





(631)
434-1600


(Registrant’s
telephone  number, including area code)





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





x
YES           ̈
NO





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T ('
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).





 ̈
YES             ̈
NO





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





 ̈  LARGE
      ACCELERATED FILER
             ̈
      ACCELERATED  FILER ̈
      NON-ACCELERATED FILER
            x
      SMALLER REPORTING COMPANY(Do
      not check if a smaller reporting company)





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





 ̈
YES              x
NO





As
of   July 29, 2009, 10,054,463 shares of .01 par value Common
Stock of the issuer were outstanding.







HAUPPAUGE DIGITAL INC. AND
SUBSIDIARIES




INDEX





Page no.PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
                              4Consolidated
      Balance Sheets –
                                June
      30, 2009 (unaudited) and September 30, 2008
                              4Consolidated
      Statements of Operations -
                                Three  Months
      ended  June 30,  2009 (unaudited) and
      2008  (unaudited)
                              5Consolidated
      Statements of Operations -
                                Nine  Months
      ended  June 30,  2009 (unaudited) and
      2008  (unaudited)
                              6Consolidated
      Statements of Other Comprehensive Loss
                                Three  Months
      and Nine Months  ended  June 30,  2009
      (unaudited)  and 2008  (unaudited)
                              7Consolidated
      Statements of Cash Flows-Nine Months ended June 30, 2009 (unaudited) and
      2008 (unaudited)
                              8Notes
      to Consolidated Financial Statements
                              9-17Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                              18-25Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                              25-26Item  4T.
      Controls and Procedures
                              26




2


PART II.  OTHER
      INFORMATIONItem
      1. Legal Proceedings
                27Item
      1A.  Risk Factors
                27Item  2.  Unregistered
      Sales of Equity Securities and Use of Proceeds
                27Item
      6. Exhibits
                27-28Signatures
                29


3


PART I. FINANCIAL
INFORMATION




Item
1. Financial Statements


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





June
      30,
                                    2009
                                    (unaudited)
                                  
                                  
                                  September
      30 ,
                                    2008Assets:Cash
      and cash  equivalents
                                  
                                  $
                                  9,033,115
                                  
                                  
                                  $
                                  14,191,721Trade
      receivables, net of  various allowances
                                  
                                  
                                  7,147,085
                                  
                                  
                                  
                                  6,932,400Other
      non trade receivables
                                  
                                  
                                  3,288,182
                                  
                                  
                                  
                                  2,316,057Inventories
                                  
                                  
                                  9,934,266
                                  
                                  
                                  
                                  12,236,166Deferred
      tax asset-current
                                  
                                  
                                  1,133,073
                                  
                                  
                                  
                                  1,133,073Prepaid
      expenses and other current assets
                                  
                                  
                                  1,112,100
                                  
                                  
                                  
                                  1,093,406Total
      current assets
                                  
                                  
                                  31,647,821
                                  
                                  
                                  
                                  37,902,823Intangible
      assets, net of amortization
                                  
                                  
                                  4,884,811
                                  
                                  
                                  
                                  -Property,
      plant and equipment, net
                                  
                                  
                                  818,144
                                  
                                  
                                  
                                  769,288Security
      deposits and other non current assets
                                  
                                  
                                  108,070
                                  
                                  
                                  
                                  102,227Deferred
      tax asset-non current
                                  
                                  
                                  887,611
                                  
                                  
                                  
                                  887,611Total
      assets
                                  
                                  $
                                  38,346,457
                                  
                                  
                                  $
                                  39,661,949Liabilities
      and  Stockholders’  Equity:Current
      Liabilities:Accounts
      payable
                                  
                                  $
                                  9,262,165
                                  
                                  
                                  $
                                  10,406,836Accrued
      expenses – fees
                                  
                                  
                                  10,567,740
                                  
                                  
                                  
                                  7,952,244Accrued
      expenses – other
                                  
                                  
                                  3,342,408
                                  
                                  
                                  
                                  2,256,099Note
      payable
                                  
                                  
                                  1,250,045
                                  
                                  
                                  
                                  -Income
      taxes payable
                                  
                                  
                                  119,854
                                  
                                  
                                  
                                  58,234Total
      current  liabilities
                                  
                                  
                                  24,542,212
                                  
                                  
                                  
                                  20,673,413Stockholders'
      Equity:Common
      stock, $.01 par value; 25,000,000 shares authorized,10,808,775  and
      10,784,717  issued, respectively
                                  
                                  
                                  108,087
                                  
                                  
                                  
                                  107,847Additional
      paid-in capital
                                  
                                  
                                  17,135,030
                                  
                                  
                                  
                                  16,709,201Retained
      earnings
                                  
                                  
                                  2,346,930
                                  
                                  
                                  
                                  7,938,695Accumulated
      other comprehensive loss
                                  
                                  
                                  (3,381,465
                                  )
                                  
                                  
                                  (3,362,870
                                  )Treasury
      Stock, at cost, 759,579 shares
                                  
                                  
                                  (2,404,337
                                  )
                                  
                                  
                                  (2,404,337
                                  )Total
      stockholders' equity
                                  
                                  
                                  13,804,245
                                  
                                  
                                  
                                  18,988,536Total  liabilities
      and  stockholders' equity
                                  
                                  $
                                  38,346,457
                                  
                                  
                                  $
                                  39,661,949





See accompanying notes to
consolidated financial statements


4





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three months ended June 30,2009
                                  
                                  
                                  2008Net
      sales
                                  
                                  $
                                  13,067,124
                                  
                                  
                                  $
                                  19,415,731Cost  of
      sales
                                  
                                  
                                  9,845,438
                                  
                                  
                                  
                                  15,568,094Gross
      profit
                                  
                                  
                                  3,221,686
                                  
                                  
                                  
                                  3,847,637Selling,
      general and  administrative expenses
                                  
                                  
                                  3,954,536
                                  
                                  
                                  
                                  3,997,595Research
      and development expenses
                                  
                                  
                                  1,122,911
                                  
                                  
                                  
                                  966,690Loss  from
      operations
                                  
                                  
                                  (1,855,761
                                  )
                                  
                                  
                                  (1,116,648
                                  )Other  income
      (expense):Interest  income
                                  
                                  
                                  1,707
                                  
                                  
                                  
                                  11,816Interest
      expense
                                  
                                  
                                  (20,832
                                  )
                                  
                                  
                                  -Foreign
      currency  gain
                                  
                                  
                                  25,532
                                  
                                  
                                  
                                  15,823Total  other
      income
                                  
                                  
                                  6,407
                                  
                                  
                                  
                                  27,639Loss
      before taxes
                                  
                                  
                                  (1,849,354
                                  )
                                  
                                  
                                  (1,089,009
                                  )Tax  provision
                                  
                                  
                                  38,028
                                  
                                  
                                  
                                  28,554Net
      loss
                                  
                                  $
                                  (1,887,382
                                  )
                                  
                                  $
                                  (1,117,563
                                  )Net  loss  per
      share:Basic
                                  
                                  $
                                  (0.19
                                  )
                                  
                                  $
                                  (0.11
                                  )Diluted
                                  
                                  $
                                  (0.19
                                  )
                                  
                                  $
                                  (0.11
                                  )





See
accompanying notes to consolidated financial statements


5








HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Nine months ended June 30,2009
                              
                              
                              2008Net
      sales
                              
                              $
                              43,089,233
                              
                              
                              $
                              73,975,884Cost  of
      sales
                              
                              
                              34,305,007
                              
                              
                              
                              58,647,765Gross
      profit
                              
                              
                              8,784,226
                              
                              
                              
                              15,328,119Selling,
      general and  administrative expenses
                              
                              
                              11,655,103
                              
                              
                              
                              12,500,452Research
      and development expenses
                              
                              
                              3,236,401
                              
                              
                              
                              2,859,386Loss  from
      operations
                              
                              
                              (6,107,278
                              )
                              
                              
                              (31,719
                              )Other  income
      (expense):Interest  income
                              
                              
                              11,332
                              
                              
                              
                              28,633Interest
      expense
                              
                              
                              (49,478
                              )
                              
                              
                              -Foreign
      currency  gain (loss)
                              
                              
                              669,209
                              
                              
                              
                              (16,130
                              )Total
      other income
                              
                              
                              631,063
                              
                              
                              
                              12,503Loss
      before taxes
                              
                              
                              (5,476,215
                              )
                              
                              
                              (19,216
                              )Tax  provision
                              
                              
                              115,550
                              
                              
                              
                              160,437Net
      loss
                              
                              $
                              (5,591,765
                              )
                              
                              $
                              (179,653
                              )Net
      loss  per share:Basic
                              
                              $
                              (0.56
                              )
                              
                              $
                              (0.02
                              )Diluted
                              
                              $
                              (0.56
                              )
                              
                              $
                              (0.02
                              )





See
accompanying notes to consolidated financial statements


6





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OTHER  COMPREHENSIVE LOSS


(UNAUDITED)





Three months ended June 30,2009
                
                
                2008Net
      loss
                
                $
                (1,887,382
                )
                
                $
                (1,117,563
                )Foreign
      currency translation gain ( loss)
                
                
                494,085
                
                
                
                (336,577
                )Forward
      exchange contracts marked to market (loss) gain
                
                
                (57,808
                )
                
                
                128,327Other  comprehensive
      loss
                
                $
                (1,451,105
                )
                
                $
                (1,325,813
                )





Nine months ended June 30,2009
                    
                    
                    2008Net
      loss
                    
                    $
                    (5,591,765
                    )
                    
                    $
                    (179,653
                    )Foreign
      currency translation gain  (loss)
                    
                    
                    1,449
                    
                    
                    
                    (462,344
                    )Forward
      exchange contracts marked to market gain (loss)
                    
                    
                    (20,134
                    )
                    
                    
                    81,503Other  comprehensive  loss
                    
                    $
                    (5,610,450
                    )
                    
                    $
                    (560,494
                    )





See
accompanying notes to consolidated financial statements


7





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine months ended June 30,2009
                    
                    
                    2008Net
      loss
                    
                    $
                    (5,591,765
                    )
                    
                    $
                    (179,653
                    )Adjustments
      to reconcile net loss to net cash (used in) provided
      by operating activities:Depreciation
      and amortization
                    
                    
                    584,012
                    
                    
                    
                    196,499Inventory
      reserve
                    
                    
                    -
                    
                    
                    
                    650,000Bad
      debt expense
                    
                    
                    -
                    
                    
                    
                    120,000Stock
      based  compensation expense
                    
                    
                    401,936
                    
                    
                    
                    543,537Other
      non cash items
                    
                    
                    (5,800
                    )
                    
                    
                    7,737Changes
      in current assets and liabilities, net of effects of
      acquisition:Accounts
      receivable
                    
                    
                    (1,186,810
                    )
                    
                    
                    10,966,426Inventories
                    
                    
                    2,301,900
                    
                    
                    
                    1,204,545Prepaid
      expenses and other current assets
                    
                    
                    (18,694
                    )
                    
                    
                    (430,391
                    )Accounts
      payable
                    
                    
                    (1,236,820
                    )
                    
                    
                    (12,751,795
                    )Accrued
      expenses  and other current liabilities
                    
                    
                    3,356,714
                    
                    
                    
                    695,098Total
      adjustments
                    
                    
                    4,196,438
                    
                    
                    
                    1,201,656Net
      cash (used in) provided by operating activities
                    
                    
                    (1,395,327
                    )
                    
                    
                    1,022,003Cash
      Flows From Investing Activities:PCTV
      acquisition
                    
                    
                    (2,490,500
                    )
                    
                    
                    -Purchases
      of property, plant and equipment
                    
                    
                    (28,319
                    )
                    
                    
                    (237,896
                    )Net
      cash used in investing activities
                    
                    
                    (2,518,819
                    )
                    
                    
                    (237,896
                    )Cash
      Flows From Financing Activities:Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (40,832
                    )Payments  on
      note payable
                    
                    
                    (1,249,998
                    )
                    
                    
                    -Proceeds
      from the exercise of stock options and employee  stock
      purchases
                    
                    
                    24,133
                    
                    
                    
                    282,925Net  cash
      (used in)  provided by  financing
      activities
                    
                    
                    (1,225,865
                    )
                    
                    
                    242,093Effect
      of exchange rates on cash
                    
                    
                    (18,595
                    )
                    
                    
                    (380,841
                    )Net  (decrease)
      increase  in cash and cash equivalents
                    
                    
                    (5,158,606
                    )
                    
                    
                    645,359Cash
      and cash equivalents, beginning of period
                    
                    
                    14,191,721
                    
                    
                    
                    11,581,657Cash
      and cash equivalents, end of period
                    
                    $
                    9,033,115
                    
                    
                    $
                    12,227,016Supplemental
      disclosures:Interest
      paid
                    
                    $
                    49,478
                    
                    
                    $
                    -Income
      taxes paid
                    
                    $
                    54,288
                    
                    
                    $
                    241,338Note
      payable to Avid Technology, Inc.
                    
                    $
                    2,500,000
                    
                    
                    $
                    -





See accompanying notes to consolidated
financial statements


8


HAUPPAUGE DIGITAL, INC. AND
SUBSIDIARIES


NOTES
TO  CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Note
1.  Basis of  Presentation





The
accompanying unaudited consolidated financial statements for Hauppauge Digital
Inc. and subsidiaries (collectively, the “Company”) included herein have been
prepared in accordance with generally accepted accounting principles for interim
period reporting in conjunction with the instructions to Form 10-Q. Accordingly,
these statements do not include all of the information required
by  generally accepted accounting principles for annual financial
statements.  In the opinion of management, all known adjustments
(consisting of normal recurring accruals and reserves) necessary to present
fairly the Company’s consolidated financial position,  results of
operations and cash flows as of and for the interim periods have been
included.  It is suggested that these interim statements be read in
conjunction with the financial statements and related notes included in the
Company's September 30, 2008 Form 10-K.





The
operating results for the three months and nine months ended  June 30,
2009  are not necessarily indicative of the results to be expected for
the September 30, 2009 year end.





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





Subsequent
events have been evaluated by Management after the balance sheet date through
the financial statement issuance date for appropriate accounting and
disclosure.




Note
2.  Trade Accounts and Other Non-Trade Receivables




Trade
receivables consist of:




·
            Trade
      receivables from sales to customers




·
            Allowances,
      consisting of sales and bad debt




Other non
trade receivables consist of :




·
            Receivables
      pertaining to component parts purchased from the Company at cost by the
      Company’s  contract manufacturers which are excluded from
      sales




·
            General
      services tax (GST) and value added tax (VAT) reclaimable on goods
      purchased by the Company’s Asian and European
  locations




·
            Other
      minor non-trade receivables




Trade
receivables  and other non-trade receivables as of  June 30,
2009 and September 30, 2008 consisted of :


9


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





June 30,
                      
                      
                      September 30,2009
                      
                      
                      2008Trade
      receivables
                      
                      $
                      11,235,305
                      
                      
                      $
                      11,668,214Allowances
      and reserves
                      
                      
                      (4,088,220
                      )
                      
                      
                      (4,735,814
                      )Total
      trade receivables
                      
                      
                      7,147,085
                      
                      
                      
                      6,932,400Receivable
      from contract manufacturers
                      
                      
                      2,393,436
                      
                      
                      
                      1,795,225GST
      and VAT taxes receivables
                      
                      
                      763,203
                      
                      
                      
                      484,086Other
                      
                      
                      131,543
                      
                      
                      
                      36,746Total
      non trade receivables
                      
                      $
                      3,288,182
                      
                      
                      $
                      2,316,057




Note
3.  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:





June 30,
                    
                    
                    September 30,2009
                    
                    
                    2008Component
      parts
                    
                    $
                    3,657,763
                    
                    
                    $
                    4,561,140Finished
      goods
                    
                    
                    6,276,503
                    
                    
                    
                    7,675,026$
                    9,934,266
                    
                    
                    $
                    12,236,166




Note
4.  Net Income (Loss) Per  Share





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





Three months ended
                        
                        
                        Nine months endedJune 30,
                        
                        
                        June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Weighted
      average shares outstanding-basic
                        
                        
                        10,048,771
                        
                        
                        
                        10,018,152
                        
                        
                        
                        10,042,546
                        
                        
                        
                        9,951,552Number
      of shares issued on the assumedexercise
      of  stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average shares outstanding-diluted
                        
                        
                        10,048,771
                        
                        
                        
                        10,018,152
                        
                        
                        
                        10,042,546
                        
                        
                        
                        9,951,552





Options
to purchase 1,522,394  and 1,767,744 shares of common
stock,  at  prices for both periods ranging
from  $1.05 to $8.75,  were outstanding for the three months
ended June 30, 2009 and 2008, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.


10


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO  CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Options
to purchase 1,522,394  and 1,767,744 shares of common
stock  at  prices for both periods ranging
from  $1.05 to $8.75, respectively,  were outstanding for
the nine months ended June 30, 2009 and 2008, respectively, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive.




Note
5.  Accumulated  Other Comprehensive Loss





Accumulated
other comprehensive loss consists of two components: translation
gains  and losses  and FAS 133 mark to market gains and
losses  on the Company’s open foreign exchange contracts. As of June 30,
2009,  appearing in the equity section under  “ Accumulated
other  comprehensive loss” was a  loss
of  $3,381,465, which consisted of a deferred translation loss of
$3,344,876 and a deferred loss of $36,589 due to the mark to market differences
between the value of  the Company’s open forward
exchange  contracts at the contract rates versus the same contracts
valued at the period ending forward rate.





The table
below  details the gains and losses  that make up the
accumulated other  comprehensive  loss  on the
Company’s balance sheet as of  June 30, 2009:





Accumulatedothercomprehensiveloss
                      
                      Balance as of
                      
                      
                      Oct 08 to June 09
                      
                      
                      Balance as ofFiscal2009activity
                      
                      Sept30,2008
                      
                      
                      gains (losses)
                      
                      
                      June30,2009Translation
      gain (losses)
                      
                      $
                      (3,346,325
                      )
                      
                      $
                      1,449
                      
                      
                      $
                      (3,344,876
                      )FAS
      133 mark to market loss
                      
                      
                      (16,545
                      )
                      
                      
                      (20,044
                      )
                      
                      
                      (36,589
                      )$
                      (3,362,870
                      )
                      
                      $
                      (18,595
                      )
                      
                      $
                      (3,381,465
                      )




Note
6. Revenue recognition





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





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


11


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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





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




Note
7.  Product segment and geographic information





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





The
Company’s products fall under three product categories:





·
            Analog
      TV tuner boards


·
            Digital  TV
      tuner, and combination analog and digital TV tuner,
  boards


·
            Other
      non-TV tuner products





The
Company’s Analog TV tuner products are TV tuner modules which can be added to a
PC and enable a PC user, among other things, to watch and record analog cable TV
in a resizable window on a PC.





The
Company’s digital TV and combination analog and digital tuner products are TV
tuner modules which enable  a PC user, among other things, to watch
and record analog cable TV and digital TV in a resizable window on a
PC.





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


12





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Sales by
functional category are as follows:





Three months ended June 30,
                  
                  
                  Nine months ended June 30,Product line sales
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Analog
      TV tuner products
                  
                  $
                  336,030
                  
                  
                  $
                  1,000,041
                  
                  
                  $
                  2,380,493
                  
                  
                  $
                  7,146,937Digital
      and combination analog and  digital TV tuner
      products
                  
                  
                  11,841,827
                  
                  
                  
                  17,180,626
                  
                  
                  
                  37,447,228
                  
                  
                  
                  64,071,903Other
      non-TV tuner products
                  
                  
                  889,267
                  
                  
                  
                  1,235,064
                  
                  
                  
                  3,261,512
                  
                  
                  
                  2,757,044Total
      sales
                  
                  $
                  13,067,124
                  
                  
                  $
                  19,415,731
                  
                  
                  $
                  43,089,233
                  
                  
                  $
                  73,975,884





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





Three months ended June 30,
                    
                    
                    Nine months ended June 30,Geographicregion
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008The
      Americas
                    
                    
                    53
                    %
                    
                    
                    42
                    %
                    
                    
                    50
                    %
                    
                    
                    48
                    %Europe
                    
                    
                    44
                    %
                    
                    
                    54
                    %
                    
                    
                    47
                    %
                    
                    
                    49
                    %Asia
                    
                    
                    3
                    %
                    
                    
                    4
                    %
                    
                    
                    3
                    %
                    
                    
                    3
                    %Total
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





Note
8. Tax provision





The
Company’s tax provision for the three  months and nine months
ended  June 30, 2009 and 2008 is as follows:





Three months ended June 30,
                  
                  
                  Nine months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Tax  expense
      on international operations
                  
                  $
                  28,028
                  
                  
                  $
                  28,554
                  
                  
                  $
                  85,550
                  
                  
                  
                  143,437State
      taxes
                  
                  
                  10,000
                  
                  
                  
                  -
                  
                  
                  
                  30,000
                  
                  
                  
                  17,000Tax
      provision
                  
                  $
                  38,028
                  
                  
                  $
                  28,554
                  
                  
                  $
                  115,550
                  
                  
                  $
                  160,437


13


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
9. Fair Value Measurements





The
Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) on October 1, 2008. SFAS No. 157 defines fair value,
establishes a methodology for measuring fair value, and expands the required
disclosure for fair value measurements. On February 12, 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position No. SFAS 157-2,
“Effective Date of FASB Statement No. 157,” which amends SFAS No. 157
by delaying its effective date by one year for non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis.  The
adoption of SFAS No. 157 for the Company’s financial assets and financial
liabilities did not have a material impact on its consolidated financial
statements.  At June 30, 2009  the Company had forward
contracts whose fair value at quarter end was determined via inputs that
included quoted prices for similar foreign exchange contracts in active markets
and were thus considered to be Level 2 inputs under the SFAS 157 hierarchy (see
Note 5).  Effective October 1, 2009, SFAS No. 157 will also apply
to all other fair value measurements for the Company.  The Company is
evaluating the effect the implementation of SFAS No. 157
will have on its non-financial assets and non-financial liabilities on its
consolidated financial statements.




The
carrying amount of cash, accounts receivables and accounts payables and other
short-term financial instruments approximate their fair value due to their
short-term nature.  The Company believes that borrowings outstanding under
its note payable approximate fair value due to the short-term duration of the
loan.





Note
10. Acquisition of PCTV assets from Avid Technology, Inc.





Effective
December 24, 2008, pursuant to an Asset Purchase Agreement, dated as of October
25, 2008, as amended by that certain Amendment No. 1 to the Asset Purchase
Agreement (the “Amendment”) (together with the Amendment, the “Asset Purchase
Agreement”), PCTV Systems, Sarl, a Luxembourg company (“Buyer”)
and  the Company’s  wholly-owned
subsidiary,  acquired certain assets and properties (the “Acquired
Assets”) of Avid Technology, Inc. (“Avid”), a Delaware corporation, Pinnacle
Systems, Inc., a California corporation (“Pinnacle”), Avid Technology GmbH, a
limited liability company organized under the laws of Germany, Avid Development
GmbH, a limited liability company organized under the laws of Germany, and Avid
Technology International BV (collectively, the “Sellers”).  The
Acquired Assets were used by the Sellers in the business of, among other things,
the development, manufacture and sale of personal devices containing a
television tuner for receiving over-the-air, satellite and/or cable television
signals that are used in conjunction with personal computers for personal
television viewing.   The potential  increase in the
Company’s customer base,  the potential  absorption of the
PCTV operations into the existing Hauppauge infrastructure with minimal
incremental costs  plus  the acquisition  of the
seller’s technology, reference designs  and product
line  were among the attributes that were considered in
the  Company’s decision to complete the acquisition.


14


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





The
purchase price consisted of $2,238,000 payable in cash; $2,500,000 payable
pursuant to Promissory Note, dated December 24, 2008, made payable by the Buyer
to Avid (the “Note”) and the assumption of certain liabilities.  The
principal amount due pursuant to the Note is payable in 12 equal monthly
installments of $208,333. The first such payment was due and paid on January 24,
2009.   Interest on the outstanding principal amount of the Note
is payable at a rate equal to (i) from December 24, 2008 until the Maturity Date
(as defined in the Note), five percent (5%), (ii) from and after the Maturity
Date, or during the continuance of an Event of Default (as defined in the Note),
at seven percent (7%).  Pursuant to the terms of the Note, the Buyer
and its affiliates are prohibited from (i) declaring or paying any cash
dividend, or making a distribution on, repurchasing, or redeeming, any class of
stock or other equity or ownership interest in the Buyer or its affiliates, (ii)
selling, leasing, transferring or otherwise disposing of any assets or property
of the Buyer or any of its affiliates, or attempting to or contracting to do so,
other than (a) the sale of inventory in the ordinary course of business
and consistent with past practice, (b) the granting of non-exclusive licenses of
intellectual property in the ordinary course of business and consistent with
past practice and (c) the sale, lease, transfer or disposition of any assets or
property (other than the Acquired Assets) with a value not to exceed $500,000 in
the aggregate, or (iii) dissolving or liquidating, or merging or consolidating
with any other entity, or acquiring all or substantially all of the stock or
assets of any other entity. As of  June 30,
2009,  the  note payable to Avid Technologies Inc. was
$1,250,045. The interest paid on the note was $49,478 for nine months ended June
30, 2009.





The
following allocation of the purchase price and the estimated transaction costs
are preliminary and based on information available to the Company’s management
at the time the  consolidated financial statements were
prepared.  Accordingly, the allocation is subject to change and the
impact of such changes could be material:





Purchase Price PaidCash
      paid to seller at closing
                        
                        $
                        2,238,000Notes
      payable assumed
                        
                        
                        2,500,000Warranty
      liability assumed
                        
                        
                        262,000Direct
      acquisition costs
                        
                        
                        489,060Total
      purchase price
                        
                        $
                        5,489,060Allocation of Purchase
PriceIdentifiable
      intangible assets
                        
                        $
                        5,261,929Fixed
      assets
                        
                        
                        227,131Total
      allocation of purchase price
                        
                        $
                        5,489,060





The
values allocated to identifiable intangible assets in the acquisition are
expected to be deductible for income tax purposes.





Because  the
acquisition was completed on December 24, 2008,  results from the
operations of the PCTV business effectively started on January 1,
2009.   On the Company’s  June 30,
2009  balance sheet the acquisition was recorded by allocating the
purchase price to the assets acquired, including intangible assets such as
customer lists, technology and reference designs,  based on a
purchase  price allocation  provided by an independent
business valuation company.





The
following unaudited pro forma results assume the acquisition occurred on October
1, 2007.  The pro forma results do not purport to represent what the
Company’s results of operations actually would have been if the transactions set
forth above had occurred on the date indicated or what the Company’s results of
operations will be in future periods.  The financial results for the
periods prior to the acquisition were based on internal financial statements as
provided by the Sellers.


15





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Three months
                  
                  
                  Nine months
                  
                  
                  Nine monthsended
                  
                  
                  ended
                  
                  
                  endedJune 30,
                  
                  
                  June 30,
                  
                  
                  June 30,Proformastatements:
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
                  
                  $
                  30,438,731
                  
                  
                  $
                  54,112,223
                  
                  
                  $
                  107,044,884Net  loss
                  
                  $
                  (2,985,563
                  )
                  
                  $
                  (6,289,775
                  )
                  
                  $
                  (5,783,653
                  )Net  loss
      per shareBasic
      net loss per share
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.63
                  )
                  
                  $
                  (0.58
                  )Diluted
      net loss per share
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.63
                  )
                  
                  $
                  (0.58
                  )





In
connection with the transactions contemplated by the Asset Purchase Agreement,
the Buyer, Hauppauge Digital Europe Sarl (“HDES”), and Hauppauge Computer Works,
Inc. (“HCW”), each a wholly-owned subsidiary of the Company (collectively, the
“Subsidiaries”) and the Sellers entered into a Transition Services Agreement,
dated December 24, 2008 (the “TSA”), pursuant to which, among other things, the
parties agreed to provide each other with certain services relating to
infrastructure and systems, order processing and related matters and systems
transition and related matters (the “Services”), as set forth in detail in the
TSA.  The fees for such Services are set forth in the
TSA.  The term of the TSA shall be until the earlier to occur of (i)
18 months following the Closing or (ii) termination of the last of the Services
to be provided pursuant to the TSA.  The TSA may be terminated by the
Subsidiaries at any time upon thirty (30) days prior written notice to the
Sellers and may be terminated with respect to any particular Service to be
provided pursuant to the TSA upon ten (10) days prior written notice to
Seller.





Further,
Avid and  Avid Technology International BV (collectively, the
“Consignor”), and HCW and HDES (collectively, the “Consignee”) entered into an
Inventory and Product Return Agreement, dated December 24, 2008 (the “Inventory
Agreement”).  Pursuant to the terms of the Inventory Agreement, the
Consignor is obligated to deliver the Consigned Inventory (as defined in the
Inventory Agreement) to the Consignee and the Consignee is obligated to, as
applicable, fill orders from products held as Consigned Inventory before filling
any such orders with products or inventory other than the Consigned
Inventory.  Upon the sale of Consigned Inventory by the Consignee, the
Consignee has agreed to pay the Consignor for such Consigned Inventory as
follows: (i) if Consignee sells Consigned Inventory for a price equal to or
greater than Consignor’s Cost (as defined in the Inventory Agreement) for such
Consigned Inventory, then Consignee has agreed to pay Consignor an amount equal
to one hundred percent (100%) of the Consignor Cost for such Consigned
Inventory; or (ii) if Consignee sells Consigned Inventory for a price less than
the Consignor Cost for such Consigned Inventory, then Consignee has agreed to
pay Consignor an amount equal to eighty percent (80%) of the sales price for
such Consigned Inventory.  The term of the Inventory Agreement expires
18 months from the date of execution.


16





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





In
connection with the transactions contemplated by the Asset Purchase Agreement,
Avid, Pinnacle and the Buyer also entered into an Intellectual Property License
Agreement, dated December 24, 2008 (the “IP Agreement”).  Pursuant to
the terms of the IP Agreement, Avid and Pinnacle have granted the Buyer certain
irrevocable, personal, non-exclusive, worldwide, fully paid, royalty-free and
non-transferable licenses to certain copyrights and other intellectual property
rights owned by Avid, Pinnacle and their respective subsidiaries, subject to
certain termination provisions as set forth in the IP
Agreement.


17


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




THREE MONTH PERIOD  ENDED
JUNE 30 2009 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2008





Results
of operations for the three months ended  June 30, 2009 compared to
June 30, 2008 are as follows:





Three
                    
                    
                    ThreeMonths
                    
                    
                    MonthsEnded
                    
                    
                    Ended
                    
                    
                    Variance
                    
                    
                    Percentage of sales6/30/09
                    
                    
                    6//30/08
                    
                    
                    $
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    VarianceNet
      sales
                    
                    $
                    13,067,124
                    
                    
                    $
                    19,415,731
                    
                    
                    $
                    (6,348,607
                    )
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %
                    
                    
                    -Cost
      of sales
                    
                    
                    9,845,438
                    
                    
                    
                    15,568,094
                    
                    
                    
                    (5,722,656
                    )
                    
                    
                    75.35
                    %
                    
                    
                    80.18
                    %
                    
                    
                    -4.83
                    %Gross
      profit
                    
                    
                    3,221,686
                    
                    
                    
                    3,847,637
                    
                    
                    
                    (625,951
                    )
                    
                    
                    24.65
                    %
                    
                    
                    19.82
                    %
                    
                    
                    4.83
                    %Gross
      profit %
                    
                    
                    24.65
                    %
                    
                    
                    19.82
                    %
                    
                    
                    4.83
                    %Selling,
      general and administrative expenses:Sales
      and marketing
                    
                    
                    2,753,296
                    
                    
                    
                    2,776,622
                    
                    
                    
                    (23,326
                    )
                    
                    
                    21.07
                    %
                    
                    
                    14.30
                    %
                    
                    
                    6.77
                    %Technical
      support
                    
                    
                    127,922
                    
                    
                    
                    131,393
                    
                    
                    
                    (3,471
                    )
                    
                    
                    0.98
                    %
                    
                    
                    0.68
                    %
                    
                    
                    0.30
                    %General  and
      administrative
                    
                    
                    796,503
                    
                    
                    
                    994,339
                    
                    
                    
                    (197,836
                    )
                    
                    
                    6.11
                    %
                    
                    
                    5.12
                    %
                    
                    
                    0.99
                    %Amortization
      of intangible assets
                    
                    
                    188,709
                    
                    
                    
                    -
                    
                    
                    
                    188,709
                    
                    
                    
                    1.45
                    %
                    
                    
                    0.00
                    %
                    
                    
                    1.45
                    %Stock
      compensation
                    
                    
                    88,106
                    
                    
                    
                    95,241
                    
                    
                    
                    (7,135
                    )
                    
                    
                    0.68
                    %
                    
                    
                    0.49
                    %
                    
                    
                    0.19
                    %Total
      selling, general and administrative expenses
                    
                    
                    3,954,536
                    
                    
                    
                    3,997,595
                    
                    
                    
                    (43,059
                    )
                    
                    
                    30.29
                    %
                    
                    
                    20.59
                    %
                    
                    
                    9.70
                    %Research
      and development expenses
                    
                    
                    1,074,268
                    
                    
                    
                    922,752
                    
                    
                    
                    151,516
                    
                    
                    
                    8.22
                    %
                    
                    
                    4.75
                    %
                    
                    
                    3.47
                    %Research
      & development  stock compensation
                    
                    
                    48,643
                    
                    
                    
                    43,938
                    
                    
                    
                    4,705
                    
                    
                    
                    0.36
                    %
                    
                    
                    0.24
                    %
                    
                    
                    0.12
                    %Total
      expenses
                    
                    
                    5,077,447
                    
                    
                    
                    4,964,285
                    
                    
                    
                    113,162
                    
                    
                    
                    38.87
                    %
                    
                    
                    25.58
                    %
                    
                    
                    13.29
                    %Net
      operating loss
                    
                    
                    (1,855,761
                    )
                    
                    
                    (1,116,648
                    )
                    
                    
                    (739,113
                    )
                    
                    
                    -14.22
                    %
                    
                    
                    -5.76
                    %
                    
                    
                    -8.46
                    %Other
      income (expense) :Interest
      income
                    
                    
                    1,707
                    
                    
                    
                    11,816
                    
                    
                    
                    (10,109
                    )
                    
                    
                    0.01
                    %
                    
                    
                    0.06
                    %
                    
                    
                    -0.05
                    %Interest
      (expense)
                    
                    
                    (20,832
                    )
                    
                    
                    -
                    
                    
                    
                    (20,832
                    )
                    
                    
                    -0.16
                    %
                    
                    
                    0.00
                    %
                    
                    
                    -0.16
                    %Foreign
      currency
                    
                    
                    25,532
                    
                    
                    
                    15,823
                    
                    
                    
                    9,709
                    
                    
                    
                    0.19
                    %
                    
                    
                    0.08
                    %
                    
                    
                    0.11
                    %Total
      other income (expense)
                    
                    
                    6,407
                    
                    
                    
                    27,639
                    
                    
                    
                    (21,232
                    )
                    
                    
                    0.04
                    %
                    
                    
                    0.14
                    %
                    
                    
                    -0.10
                    %Loss  before
      taxes
                    
                    
                    (1,849,354
                    )
                    
                    
                    (1,089,009
                    )
                    
                    
                    (760,345
                    )
                    
                    
                    -14.18
                    %
                    
                    
                    -5.62
                    %
                    
                    
                    -8.56
                    %Taxes
      provision
                    
                    
                    38,028
                    
                    
                    
                    28,554
                    
                    
                    
                    9,474
                    
                    
                    
                    0.29
                    %
                    
                    
                    0.15
                    %
                    
                    
                    0.14
                    %Net
      loss
                    
                    $
                    (1,887,382
                    )
                    
                    $
                    (1,117,563
                    )
                    
                    $
                    (769,819
                    )
                    
                    
                    -14.47
                    %
                    
                    
                    -5.77
                    %
                    
                    
                    -8.70
                    %





Net sales
for the three months ended June 30, 2009 decreased $6,348,607 compared to the
three months ended June 30, 2008 as shown in the table below.





Increase
                    
                    
                    Increase(decrease)
                    
                    
                    (decrease)
                    
                    
                    Percentage of sales byThree Months
                    
                    
                    Three Months
                    
                    
                    Dollar
                    
                    
                    dollar
                    
                    
                    Geographic regionended 6/30/09
                    
                    
                    ended 6/30/08
                    
                    
                    Variance
                    
                    
                    variance %
                    
                    
                    2009
                    
                    
                    2008The
      Americas
                    
                    $
                    6,834,846
                    
                    
                    $
                    8,112,299
                    
                    
                    $
                    (1,277,453
                    )
                    
                    
                    -16
                    %
                    
                    
                    53
                    %
                    
                    
                    42
                    %Europe
                    
                    
                    5,821,748
                    
                    
                    
                    10,561,243
                    
                    
                    
                    (4,739,495
                    )
                    
                    
                    -45
                    %
                    
                    
                    44
                    %
                    
                    
                    54
                    %Asia
                    
                    
                    410,530
                    
                    
                    
                    742,189
                    
                    
                    
                    (331,659
                    )
                    
                    
                    -45
                    %
                    
                    
                    3
                    %
                    
                    
                    4
                    %Total
                    
                    $
                    13,067,124
                    
                    
                    $
                    19,415,731
                    
                    
                    $
                    (6,348,607
                    )
                    
                    
                    -33
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %


18


Net sales
to customers in The Americas were 53%  and 42% of net sales for the
three months ended June  30, 2009 and 2008,
respectively.  Net sales to customers in Europe were 44% and 54% of
net sales for the three months ended June 30, 2009 and 2008,
respectively.   Net sales to customers in Asia were 3% and 4% of
net sales for the three months ended June 30, 2009 and  2008,
respectively.  We experienced a decrease in unit sales of about 36%
while the change in sales mix increased the average sales price by about
4%.





Factors
driving the  decline in  sales for the third quarter of
fiscal 2009 were the effects of a weakened economy which curtailed consumer
spending,  the  liquidation of  Circuit
City,  the weakening of the Euro compared to the U.S. dollar
and  the shift in emphasis by   PC
manufacturers  to lower cost PCs which do not include TV
tuners.  Somewhat offsetting the declines caused by the factors listed
above was the addition of sales from the PCTV product line that we acquired from
Avid Technology, Inc.





Gross
profit





Gross
profit decreased $625,951 for the three months ended June 30, 2009 compared to
the  three months ended June 30, 2008.




The
decrease in the gross profit is detailed below:





Increase (decrease)Lower
      sales
                  
                  $
                  (1,848,381
                  )Decrease
      in the Euro exchange rate
                  
                  
                  (812,003
                  )Lower
      production and production related expenses
                  
                  
                  425,363Higher
      gross profit due favorable sales mix
                  
                  
                  1,609,070Total  decrease
      in gross profit
                  
                  $
                  (625,951
                  )





Gross
profit percentage for the three months  ended June 30, 2009 was 24.65
% compared to 19.52% for the three  months ended  June 30,
2008, resulting in a  gross profit increase
of  4.83%.





The
increase in  gross profit  percentage is detailed
below:





Increase (decrease)Higher
      gross profit due favorable sales mix
                  
                  
                  11.94
                  %Decrease
      in the Euro exchange rate
                  
                  
                  (5.85
                  )%Production
      and production related expenses
                  
                  
                  (1.26
                  )%Net
      increase in gross profit  percentage
                  
                  
                  4.83
                  %





Selling,
general and administrative expenses





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





Three months ended June
      30,Dollar Costs
                                  
                                  
                                  Percentage of Sales2009
                                  
                                  
                                  2008
                                  
                                  
                                  Decrease
                                  
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  IncreaseSales
      and marketing-HCW
                                  
                                  $
                                  2,637,961
                                  
                                  
                                  $
                                  2,776,622
                                  
                                  
                                  $
                                  (138,661
                                  )
                                  
                                  
                                  20.19
                                  %
                                  
                                  
                                  14.30
                                  %
                                  
                                  
                                  5.89
                                  %Sales
      and marketing-PCTV
                                  
                                  
                                  115,335
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  115,335
                                  
                                  
                                  
                                  0.88
                                  %
                                  
                                  
                                  0.00
                                  %
                                  
                                  
                                  0.88
                                  %Technical  support
                                  
                                  
                                  127,922
                                  
                                  
                                  
                                  131,393
                                  
                                  
                                  
                                  (3,471
                                  )
                                  
                                  
                                  0.98
                                  %
                                  
                                  
                                  0.68
                                  %
                                  
                                  
                                  0.30
                                  %General
      and administrative-HCW
                                  
                                  
                                  770,359
                                  
                                  
                                  
                                  994,339
                                  
                                  
                                  
                                  (223,980
                                  )
                                  
                                  
                                  5.90
                                  %
                                  
                                  
                                  5.12
                                  %
                                  
                                  
                                  0.78
                                  %General
      and administrative-PCTV
                                  
                                  
                                  26,144
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  26,144
                                  
                                  
                                  
                                  0.21
                                  %
                                  
                                  
                                  0.00
                                  %
                                  
                                  
                                  0.21
                                  %Amortization
      of intangible assets
                                  
                                  
                                  188,709
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  188,709
                                  
                                  
                                  
                                  1.45
                                  %
                                  
                                  
                                  0.00
                                  %
                                  
                                  
                                  1.45
                                  %Stock
      compensation
                                  
                                  
                                  88,106
                                  
                                  
                                  
                                  95,241
                                  
                                  
                                  
                                  (7,135
                                  )
                                  
                                  
                                  0.68
                                  %
                                  
                                  
                                  0.49
                                  %
                                  
                                  
                                  0.19
                                  %Total
                                  
                                  $
                                  3,954,536
                                  
                                  
                                  $
                                  3,997,595
                                  
                                  
                                  $
                                  (43,059
                                  )
                                  
                                  
                                  30.29
                                  %
                                  
                                  
                                  20.59
                                  %
                                  
                                  
                                  9.70
                                  %


19


Selling,
general and administrative expenses decreased $ 43,059 from the prior year’s
fiscal third quarter.  Sales and marketing expense for HCW decreased
$138,661, primarily driven by the decrease in the Euro exchange rate compared to
the U.S. dollar  which resulted in an expense reduction
of  $257,410, lower compensation expense of $21,221 due personnel
reductions and  lower travel and industry show expenses
$42,459  due  to the budgeted  expense reductions.
Offsetting these decreases was an increase of $ 115,335 in sales and marketing
expense for PCTV due to personnel expenses related to PCTV employees hired in
connection with the acquisition of the PCTV business from Avid Technology, Inc.
and increased sales office expenses for HCW  of $34,238 related to
higher personnel costs.





The  decrease  in
general and administrative expense for HCW  of  $223,980 was
primarily due lower professional fees, primarily for  legal and
consulting  fees  of  $121,644,  a
decrease in compensation expense of $31,231 due to staff
reductions,  a reduction of $36,689 in insurance expense due to lower
negotiated premiums,  lower communications
expenses  of  $6,643 and lower insurance expense of $36,689
due lower  premiums. These decreases were somewhat offset by $26,144
in general and administration expenses related to the PCTV
operation.  There also was $188,709 in amortization of intangible
assets charged to operations for the third quarter of fiscal
2009  related to the acquisition of the PCTV business.





Research
and  development expenses





Research
and development expenses
increased  $156,221.  Higher  compensation expense
of $426,441 for  personnel expenses related to PCTV employees hired in
connection with  the acquisition of the PCTV business from Avid
Technology, Inc., offset by $ 183,183 in lower compensation expense due to staff
reductions and $107,240 less in project development expenses due to a lower
volume of programs in progress for fiscal 2009.




Tax
provision





Our  tax
provision for the three months ended June 30, 2009 and 2008 is as
follows:





Three months ended June
      30,2009
                  
                  
                  2008Tax  expense  on
      international  operations
                  
                  $
                  28,028
                  
                  
                  $
                  28,554State
      taxes
                  
                  
                  10,000
                  
                  
                  
                  -Tax
      provision
                  
                  $
                  38,028
                  
                  
                  $
                  28,554





We
recorded a net loss of  $1,887,382, for the three  months
ended June 30, 2009, which resulted in basic and diluted net loss per share of
$0.19 on weighted average basic and diluted shares
of  10,048,771  compared to a net loss of $1,117,563 for the
three months ended June 30, 2008, which resulted in  basic and diluted
net loss per share of $0.11  on weighted average  basic and
diluted shares of  10,018,771.





Options
to purchase 1,522,394  and 1,767,744 shares of common
stock,  at  prices for both periods ranging
from  $1.05 to $8.75,  were outstanding for the three months
ended June 30, 2009 and 2008, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.


20





NINE  MONTH
PERIOD  ENDED JUNE 30, 2009 COMPARED TO NINE MONTH PERIOD ENDED JUNE
30, 2008





Results
of operations for the nine months ended June 30, 2009 compared to June 30, 2008
are as follows:





Nine
                    
                    
                    NineMonths
                    
                    
                    MonthsEnded
                    
                    
                    Ended
                    
                    
                    Variance
                    
                    
                    Percentage of sales6/30/09
                    
                    
                    6/30/08
                    
                    
                    $
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    VarianceNet
      sales
                    
                    $
                    43,089,233
                    
                    
                    $
                    73,975,884
                    
                    
                    $
                    (30,886,651
                    )
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %
                    
                    
                    -Cost
      of sales
                    
                    
                    34,305,007
                    
                    
                    
                    58,647,765
                    
                    
                    
                    (24,342,758
                    )
                    
                    
                    79.61
                    %
                    
                    
                    79.28
                    %
                    
                    
                    0.33
                    %Gross
      profit
                    
                    
                    8,784,226
                    
                    
                    
                    15,328,119
                    
                    
                    
                    (6,543,893
                    )
                    
                    
                    20.39
                    %
                    
                    
                    20.72
                    %
                    
                    
                    -0.33
                    %Gross
      profit %
                    
                    
                    20.39
                    %
                    
                    
                    20.72
                    %
                    
                    
                    -0.33
                    %Selling,
      general and administrative expenses:Sales
      and marketing
                    
                    
                    7,956,761
                    
                    
                    
                    8,699,273
                    
                    
                    
                    (742,512
                    )
                    
                    
                    18.47
                    %
                    
                    
                    11.76
                    %
                    
                    
                    6.71
                    %Technical
      support
                    
                    
                    398,906
                    
                    
                    
                    434,160
                    
                    
                    
                    (35,254
                    )
                    
                    
                    0.93
                    %
                    
                    
                    0.59
                    %
                    
                    
                    0.34
                    %General  and
      administrative
                    
                    
                    2,663,055
                    
                    
                    
                    3,081,296
                    
                    
                    
                    (418,241
                    )
                    
                    
                    6.18
                    %
                    
                    
                    4.17
                    %
                    
                    
                    2.01
                    %Amortization
      of intangible assets
                    
                    
                    377,418
                    
                    
                    
                    -
                    
                    
                    
                    377,418
                    
                    
                    
                    0.88
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.88
                    %Stock
      compensation
                    
                    
                    258,963
                    
                    
                    
                    285,723
                    
                    
                    
                    (26,760
                    )
                    
                    
                    0.60
                    %
                    
                    
                    0.39
                    %
                    
                    
                    0.21
                    %Total
      selling, general and administrative expenses
                    
                    
                    11,655,103
                    
                    
                    
                    12,500,452
                    
                    
                    
                    (845,349
                    )
                    
                    
                    27.06
                    %
                    
                    
                    16.91
                    %
                    
                    
                    10.15
                    %Research
      and development expenses
                    
                    
                    3,093,428
                    
                    
                    
                    2,727,572
                    
                    
                    
                    365,856
                    
                    
                    
                    7.18
                    %
                    
                    
                    3.69
                    %
                    
                    
                    3.49
                    %Research
      & development  stock compensation
                    
                    
                    142,973
                    
                    
                    
                    131,814
                    
                    
                    
                    11,159
                    
                    
                    
                    0.33
                    %
                    
                    
                    0.18
                    %
                    
                    
                    0.15
                    %Total
      expenses
                    
                    
                    14,891,504
                    
                    
                    
                    15,359,838
                    
                    
                    
                    (468,334
                    )
                    
                    
                    34.57
                    %
                    
                    
                    20.78
                    %
                    
                    
                    13.79
                    %Net
      operating loss
                    
                    
                    (6,107,278
                    )
                    
                    
                    (31,719
                    )
                    
                    
                    (6,075,559
                    )
                    
                    
                    -14.18
                    %
                    
                    
                    -0.06
                    %
                    
                    
                    -14.12
                    %Other
      income (expense) :Interest
      income
                    
                    
                    11,332
                    
                    
                    
                    28,633
                    
                    
                    
                    (17,301
                    )
                    
                    
                    0.03
                    %
                    
                    
                    0.04
                    %
                    
                    
                    -0.01
                    %Interest
      expense
                    
                    
                    (49,478
                    )
                    
                    
                    -
                    
                    
                    
                    (49,478
                    )
                    
                    
                    -0.11
                    %
                    
                    
                    0.00
                    %
                    
                    
                    -0.11
                    %Foreign
      currency
                    
                    
                    669,209
                    
                    
                    
                    (16,130
                    )
                    
                    
                    685,339
                    
                    
                    
                    1.55
                    %
                    
                    
                    -0.02
                    %
                    
                    
                    1.57
                    %Total
      other income (expense)
                    
                    
                    631,063
                    
                    
                    
                    12,503
                    
                    
                    
                    618,560
                    
                    
                    
                    1.47
                    %
                    
                    
                    0.02
                    %
                    
                    
                    1.45
                    %Loss  before
      taxes
                    
                    
                    (5,476,215
                    )
                    
                    
                    (19,216
                    )
                    
                    
                    (5,456,999
                    )
                    
                    
                    -12.71
                    %
                    
                    
                    -0.04
                    %
                    
                    
                    -12.67
                    %Tax
      provision
                    
                    
                    115,550
                    
                    
                    
                    160,437
                    
                    
                    
                    (44,887
                    )
                    
                    
                    0.27
                    %
                    
                    
                    -0.04
                    %
                    
                    
                    -9.66
                    %Net
      loss
                    
                    $
                    (5,591,765
                    )
                    
                    $
                    (179,653
                    )
                    
                    $
                    (5,412,112
                    )
                    
                    
                    -12.98
                    %
                    
                    
                    0.00
                    %
                    
                    
                    -12.98
                    %





Net sales
for the nine months ended June 30, 2009 decreased $30,886,651 compared to the
nine months ended June 30, 2008 as shown in the table below.





Increase
                  
                  
                  Increase(decrease)
                  
                  
                  (decrease)
                  
                  
                  Percentage of sales byNine Months
                  
                  
                  Nine Months
                  
                  
                  Dollar
                  
                  
                  Dollar
                  
                  
                  Geographic regionended 6/30/09
                  
                  
                  ended 6/30/08
                  
                  
                  Variance
                  
                  
                  variance %
                  
                  
                  2009
                  
                  
                  2008The
      Americas
                  
                  
                  21,341,299
                  
                  
                  
                  35,497,270
                  
                  
                  
                  (14,155,971
                  )
                  
                  
                  -40
                  %
                  
                  
                  50
                  %
                  
                  
                  48
                  %Europe
                  
                  
                  20,363,226
                  
                  
                  
                  36,560,030
                  
                  
                  
                  (16,196,804
                  )
                  
                  
                  -44
                  %
                  
                  
                  47
                  %
                  
                  
                  49
                  %Asia
                  
                  
                  1,384,708
                  
                  
                  
                  1,918,584
                  
                  
                  
                  (533,876
                  )
                  
                  
                  -28
                  %
                  
                  
                  3
                  %
                  
                  
                  3
                  %Total
                  
                  $
                  43,089,233
                  
                  
                  $
                  73,975,884
                  
                  
                  $
                  (30,886,651
                  )
                  
                  
                  -42
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %


21


Net sales
to customers in The  Americas were 50%  and 48% of net sales
for the nine months ended June 30, 2009 and 2008, respectively.  Net
sales to customers in Europe were 47% and 49%  of net sales for the
nine months ended  June 30, 2009 and 2008,
respectively.   Net sales to customers in Asia were 3% of net
sales for the nine months ended June 30, 2009  and  2008,
respectively.  We experienced a decrease in unit sales of about 43%
while the change in sales mix increased the average sales price by about
3%.





Factors
driving the  decline in  sales for the nine months ended
June 30,  2009 were the effects of a weakened economy which curtailed
consumer spending,  the  liquidation of  Circuit
City,  the weakening of the Euro and  the shift in
emphasis  by the  PC manufacturers  to lower cost
PCs which do not include TV tuners.  Somewhat offsetting the declines
caused by the factors listed above was the addition of sales from the PCTV
product line that we acquired from Avid Technology, Inc.





Gross
profit





Gross
profit  decreased $6,543,893 for the nine months ended June 30, 2009
compared to the nine months ended June 30, 2008.





The
decrease in  the gross profit is detailed below:





Increase (decrease)Lower
      sales
                  
                  $
                  (9,093,029
                  )Decrease
      in the Euro exchange rate
                  
                  
                  (2,475,837
                  )Lower
      production and production related expenses
                  
                  
                  1,870,234Higher
      gross profit due favorable sales mix
                  
                  
                  3,154,739Total  decrease
      in gross profit
                  
                  $
                  (6,543,893
                  )





Gross
profit percentage for the nine months  ended  June 30, 2009
was 20.39 % compared to 20.72% for the nine months ended  June 30,
2008, resulting in a  gross profit decrease
of  0.33%.





The
decrease in the gross profit  percentage is detailed
below:





Increase (decrease)Lower  gross
      profit due favorable sales mix
                  
                  
                  7.01
                  %Decrease
      in the Euro exchange rate
                  
                  
                  (5.43
                  )%Production
      and production related expenses
                  
                  
                  (1.91
                  )%Net
      decrease in gross profit  percentage
                  
                  
                  (0.33
                  )%





Selling,
general and administrative expenses





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





Nine months ended June 30,Dollar Costs
                                    
                                    
                                    Percentage of Sales2009
                                    
                                    
                                    2008
                                    
                                    
                                    Decrease
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    IncreaseSales and marketing-HCW
                                    
                                    $
                                    7,753,381
                                    
                                    
                                    $
                                    8,699,273
                                    
                                    
                                    $
                                    (945,892
                                    )
                                    
                                    
                                    17.99
                                    %
                                    
                                    
                                    11.76
                                    %
                                    
                                    
                                    6.23
                                    %Sales
      and marketing-PCTV
                                    
                                    
                                    203,380
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    203,380
                                    
                                    
                                    
                                    0.48
                                    %
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    0.48
                                    %Technical  support
                                    
                                    
                                    398,906
                                    
                                    
                                    
                                    434,160
                                    
                                    
                                    
                                    (35,254
                                    )
                                    
                                    
                                    0.93
                                    %
                                    
                                    
                                    0.59
                                    %
                                    
                                    
                                    0.34
                                    %General
      and administrative-HCW
                                    
                                    
                                    2,521,048
                                    
                                    
                                    
                                    3,081,296
                                    
                                    
                                    
                                    (560,248
                                    )
                                    
                                    
                                    5.85
                                    %
                                    
                                    
                                    4.17
                                    %
                                    
                                    
                                    1.68
                                    %General
      and administrative-PCTV
                                    
                                    
                                    142,007
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    142,007
                                    
                                    
                                    
                                    0.33
                                    %
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    0.33
                                    %Amortization
      of intangible assets
                                    
                                    
                                    377,418
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    377,418
                                    
                                    
                                    
                                    0.88
                                    %
                                    
                                    
                                    0.00
                                    %
                                    
                                    
                                    0.88
                                    %Stock
      compensation
                                    
                                    
                                    258,963
                                    
                                    
                                    
                                    285,723
                                    
                                    
                                    
                                    (26,760
                                    )
                                    
                                    
                                    0.60
                                    %
                                    
                                    
                                    0.39
                                    %
                                    
                                    
                                    0.21
                                    %Total
                                    
                                    $
                                    11,655,103
                                    
                                    
                                    $
                                    12,500,452
                                    
                                    
                                    $
                                    (845,349
                                    )
                                    
                                    
                                    27.06
                                    %
                                    
                                    
                                    16.91
                                    %
                                    
                                    
                                    10.15
                                    %




22




Selling,
general and administrative expenses decreased $845,349 compared to the same
period in the prior fiscal year.  Sales and marketing expense for
HCW  decreased $945,892, primarily driven by  the decrease
in the  Euro exchange rate compared to the U.S. dollar which resulted
in an expense reduction of $676,489, lower compensation expense
of  $61,273 due personnel reductions, lower travel and industry show
expenses $85,757  due  to the budgeted  expense
reductions ,  lower commissions,  marketing development
and  advertising  expense of  $293,738 due to
lower sales.  Offsetting these decreases
were  higher  HCW  European sales office expense
of $112,433  due to higher personnel costs and $203,380 in sales and
marketing expenes for PCTV due to  personnel expenses related to PCTV
employees hired in connection with the acquisition of the PCTV business from
Avid Technology, Inc.





The  decrease  in
general and administrative expense for HCW  of  $560,248 was
primarily due lower professional fees, primarily for  legal and
consulting  fees of  $260,705, a decrease in bad debt
expense of  $120,000 related to the February 2008 liquidation of
CompUSA, a decrease in compensation expense of $81,633 due to staff reductions,
a reduction of $77,617 in insurance expense due to lower  premiums and
lower communication expenses of  $16,796. These decreases were offset
$142,007 in PCTV general and administrative expenses, mainly due to $140,000
paid to Avid Technology, Inc. pursuant to a transitional services
agreement.  There also was $377,418 in amortization of intangible
assets charged to operations  related to the acquisition of the PCTV
business.





Research
and  development expenses





Research
and development expenses increased $377,015. The primary drivers of the increase
were higher compensation expense of $846,191 for personnel expenses related to
PCTV employees hired in connection with the acquisition of the PCTV business
from Avid Technology, Inc.,   offset by $239,955 in lower
compensation expense due to staff reductions,  $241,255 less in
project development expenses due to a lower volume of programs in progress
during  fiscal 2009 and $39,559 less in travel expense due budget
restrictions.




Tax
provision





Our  tax
provision for the nine months ended June 30, 2009 and 2008 is as
follows:





Nine months ended June 30,2009
                  
                  
                  2008Tax  expense  on
      international  operations
                  
                  $
                  85,550
                  
                  
                  
                  143,437State
      taxes
                  
                  
                  30,000
                  
                  
                  
                  17,000Tax
      provision
                  
                  $
                  115,550
                  
                  
                  $
                  160,437





We
recorded a net loss of  $5,591,765, for the nine months ended June 30,
2009, which resulted in basic and diluted net loss per share of
$0.56  on weighted average basic and diluted shares
of  10,042,546  compared to a net loss of $179,653 for the
nine months ended June 30, 2008, which resulted in  basic and diluted
net loss per share of $0.02  on weighted average  basic and
diluted shares of 9,951,552. .





Options
to purchase 1,522,394  and 1,767,744 shares of common
stock  at  prices for both periods ranging
from  $1.05 to $8.75, respectively,  were outstanding for
the nine months ended June 30, 2009 and 2008, respectively, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive.


23


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
second fiscal quarter (January  to March). In addition, our
international sales, mostly in the European  market, were 52%, 44% and
54% of sales for the years ended September 30, 2008, 2007 and 2006,
respectively.  Part of our third  and fourth
quarters  (April through June and July to September) can be
potentially impacted by the reduction of activity experienced in Europe during
the summer holiday period.





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




Liquidity
and capital resources





Our cash,
working capital and stockholders’ equity position as of  June 30, 2009
and September 30, 2008 is set forth below:





June 30, 2009
                  
                  
                  September 30, 2008Cash
                  
                  $
                  9,033,115
                  
                  
                  $
                  14,191,721Working
      Capital
                  
                  
                  7,105,609
                  
                  
                  
                  17,229,410Stockholders’
      Equity
                  
                  
                  13,804,245
                  
                  
                  
                  18,988,536








We had
cash and cash equivalents as of June 30, 2009 of $9,033,115, a decrease of
$5,158,606 from September 30, 2008.





The
decrease  in cash was due to :





Sources of cash:Decrease
      in inventory
                      
                      $
                      2,301,900Increase  in  accounts
      payable and accrued expenses
                      
                      
                      2,119,894Proceeds
      from employee stock purchases
                      
                      
                      24,133Less cash used for:Net
      loss adjusted for non cash items
                      
                      
                      (4,611,617
                      )PCTV
      acquisition-net of note payable
                      
                      
                      (2,490,500
                      )Payment
      on note payable
                      
                      
                      (1,249,998
                      )Increase  in  accounts
      receivables
                      
                      
                      (1,186,810
                      )Capital
      equipment purchases
                      
                      
                      (28,319
                      )Increase  in
      prepaid expenses and other current assets
                      
                      
                      (18,694
                      )Effect
      of exchange rates on cash
                      
                      
                      (18,595
                      )Net
      cash decrease
                      
                      $
                      (5,158,606
                      )





Net cash
of $1,395,327 used in operating activities was due to the net loss adjusted for
non cash items of $4,611,617,  an increase  in accounts
receivable  of  $1,186,810  plus an increase in
prepaid expenses and other current assets
of  $18,694,  offset  by a decrease
in  inventory of  $2,301,900 and an increase in accounts
payable  and  accrued expenses
of  $2,119,894.  The increase in accounts receivable was due
to sales shipped during June 2009  making up 40% of the sales for the
quarter.  The decrease in inventory was due to lower sales which
resulted in a lower  investment in inventory


24


Cash of
$2,518,819  was used  in
investing  activities.  Of this amount, $2,490,500 was used
for the acquisition of the PCTV business and $28,319 was used to purchase fixed
assets. The $2,490,500  used for the PCTV acquisition consisted
of   $2,238,000  paid  against the $5,000,000
purchase price and $252,300  disbursed in payment of direct expenses
of the acquisition. We also entered into  a Note Payable with Avid
Technology, Inc. of $2,500,000, of which $1,249,998 in payments have been made
against the note .  Cash of $24,133 was provided from purchases of
stock pursuant to our employee stock purchase plan.





Our cash
requirements for the next twelve months will include, among other
things,  the cash required to pay off
the  note  to Avid Technology, Inc related to
the  purchase the  PCTV product line and the cash needed to
fund the acquisition’s working capital needs.  With the proper
execution of our business and operational integration plan, we believe that our
cash and cash equivalents as of  March  31, 2009 and our
internally generated cash flow  will provide us with sufficient
liquidity to meet our capital needs for the next twelve
months.   Failure to meet the operating and integration plan
could require the need for additional sources of capital.   In
light of the current economic and credit conditions there can be no assurances
that we will be able to find external sources of financing to fund our
additional working capital needs.





On March
31, 2009 our line of credit with the JP Morgan Chase Bank expired and was not
renewed.




Future
contractual  obligations





The
following table shows our contractual obligations related to lease obligations
as of June 30, 2009:





Payments
      due by periodTotal
                  
                  
                  Less than 1 year
                  
                  
                  1-3 years
                  
                  
                  3 to 5 yearsNote
      payable to Avid Technology Inc. (1)
                  
                  $
                  1,250,045
                  
                  
                  $
                  1,250,045Operating
      lease obligations
                  
                  $
                  1,355,035
                  
                  
                  $
                  484,338
                  
                  
                  $
                  785,671
                  
                  
                  $
                  85,026Total
                  
                  $
                  2,605,080
                  
                  
                  $
                  1,734,383
                  
                  
                  $
                  785,671
                  
                  
                  $
                  85,026




(1)
            See
      Note 10 to our consolidated financial statements  for further
      details on the note payable to Avid Technologies,
  Inc.




Inflation





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




Item  3.  Quantitative
and qualitative disclosures about market risks





For each
of the three fiscal years ended September 30, 2008, at least 40% of
our  sales were generated by our European subsidiary and were
invoiced  and collected  in local currency, which was
primarily the Euro. On the supply side, since we predominantly deal with North
American and Asian suppliers and contract manufacturers, approximately 90% of
our inventory required to support  our European sales are purchased
and paid in U.S. Dollars.


25





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





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




Item
4T. Controls and procedures





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely
decisions regarding required disclosure.





As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, with the participation of our principal executive officer
and principal financial officer, we evaluated the effectiveness of our
disclosure controls and procedures.  Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of June 30,
2009.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting, identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
Exchange Act, that occurred during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




Special
note regarding forward looking statements





This
Quarterly Report contains forward-looking statements as that term is defined in
the federal securities laws.  The events described in forward-looking
statements contained in this Quarterly Report may not
occur.  Generally these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of our plans
or strategies, projected or anticipated benefits from acquisitions to be made by
us, or projections involving anticipated revenues, earnings or other aspects of
our operating results.  The words “may,” “will,” “expect,” “believe,”
“anticipated,” “project,” “plan,” “intend,” “estimate,” and “continue,” and
their opposites and similar expressions are intended to identify forward-looking
statements.  We caution you that these statements are not guarantees
of future performance or events and are subject to a number of uncertainties,
risks and other influences (including, but not limited to, those set forth in
our Annual Report on Form 10-K for the year ended September 30, 2008), many of
which are beyond our control, that may influence the accuracy of the statements
and the projections upon which the statements are based.  Any one or
more of these uncertainties, risks and other influences could materially affect
our results of operations and whether forward looking statements made by us
ultimately prove to be accurate.  Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements.  We undertake no obligation to publicly
update or revise any forward-looking statements, whether from new information,
future events or otherwise.  All cautionary statements made in this
Quarterly Report should be read as being applicable to all related
forward-looking statements wherever they appear.


26





PART
II.  OTHER INFORMATION





Item
1.  Legal  proceedings





There
have been no material changes with respect to legal proceedings disclosed in our
Annual Report on Form 10-K for the fiscal year ended September 30,
2008.





Item
1A.  Risk factors





There
have been no material changes with respect to the risk factors disclosed in our
Annual Report on Form 10-K for the fiscal year ended September 30,
2008.




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





None
sold  during the third  fiscal quarter ended June 30.
2009.




Item
6.  Exhibits


3.1
                            Certificate
      of Incorporation (1)3.1.1
                            Certificate
      of Amendment of the Certificate of Incorporation, dated July 14, 2000
      (2)3.2
                            By-laws,
      as amended to date (3)4.1
                            Form
      of Common Stock Certificate (1)31.1
                            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                            Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002




32.0
                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




27


(1)     Denotes
document filed as an Exhibit to our Registration Statement on Form SB-2 (No.
33-85426), as amended, effective January 10, 1995 and incorporated herein by
reference.


(2)     Denotes
document filed as an Exhibit to our Form 10-K for the period ended September 30,
2006, and incorporated herein by reference.


(3)     Denotes
document filed as an Exhibit to our Form 8-K dated December 26, 2007 and
incorporated herein by reference.


28


SIGNATURES





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





HAUPPAUGE
      DIGITAL INC.RegistrantDate:
      August  14,
      2009
                                            By
                                            /s/Kenneth PlotkinKENNETH  PLOTKINChief
      Executive Officer, Chairman of theBoard,
      President (Principal Executive Officer)Date:
      August 14,
      2009
                                            By
                                            /s/Gerald TucciaroneGERALD
      TUCCIARONETreasurer,
      Chief Financial Officer,(Principal
      Financial Officer and PrincipalAccounting
      Officer) and
Secretary


29