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



                                    FORM 10-Q

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



For the quarterly period ended:  March  31,  2002
                                 ----------------

                                       OR

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

For the transition period from _______ to ________

                       Commission file number     1-13550
                                                  -------


                             HAUPPAUGE DIGITAL, INC.
                             -----------------------
             (Exact Name of registrant as specified in its charter)

         Delaware                                           11-3227864
         --------                                           ----------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

                    91 Cabot Court, Hauppauge, New York 11788
                    -----------------------------------------
                    (Address of principal executive offices)

                                 (631) 434-1600
                                 --------------
                           (Issuer's telephone number)


Indicate by check mark  whether the issuer (1) filed all reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
                       Yes         X             No
                           ------------------       -------------------

As of April 22,  2002,  8,893,490  shares of $.01 par value  Common Stock of the
registrant were outstanding, not including treasury shares.

                                        1

<PAGE>

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

                                      INDEX
                                      -----
<TABLE>
<CAPTION>


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

<S>                                                                                                 <C>
Item 1.Financial Statements                                                                       Page No.
                                                                                                  --------


Condensed Consolidated Balance Sheets-
   March 31,  2002 (unaudited) and September 30, 2001                                                3

Condensed Consolidated Statements of Income-
  Six  Months ended March  31, 2002 (unaudited) and 2001 (unaudited)                                 4

Condensed Consolidated Statements of Income-
  Three  Months ended March 31, 2002 (unaudited) and 2001 (unaudited)                                5

Condensed Consolidated Statements of  Comprehensive Income -
  Three and six months  ended March 31, 2002 (unaudited) and 2001 (unaudited)                        6

Condensed Consolidated Statements of Cash Flow-
  Six Months ended March  31 , 2002 (unaudited) and 2001 (unaudited)                                 7

Notes to Condensed Consolidated Financial Statements                                              8-10

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations                                                                    11-22

Item 3. Quantitative and Qualitative Disclosures about Market Risks                                 22

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

Item 1.  Legal Proceedings                                                                          23

Item 6.  Exhibits and Reports on form 8-K                                                           24


SIGNATURES                                                                                          25
----------

</TABLE>

                                        2

<PAGE>

PART I. FINANCIAL INFORMATION
-----------------------------
 Item 1. Financial Statements

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>


                                                                                      March  31,
                                                                                         2002               September 30,
                                                                                      (Unaudited)                2001
                                                                                -----------------------------------------
                                    ASSETS
        <S>                                                                                <C>                    <C>
 Current Assets:
     Cash and cash  equivalents                                                       $  6,784,947          $  4,422,239
     Accounts receivable, net of various allowances  of
            $2,887,000   and $2,867,000                                                  2,905,849             4,243,594
      Income taxes receivable                                                              501,000               501,000
     Inventories                                                                         7,787,545             8,171,567
     Prepaid expenses and other current assets                                             529,311               518,265
                                                                                           -------               -------
                Total current assets                                                    18,508,652            17,856,665

     Property, plant and equipment, net                                                    717,789               825,847
     Other intangible assets-net                                                             3,800                16,400
     Security deposits and other non current assets                                         84,222                85,228
                                                                                            ------                ------
                                                                                     $  19,314,463          $ 18,784,140
                                                                                     =============          ============
 Liabilities and  Stockholders'  Equity :

 Current Liabilities:
    Accounts payable                                                                 $   5,921,940 $           5,732,971
    Accrued expenses                                                                     1,527,237             1,585,023
    Income taxes payable                                                                   295,835               280,528
                                                                                           -------               -------
              Total current liabilities                                                  7,745,012             7,598,522

 Stockholders' Equity
    Common stock $.01 par value; 25,000,000 shares authorized, 9,381,507
          and 9,364,359  issued, respectively                                               93,815                93,644
     Additional paid-in capital                                                         12,198,378            12,164,243
     Retained earnings                                                                   1,067,433               566,497
     Accumulated other comprehensive income ( loss)                                       (377,602)             (267,204)
    Treasury Stock, at cost, 488,017, and 465,086 shares, respectively                  (1,412,573)           (1,371,562)
                                                                                        ----------            ----------
             Total stockholders' equity                                                 11,569,451            11,185,618
                                                                                        ----------            ----------
                                                                                     $  19,314,463 $          18,784,140
                                                                                     ============= =====================
</TABLE>


           See accompanying notes to consolidated financial statements

                                        3

<PAGE>

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


<TABLE>
<CAPTION>

                                                                                            Six months ended March 31,
                                                                                         2002                       2001
                                                                                         -----                      ----

        <S>                                                                               <C>                        <C>
Net Sales                                                                            $ 22,811,233               $ 32,390,983
Cost  of Sales                                                                         17,068,511                 25,216,671
                                                                                       ----------                 ----------
    Gross Profit                                                                        5,742,722                  7,174,312

Selling, General and  Administrative Expenses                                           4,461,373                  5,463,890
Research & Development Expenses                                                           723,437                    741,028
                                                                                          -------                    -------
    Income  from operations                                                               557,912                    969,394
Other  Income (expense):
  Interest income                                                                          21,628                     18,546
  Interest expense                                                                              -                    (19,720)
  Foreign currency                                                                         18,036                   (120,024)
  Non operational USD to Euro currency remeasurement                                      (54,140)                         -
                                                                                          -------                   --------
Other  income (expense)                                                                   (14,476)                  (121,198)
                                                                                          -------                   --------
      Income  before taxes on income                                                      543,436                    848,196
Taxes provision (benefit)                                                                  42,500                   (212,300)
                                                                                           ------                   --------
   Income  before cumulative effect of a change in accounting principle                   500,936                  1,060,496
   Cumulative effect of a change in accounting principle, net of taxes                          -                    204,000
                                                                                          -------                    -------
      Net income                                                                      $   500,936                $ 1,264,496
                                                                                      ===========                ===========
Net income per  share-basic:
   Income  before cumulative effect of a change in accounting principle                     $0.06                      $0.12
   Cumulative effect of a change in accounting principle                                    $0.00                      $0.02
                                                                                            -----                      -----
Net income  per share-basic                                                                 $0.06                      $0.14
                                                                                            -----                      -----

Net income per share-diluted
   Income  before cumulative effect of a change in accounting principle                     $0.06                      $0.12
   Cumulative effect of a change in accounting principle                                    $0.00                      $0.02
                                                                                            -----                      -----
Net income  per share-basic                                                                 $0.06                      $0.14
                                                                                            =====                      =====
</TABLE>

           See accompanying notes to consolidated financial statements

                                        4
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                     Three months ended  March  31,
                                                                                     ------------------------------
                                                                                        2002             2001
                                                                                     ------------------------------
<S>                                                                                     <C>              <C>
Net Sales                                                                            $ 10,748,433    $ 14,495,209
Cost  of Sales                                                                          7,924,737      11,291,068
                                                                                        ---------      ----------
    Gross Profit                                                                        2,823,696       3,204,141

Selling, General and  Administrative Expenses                                           2,294,614       2,618,042
Research & Development Expenses                                                           364,413         347,768
                                                                                          -------         -------
    Income  from operations                                                               164,669         238,331

Other  Income (expense):
  Interest income                                                                          12,338           9,715
  Interest expense                                                                              -          (7,870)
  Foreign currency                                                                         10,455         (70,674)
  Non operational USD to Euro currency re-measurement                                      49,492               -
                                                                                           ------          ------
Other  income (expense)                                                                    72,285         (68,829)
                                                                                           ------         -------
      Income  before taxes on income                                                      236,954         169,502
Taxes provision (benefit)                                                                  20,000        (130,214)
                                                                                           ------        --------
      Net income                                                                      $   216,954     $   299,716
                                                                                      ===========     ===========

Net income per shares:
    Basic                                                                                   $0.02           $0.03
    Diluted                                                                                 $0.02           $0.03
                                                                                            =====           =====
</TABLE>

           See accompanying notes to consolidated financial statements

                                        5
<PAGE>

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


<TABLE>
<CAPTION>



                                                  Three months  ended  March  31,          Six months ended March 31,
                                                  -------------------------------          --------------------------

                                                       2002            2001                     2002          2001
                                                       ----            ----                     ----          ----
<S>                                                     <C>                <C>                    <C>          <C>
       Other comprehensive income:
------------------------------------------

Net income                                         $ 216,954         $299,716              $  500,936       $1,264,496
Foreign currency translation gain  (loss)           (105,381)          37,185                (110,398)          37,185
                                                  --------------------------------------------------------------------
Other  comprehensive income                        $ 111,573         $336,901              $  390,538       $1,301,681
                                                  ====================================================================

</TABLE>


          See accompanying notes to consolidated financial statements


                                       6

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>


                                                                                    Six months ended March 31,
                                                                               2002                          2001
                                                                               ----------------------------------

<S>                                                                                  <C>                    <C>

Cash Flows From Operating Activities:
  Net income                                                                   $   500,936             $   1,264,496
                                                                               -----------             -------------
   Adjustments to reconcile net income to net cash
     Provided by (used in) operating activities:
    Depreciation and amortization                                                  167,161                   198,052
     Provision for uncollectible  accounts receivable                               20,000                    10,000
    Other non cash items                                                            20,008                    19,002
  Changes in current assets and liabilities:
     Accounts receivable                                                         1,317,745                   724,897
     Inventories                                                                   384,022                  (822,678)
    Prepaid expenses and other current assets                                      (11,046)                 (767,683)
    Accounts payable and other current liabilities                                 146,490                   350,031
                                                                                   -------                   -------
        Total adjustments                                                        2,044,380                  (288,379)
                                                                                 ---------                  --------
   Net cash  provided by  operating activities                                   2,545,316                   976,117
                                                                                 ---------                   -------

Cash Flows From Investing Activities:
    Purchases of property, plant and equipment                                     (46,503)                 (120,338)
                                                                                   -------                  --------
       Net cash used in investing activities                                       (46,503)                 (120,338)
                                                                                   -------                  --------

Cash Flows From Financing Activities:
    Loan repayments                                                                      -                  (640,000)
    Proceeds from employee stock purchases                                          15,304                    27,382
    Purchase of treasury stock                                                     (41,011)                        -
                                                                                   -------                  --------
        Net cash used in  financing activities                                     (25,707)                 (612,618)
                                                                                   -------                  --------
        Net increase in cash and cash equivalents                                2,473,106                   243,161
                                                                                 ---------                   -------
Effect of exchange rate changes on cash and cash equivalents                      (110,398)                        -
Cash and cash equivalents, beginning of period                                   4,422,239                 2,744,855
                                                                                 ---------                 ---------
Cash and cash equivalents, end of period                                       $ 6,784,947                 2,988,016
                                                                               ===========                 =========
Supplemental disclosures:
   Interest paid                                                               $         -             $      13,681
   Income taxes paid                                                           $    25,386             $       4,506
                                                                               ===========             =============

</TABLE>

           See accompanying notes to consolidated financial statements

                                       7

<PAGE>

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

Note 1.  Basis of  Presentation

The accompanying  unaudited condensed consolidated financial statements included
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles for interim period  reporting in conjunction with the instructions to
Form 10-Q.  Accordingly,  these statements do not include all of the information
required  by  generally  accepted  accounting  principles  for annual  financial
statements.  In the opinion of management,  all known adjustments (consisting of
normal  recurring  accruals  and  reserves)  necessary  to  present  fairly  the
financial  position,  results of operations and cash flows for the three and six
month period ended March 31, 2002 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, 2001 Form 10-K.

The  operating  results for the three and six month  period ended March 31, 2002
are not  necessarily  indicative of the results to be expected for the September
30, 2002 year end.

Note 2.    Derivative Financial   Instruments

The Company uses  derivatives to reduce its exposure to  fluctuations in foreign
currencies. Derivative products, such as foreign currency forward contracts, are
used to hedge the foreign currency market exposures  underlying  forecasted Euro
sales transactions with customers.  The Company's  accounting policies for these
instruments  are  based  on its  designation  of  such  instruments  as  hedging
transactions. The Company does not use derivative instruments for purposes other
than hedging.  The Company  records all derivatives on the balance sheet at fair
value. As of March 31, 2002, a current asset of $7,349 reflecting the fair value
of the Company's  outstanding foreign currency forward contracts was recorded on
the  balance  sheet.  The  Company  recognizes  gains and  losses on  derivative
contracts as an  adjustment  to net sales.  For the three and six month  periods
ended March 31, 2002 and 2001, the Company  recorded as an increase to net sales
of  approximately $ 62,300 and $66,000,  respectively and $ 97,000 and $788,000,
respectively.

To date, none of the Company's derivatives qualify for hedge accounting.

The effect of implementing SFAS No.133,  "Accounting for Derivative  Instruments
and Hedging  Activities",  which was adopted on October 1, 2000, is presented in
this form 10-Q as a cumulative  effect of a change in  accounting  principle for
the six months ended March 31, 2001.

 Note 3.  Inventories

     Inventories  have been valued at the lower of average  cost or market.  The
     components of inventory consist of:

                                    March 31,          September 30,
                                     2002                   2001
                                     ----                   ----

     Component Parts            $ 3,103,944             $ 2,421,420
     Work in Progress                 9,173                  92,070
     Finished Goods               4,674,428               5,658,077
                                  ---------               ---------
                                $ 7,787,545             $ 8,171,567
                                ===========             ===========

                                        8

<PAGE>

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

Note 4.  Net Income Per  Share

Basic net income per share  includes no dilution and is computed by dividing net
income by the  weighted  average  number of common  shares  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:

<TABLE>
<CAPTION>

                                                                          Three Months Ended          Six Months Ended
                                                                              March   31,                  March 31,
                                                                              2002       2001           2002         2001
                                                                              ----       ----           ----         ----
        <S>                                                                   <C>       <C>             <C>          <C>
 Weighted average shares outstanding-basic                                 8,893,147    8,887,719     8,890,175    8,886,349
 Number of shares issued on the assumed exercise of stock options            127,184      353,100       174,622      384,791
                                                                             -------      -------       -------      -------
 Weighted average shares outstanding-diluted                               9,020,331    9,240,819     9,064,797    9,271,140
                                                                           =========    =========     =========    =========

</TABLE>

Options to  purchase  1,145,222  and  530,222  shares of common  stock at prices
ranging $1.91 to $ 10.06 and $3.94 and $10.06,  respectively,  were  outstanding
for the three month period ending March 31, 2002 and 2001, respectively but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Options to  purchase  1,025,822  and  530,222  shares of common  stock at prices
ranging $2.31 to $ 10.06 and $3.94 and $10.06,  respectively,  were  outstanding
for the six month period ending March 31, 2002 and 2001,  respectively  but were
not included in the computation of diluted  earnings per share because they were
anti- dilutive.

Note 5.  Accumulated other comprehensive income ( loss)

The Euro is the  functional  currency of the  Company's  European  subsidiaries.
Assets and liabilities of these  subsidiaries  are translated to U.S. dollars at
the  exchange  rate in  effect at end of each  reporting  period,  while  equity
accounts are translated to U.S.  dollars at the historical rate in effect at the
date of the  contribution.  Operating  results are translated to U.S. dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S.  dollars at the average  monthly  forward  exchange
contract rate. The use of differing  exchange rates results in foreign  currency
translation  gains or losses,  which are shown as a component  of  stockholders'
equity under the caption "accumulated other comprehensive income (loss)".

Accumulated  other  comprehensive  loss  reflected  in the equity  section was a
charge of  $367,602  at March 31,  2002  compared  to a charge  of  $267,204  at
September 30, 2001. The increase in the other comprehensive loss of $110,398 was
primarily due to the decline in the Euro to US dollar month end exchange rate at
March 31, 2002 compared to the month end exchange rate at September 30, 2001.

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

                                       9

<PAGE>

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

Note  6.  Recent Accounting Pronouncements

In April 2001, the Emerging  Issues Task Force  ("EITF")  issued EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the  Vendor's  Products,"  which was later  codified  along with  other  similar
issues,  into EITF 01-09,  "Accounting for Consideration  Given by a Vendor to a
Customer or a Reseller of the  Vendor's  Products"  ("EITF  01-09").  EITF 01-09
clarifies the income statement  classification  of costs incurred by a vendor in
connection with the reseller's  purchase or promotion of the vendor's  products,
resulting in certain  cooperative  advertising and product placement costs. EITF
01-09 is effective for the Company in the quarter ended March 31, 2002.

The  majority of vendor  consideration  granted by the Company  relates to co-op
advertising  agreements  with  the  Company's  retail  customers.  Based  on the
requirements of EITF 01-09,  the Company has properly  included these costs as a
component  of  selling,  general  and  administrative  expenses  for all periods
presented. In the opinion of management, it appears that the effect of all other
vendor  consideration  arrangements  would  not have a  material  effect  on the
statement of operations based on the requirements of the pronouncement.


                                       10

<PAGE>

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

Six Month Period ended  March 31, 2002 compared to  March  31, 2001
-------------------------------------------------------------------

Results for the six month  period ended March 31, 2002 are detailed in the table
below:
<TABLE>
<CAPTION>


                                                          Six Months     Six Months
                                                             Ended         Ended        Variance         Percentage of sales
                                                            3/31/02       3/31/01          $          2002     2001     Variance
                                                            -------       -------       --------      ----     ----     --------
<S>                                                             <C>        <C>             <C>         <C>      <C>      <C>

Sales                                                    $ 22,811,233  $ 32,390,983    (9,579,750)   100.0%   100.0%        -
Cost of sales                                              17,068,511    25,216,671    (8,148,160)    74.8%    77.9%     -3.1%
                                                           ----------    ----------    ----------     ----     ----       ---
Gross Profit                                                5,742,722     7,174,312    (1,431,590)    25.2%    22.1%      3.1%
Gross Profit %                                                  25.17%       22.15%          3.03%

Selling, General and Administrative expenses:
Sales & Marketing                                           2,872,261    3,581,356       (709,095)    12.6%    11.1%      1.5%
Technical Support                                             191,343      194,327         (2,984)     0.8%     0.6%      0.2%
General  & Administrative                                   1,397,769    1,688,207       (290,438)     6.2%     5.2%      1.0%
                                                            ---------    ---------       --------      ---      ---       ---
     Selling, General and Administrative expenses           4,461,373    5,463,890     (1,002,517)    19.6%    16.9%      2.7%
Research & Development expenses                               723,437      741,028        (17,591)     3.2%     2.3%      0.9%
                                                              -------      -------        -------      ---      ---       ---
Total Selling, General and Administrative expenses          5,184,810    6,204,918     (1,020,108)    22.8%    19.2%      3.6%
                                                            ---------    ---------     ----------     ----     ----       ---
Income from operations                                        557,912      969,394       (411,482)     2.4%     2.9%     -0.5%


Other income (expense)

Interest income                                                21,628       18,546          3,082      0.1%     0.1%      0.0%
Interest expense                                                    -      (19,720)        19,720      0.0%    -0.1%      0.1%
Foreign currency                                               18,036     (120,024)       138,060      0.1%    -0.4%      0.5%
Non operational USD to Euro re-measurement  gain (loss)       (54,140)           -        (54,140)    -0.2%     0.0%     -0.2%
                                                              -------     --------        -------      ---      ---       ---
   Other income (expense)                                     (14,476)    (121,198)       106,722     -0.0%    -0.4%      0.4%
                                                              -------     --------        -------      ---      ---       ---
Income before taxes on income                                 543,436      848,196       (304,760)     2.4%     2.5%     -0.1%
Taxes provision (benefit)                                      42,500     (212,300)       254,800      0.2%    -0.8%     -1.0%
                                                               ------     --------        -------      ---      ---       ---
Income before  cumulative effect of  change in accounting     500,936    1,060,496       (559,560)     2.2%     3.3%     -1.1%
principle
Cumulative effect of a change in  accounting principle,
net of taxes                                                        -      204,000       (204,000)     0.0%     0.6%    -0.6%
                                                              -------      -------       --------      ---      ---      ---
Net income                                                    500,936    1,264,496       (763,560)     2.2%     3.9%    -1.7%
                                                              =======    =========       ========      ===      ===      ===
</TABLE>

Sales  decreased $ 9,579,750 for the six months ended March 31, 2002 compared to
the same period of the prior fiscal year as detailed in the table below:

<TABLE>
<CAPTION>

                                                                                    Percentage of sales by
                Six months ended March  31,            $            Percent           geographic region
                  2002              2001           (Decrease)      (Decrease)         2002         2001
                --------------------------------------------------------------------------------------------
                    <S>              <C>              <C>             <C>             <C>           <C>
Domestic      $  4,807,317     $  6,593,476     $ (1,786,159)        (27)%             21%          20%
Europe          17,482,025       23,310,935       (5,828,910)        (25)%             76%          72%
Asia               521,891        2,486,572       (1,964,681)        (79)%              3%           8%
                   -------        ---------       ----------         ---                -            -
  Total       $ 22,811,233     $ 32,390,983     $ (9,579,750)        (30)%            100%         100%
              ============     ============     ============         ===              ===          ===
</TABLE>

                                       11

<PAGE>

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

The primary forces causing the sales decrease were:

        -       Sluggish worldwide economic conditions
        -       Reduction in analog  board sales
        -       Lower OEM sales activity
        -       Lower Asian sales

Sales to domestic  customers  were 21% of net sales compared to 20% for the same
period last year. Sales to European  customers were 76% of net sales compared to
72% for the same period of last year.  Sales to Asian customers were 3% compared
to 8% for the same period last year.

Gross  margins  decreased $ 1,431,590  for the six months  ended March 31, 2002.
Gross  margin  percentage  for the six months  ended  March 31,  2002 was 25.17%
compared to 22.15% for the six months ended March 31, 2001.  The  components  of
the margin decrease are detailed below:

                                                                    Increase
                                                                   (decrease)

Decrease due to lower sales                                      $ (2,777,122)
Increase  due to higher margins on assembled boards                   504,796
Increase due to decrease in labor and other related costs             840,736
                                                                      -------
      Total  decrease in margins                                 $ (1,431,590)
                                                                 =============

The increase in gross margin  percentage of 3.03% for the six months ended March
31, 2002 compared to the same period of fiscal 2001 is as follows:

                                                                    Increase
                                                                   (decrease)

Increase in margin on assembled boards                                3.69%
Labor and other related costs as a larger percent of sales           (0.66%)
                                                                     -----
Net increase                                                          3.03%
                                                                      ====

The improved margin  percentage on assembled  boards was primarily  derived from
unit price  reductions  from our  subcontractors  and larger sales mix of higher
gross margin  product.  The decrease in the margin  percentage  attributable  to
labor and related costs was due to the percentage  decrease in sales for the six
month  period of  fiscal  2002  compared  to last year  being  greater  than the
percentage decrease in labor and other related costs for the same time periods.

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

<TABLE>
<CAPTION>

                                                                Six months ended March   31,
                                                                ----------------------------
                                                  Dollar Costs                       Percentage of Sales
                                                  ------------                       -------------------
                                    2002           2001            (Decrease)     2002      2001       Increase
                                    ----           ----            ----------     ----      ----       --------
<S>                                  <C>            <C>               <C>          <C>       <C>         <C>
Sales and Promotional          $  2,872,261   $  3,581,356      $   (709,095)     12.6%     11.1%       1.5%
Customer Support                    191,343        194,327            (2,984)      0.8%      0.6%       0.2%
General and Administrative        1,397,769      1,688,207          (290,438)      6.2%      5.2%       1.0%
                                  ---------      ---------          --------       ---       ---        ---
    Total                      $  4,461,373   $  5,463,890      $ (1,002,517)     19.6%     16.9%       2.7%
                               ============   ============      ============      ====      ====        ===

</TABLE>

                                       12

<PAGE>

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

Selling General and Administrative  expenses decreased $1,002,517 from the prior
year. As a percentage of sales, Selling, General and Administrative expenses for
the six months ended March 31, 2002  increased by 2.7% when  compared to the six
months ended March 31, 2001.

The decrease in sales and promotional expense of $709,095 was mainly due to :

        -       Lower advertising costs of $517,004 due to lower co-operative
                advertising and reduced special promotions
        -       Lower commission payments  of $ 100,117 due to lower sales
        -       Decreased compensation costs of $82,042 due to personnel
                reductions

The decrease in General and  Administrative  expenses of $ 290,438 was primarily
due to:

        -       Decrease in compensation costs of $196,853 due to personnel
                reductions for administrative personnel coupled with corporate
                personnel reductions
        -       Decreased amortization costs of $30,891 mainly due to the write
                off of goodwill during the fourth quarter of fiscal 2001
        -       Lower rent costs of $ 27,362 and lower communication costs of
                $19,821 due to the consolidation of the Eskape Labs office in
                California into the Hauppauge California office

Research and development  expenses decreased $17,591 or approximately  2.4%. The
decrease  was due to lower  worldwide  compensation  costs  offset  somewhat  by
material and contract services consumed.

Other income (expense)

Net other  expense for the six months ended March 31, 2002 was $14,476  compared
to net other expense of $121,198 for the prior year's six months ended March 31,
2001 as detailed below:

                                                      Six months ended March 31,
                                                           2002         2001
                                                           ----         ----
  Interest income                                      $  21,628     $   18,546
  Interest expense                                             -        (19,720)
  Foreign currency transaction gains (losses)             18,036       (120,024)
  Non operational USD to Euro currency re-measurement    (54,140)             -
                                                         -------        -------
  Total other (expense)                                $ (14,476)    $ (121,198)
                                                       =========     ==========

The  decrease in total other  expense was due to foreign  currency  transactions
gains in fiscal 2002 as opposed to losses in fiscal 2001,  offset by losses from
the "Non operational USD to Euro currency re- measurement".

"Non operational USD to Euro currency re-measurement" results from the revaluing
from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on
the books of our Luxembourg  based  subsidiary,  Hauppauge  Digital Europe SARL.
Since the functional  currency of Hauppauge Digital Europe SARL is the Euro, any
asset,  liability or equity  accounts  which are invested in or purchased  using
U.S. dollars by

                                       13

<PAGE>

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

Hauppauge  Digital Europe SARL need to be revalued into Euros at the end of each
reporting  period.  This  revaluation of U.S. dollar  denominated  accounts into
Euros results in a non transactional  re-measurement gain or loss, which we have
classified as " Non operational USD to Euro currency re-measurement."

Tax provision (benefit)

Our net tax provision (benefit) for the six months ended March 31, 2002 and 2001
is as follows:

                                                  Six months ended March  31,
                                                     2002            2001
                                                     ----            ----

Tax (benefit) attributable to U.S.operations    $ (477,000)       $  (369,000)
Tax expense Asian operations                             -             42,500
Tax  expense  European operations                   42,500            114,200
Deferred tax asset valuation allowance             477,000                  -
                                                   -------           --------
Net tax provision  (benefit)                    $   42,500        $  (212,300)
                                                ==========        ===========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the  Hauppauge  name.  For the last two fiscal  years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax assets as of March 31, 2002 and we  concluded  that under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

The adoption of Financial Accounting  Standards No. 133 (SFAS 133),  "Accounting
for Derivative Instruments and Hedging Activities",  on October 1, 2000 resulted
in a $204,000 gain, net of taxes of $115,000,  due to the cumulative effect of a
change in accounting principle.

As a result of the above,  we recorded net income of $500,936 for the six months
ended March 31 , 2002,  which resulted in basic and diluted net income per share
of $0.06  on  weighted  average  basic  and  diluted  shares  of  8,890,175  and
9,064,797,  respectively,  compared  to a net income of  $1,264,496  for the six
months ended March 31, 2001,  which resulted in basic and diluted net income per
share of $0.14 on weighted  average  basic and diluted  shares of 8,886,349  and
9,271,140  respectively.  Options to purchase  1,025,822  and 530,222  shares of
common stock at prices ranging $3.94 to $ 10.06, respectively,  were outstanding
as of March  31,  2002 and  2001,  respectively  but  were not  included  in the
computation of diluted earnings per share because they were anti-dilutive.


                                       14

<PAGE>

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

Three Month Period ended March  31, 2002 compared to March  31, 2001
--------------------------------------------------------------------

Results for the three  month  period  ended  March 31, 2002 are  detailed in the
table below:

<TABLE>
<CAPTION>
                                                        Three Months    Three Months
                                                           Ended           Ended        Variance            Percentage of sales
                                                          3/31/02         3/31/01          $            2002      2001     Variance
                                                          -------         -------          -            ----      ----     --------
<S>                                                         <C>             <C>            <C>            <C>      <C>        <C>
Sales                                                  $ 10,748,433   $ 14,495,209   $ (3,746,776)      100.0%    100.0%      -
Cost of sales                                             7,924,737     11,291,068     (3,366,331)       73.7%     77.9%   -4.2%
                                                          ---------     ----------     ----------        ----      ----     ---
Gross Profit                                              2,823,696      3,204,141       (380,445)       26.3%     22.1%    4.2%
Gross Profit %                                               26.27%         22.10%          4.17%

Selling, General and Administrative expenses:
Sales & Marketing                                         1,494,242      1,684,562       (190,320)       13.9%     11.6%    2.3%
Technical Support                                            94,108         94,895           (787)        0.9%      0.7%    0.2%
General  & Administrative expenses                          706,264        838,585       (132,321)        6.6%      5.8%    0.8%
                                                            -------        -------       --------         ---       ---     ---
   Selling, General and Administrative expenses           2,294,614      2,618,042       (323,428)       21.4%     18.1%    3.3%
Research  & Development expenses                            364,413        347,768         16,645         3.4%      2.4%    1.0%
                                                            -------        -------         ------         ---       ---     ---
Total Selling, General and Administrative expenses        2,659,027      2,965,810       (306,783)       24.8%     20.5%    4.3%
                                                          ---------      ---------       --------        ----      ----     ---
Income from operations                                      164,669        238,331        (73,662)        1.5%      1.6%   -0.1%

Other income (expense)
Interest income                                              12,338          9,715          2,623         0.1%      0.1%    0.0%
Interest expense                                                  -         (7,870)         7,870         0.0%     -0.1%    0.1%
Foreign currency                                             10,455        (70,674)        81,129         0.1%     -0.5%    0.6%
Non operational USD to Euro re-measurement  gain (loss)      49,492              -         49,492         0.5%      0.0%    0.5%
                                                             ------        -------         ------         ---       ---     ---
     Other income (expense)                                  72,285        (68,829)       141,114         0.7%     -0.5%    1.2%
                                                             ------        -------        -------         ---       ---     ---
Income before taxes on income                               236,954        169,502         67,452         2.2%      1.1%    1.1%
Taxes provision (benefit)                                    20,000       (130,214)       150,214         0.2%     -0.9%   -1.1%
                                                             ------       --------        -------         ---       ---     ---
Net income                                             $    216,954        299,716        (82,762)        2.0%      2.0%    0.0%
                                                       ============        =======        =======         ===       ===     ===
</TABLE>

Sales  decreased $ 3,746,776  for the three months ended March 31, 2002 compared
to the same quarter of the prior fiscal year as detailed  geographically  in the
table below:

<TABLE>
<CAPTION>
                                                                      Percentage of sales by
                    Three months ended March 31,           Percent      geographic region
                 2002            2001      (Decrease)    (Decrease)      2002        2001
                 ----            ----      ----------    ----------      ----        ----
<S>               <C>            <C>            <C>         <C>          <C>         <C>
Domestic    $  2,248,745   $  2,236,384   $    12,361        1%           21%         15%
Europe         8,270,340     11,135,462    (2,865,122)     -26%           77%         77%
Asia             229,348      1,123,363      (894,015)     -80%            2%          8%
                 -------      ---------      --------       --             -           -
  Total     $ 10,748,433   $ 14,495,209   $(3,746,776)     -26%          100%        100%
</TABLE>

The primary forces causing the sales decrease were:

        -       Sluggish worldwide economic conditions
        -       Reduction in analog  board sales
        -       Lower OEM sales activity
        -       Lower Asian sales

                                       15

<PAGE>

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

Sales to domestic  customers  were 21% of net sales compared to 15% for the same
period last year. Sales to European  customers were 77% of net sales compared to
77% for the same period of last year.  Sales to Asian customers were 2% compared
to 8% for the same period last year.

Gross  margins  decreased $ 380,445 for the three  months  ended March 31, 2002.
Gross  margin  percentage  for the three  months ended March 31, 2002 was 26.27%
compared to 22.10% for the three months ended March 31, 2001.  The components of
the margin decrease are detailed below:

                                                                 Increase
                                                                (decrease)
                                                                ----------
Decrease due to lower sales                                   $ (1,108,728)
Increase  due to higher margins on assembled boards                494,645
Increase due to decrease in labor and other related costs          233,638
                                                                   -------
      Total  (decrease) in margins                            $   (380,445)
                                                              ============

The  increase in gross  margin  percentage  of 4.17% for the three  months ended
March 31, 2002 compared to the first quarter of fiscal 2001 is as follows:

                                                                    Increase
                                                                   (decrease)
                                                                   ----------
Increase in margin on assembled boards                               4.60%
Labor and other related costs as a larger percent of sales          (0.43%)
                                                                    -----
Net increase                                                         4.17%
                                                                     ====

The improved margin  percentage on assembled  boards was primarily  derived from
unit price reductions from our  subcontractors  and a larger sales mix of higher
gross margin  product.  The decrease in the margin  percentage  attributable  to
labor and  related  costs was due to the  percentage  decrease  in sales for the
second  quarter of fiscal  2002  compared  to the second  quarter of fiscal 2001
being greater than the percentage  decrease in labor and other related costs for
the same time periods.

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

<TABLE>
<CAPTION>

                                                   Three months ended March  31,
                                         Dollar Costs                                   Percentage of Sales
                               -----------------------------------------------------------------------------------
                                    2002             2001             (Decrease)    2002         2001     Increase
                                    ----             ----             ----------    ----         ----     --------
<S>                                 <C>               <C>               <C>          <C>          <C>        <C>
Sales and Promotional          $   1,494,242     $ 1,684,562     $   (190,320)      13.9%        11.6%      2.3%
Customer Support                      94,108          94,895             (787)       0.9%         0.7%      0.2%
General and Administrative           706,264         838,585         (132,321)       6.6%         5.8%      0.8%
                                     -------         -------         --------        ---          ---       ---
    Total                      $   2,294,614     $ 2,618,042     $   (323,428)      21.4%        18.1%      3.3%
                               =============     ===========     ============       ====         ====       ===

</TABLE>

                                       16

<PAGE>

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

Selling General and  Administrative  expenses  decreased $323,428 from the prior
year's second fiscal  quarter.  As a percentage of sales,  Selling,  General and
Administrative  expenses for the three months ended March 31, 2002  increased by
3.3% when compared to three months ended March 31, 2001.

The decrease in sales and promotional expense of $190,320 was mainly due to:

        -       Lower advertising costs of $133,573 due to lower co-operative
                advertising and reduced special promotions
        -       Lower commission payments  of $48,489 due to lower sales
        -       Decreased compensation costs of $41,307 due to personnel
                reductions

The decrease in General and  Administrative  expenses of $132,321 was primarily
due to:

        -       Decrease in compensation costs of $100,664 due to personnel
                reductions for administrative personnel coupled with corporate
                personnel reductions
        -       Decreased amortization costs of $17,743 mainly due to the write
                off of goodwill during the fourth quarter of fiscal 2001
        -       Lower rent costs of $13,832 and lower communication costs of
                $12,123 due to the consolidation of the Eskape Labs office in
                California into the Hauppauge California office

Research and development  expenses increased $16,645 or approximately  4.8%. The
increase  was due to lower  worldwide  compensation  costs  offset by  increased
material and contract services consumed.

Other income (expense)

Net other income for the three months ended March 31, 2002 was $72,285  compared
to net other expense of $ 68,829 for the prior year's  second fiscal  quarter as
detailed below:

                                                  Three months ended March  31,
                                                          2002       2001
                                                          ----       ----
  Interest income                                      $ 12,338   $  9,715
  Interest expense                                            -     (7,870)
  Foreign currency transaction gains (losses)            10,445    (70,674)
  Non operational USD to Euro currency re-measurement    49,492          -
                                                         ------    --------
  Total other income (expense)                         $ 72,285   $ (68,829)
                                                       ========   =========

The  increase in total  other  income was due to foreign  currency  transactions
gains in fiscal  2002 as opposed  to losses in fiscal  2001  coupled  with gains
during the quarter  ended March 31,  2002 for the "Non  operational  USD to Euro
currency re-measurement".

"Non operational USD to Euro currency re-measurement" results from the revaluing
from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on
the books of our Luxembourg  based  subsidiary,  Hauppauge  Digital Europe SARL.
Since the functional  currency of Hauppauge Digital Europe SARL is the Euro, any
asset,  liability or equity  accounts  which are invested in or purchased  using
U.S. dollars by

                                       17

<PAGE>

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

Hauppauge  Digital Europe SARL need to be revalued into Euros at the end of each
reporting  period.  This  revaluation of U.S. dollar  denominated  accounts into
Euros results in a non transactional  re-measurement gain or loss, which we have
classified as " Non operational USD to Euro currency re-measurement."

Tax provision (benefit)

Our net tax  provision  (benefit)  for the three months ended March 31, 2002 and
2001 is as follows:

                                                  Three months ended  March 31,
                                                    2002              2001
                                                    ----              ----
Tax (benefit) attributable to U.S operations    $  (248,000)      $ (190,214)
Tax  expense  European operations                    20,000           60,000
Deferred tax asset valuation allowance              248,000                -
                                                    -------         --------
Net tax provision  (benefit)                    $    20,000       $ (130,214)
                                                ===========       ==========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the  Hauppauge  name.  For the last two fiscal  years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax assets as of March 31, 2002 and we  concluded  that under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

As a result of the above,  we recorded  net income of  $216,954  for the quarter
ended March 31 , 2002,  which resulted in basic and diluted net income per share
of $0.02  on  weighted  average  basic  and  diluted  shares  of  8,893,147  and
9,020,331,  respectively,  compared  to a net income of  $299,716  for the three
months ended March 31, 2001,  which resulted in basic and diluted net income per
share of $0.03 on weighted  average  basic and diluted  shares of 8,887,719  and
9,240,819  respectively.  Options to purchase  1,145,222  and 530,222  shares of
common  stock  at  prices  ranging  $1.91  to $  10.06  and  $3.94  and  $10.06,
respectively,  were outstanding for the three month period ending March 31, 2002
and 2001,  respectively,  but were not  included in the  computation  of diluted
earnings per share because they were anti-dilutive.

Seasonality
-----------

As our sales are primarily to the consumer market,  we have experienced  certain
seasonal revenue trends. Our peak sales quarter,  due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December),  followed
by our fourth fiscal quarter (July to September). In addition, our international
sales,  mostly in the European  market,  were 77%, 71% and 73 % of sales for the
years ended September 30, 2001, 2000 and 1999,  respectively.  Our fiscal fourth
quarter sales (July to September) can be  potentially  impacted by the reduction
of activity  experienced  in Europe  during the July and August  summer  holiday
period.

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

                                       18

<PAGE>

Liquidity and Capital Resources
-------------------------------

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

                                   March 31, September 30,
                                    2002             2001
                                    ----             ----
Cash                            $ 6,784,947      $ 4,422,239
Working Capital                  10,763,640       10,258,143
Stockholders'  Equity            11,569,451       11,185,618

The Company had cash and cash equivalents as of March 31, 2002 of $6,784,947, an
increase of $2,362,708 over September 30, 2001.

The increase was due to:

Net income adjusted for non cash items                              $   708,105
Decrease in inventories                                                 384,022
Proceeds from employee stock purchases                                   15,304
Decrease in accounts receivable                                       1,317,745
Increase in accounts payable and accrued expenses                       146,490
Less cash used for:
Increase in prepaid and other current assets                           (11,046)
Purchases of fixed assets                                              (46,503)
Purchase of treasury stock                                             (41,011)
Effect of exchange rate changes on cash and cash equivalents          (110,398)
                                                                      --------
   Net increase in cash                                             $ 2,362,708
                                                                    ===========

Net cash of $2,545,316 provided by operating  activities was primarily due to a
decrease in accounts  receivable  and  inventory  of $1,317,745  and $384,022,
respectively,  net  income  adjusted  for non  cash  items of $708,105  and an
increase in accounts payable and accrued expenses of $146,490,  offset somewhat
by an increase in prepaid assets of $11,046.

Cash of $46,503  and  $41,022 was used to  purchase  fixed  assets and  purchase
treasury stock.  Proceeds from the exercise of stock options and stock purchased
by employees from the employee stock purchase plan provided  additional  cash of
$15,304.  The change in accumulated other  comprehensive  loss decreased cash by
$110,398.

On April 5, 2001,  we extended  our  agreement  with Chase  Manhattan  Bank,  to
provide us with a  $6,500,000  credit  facility.  The facility is secured by our
assets,  and expired on March 31,  2002.  On January 25, 2002,  Chase  Manhattan
Bank,  citing the current economic  conditions in the technology  sector coupled
with our two years of non  profitability,  verbally informed us that our line of
credit  had been  terminated.  No  amounts  were  outstanding  under the  credit
facility on January 25, 2002. It is our intention to replace the terminated line
with a new credit facility.

On November 8, 1996, we approved a stock  repurchase  program for the repurchase
of up to  600,000  shares of our own  stock.  We  intend to use the  repurchased
shares for certain  employee benefit  programs.  On December 17, 1997, the stock
repurchase program was extended by a resolution of our Board of Directors. As of
March 31, 2002, we held 488,017  treasury shares  purchased for $1,412,573 at an
average purchase price of approximately $2.89 per share.

                                       19

<PAGE>

Critical Accounting Policies and Estimates
------------------------------------------

Financial  Reporting  Release  No.  60,  which  was  recently  released  by  the
Securities  and  Exchange  Commission,  requires  all  companies  to  include  a
discussion of critical accounting policies or methods used in the preparation of
financial statements.

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

        -       Revenue Recognition
        -       Management's estimates
        -       Hedging program for sales denominated in a foreign currency
        -       Translation of assets and liabilities denominated in  non
                functional currencies on our European financial statements

Revenue Recognition
-------------------

Our revenues are primarily derived from the sale of computer boards which enable
you to view  television  programs on your personal  computer.  Sales of computer
boards are commonly classified as computer hardware.  Our sales are primarily to
retailers,  distributors  and  original  equipment  manufacturers.  Sales to our
customers are documented by a purchase  order which  describes the conditions of
sale.  Sales are  recorded  when  products are shipped to our  customers,  as we
generally have no significant  post delivery  obligations,  the product price is
fixed and determinable,  collection of the resulting  receivable is probable and
product  returns are  reasonably  estimable.  Revenue  from  freight  charged to
customers is  recognized  when  products are  shipped.  Provisions  for customer
returns and other  adjustments  are provided for in the period the related sales
are recorded based upon historical data.

Management's Estimates
----------------------

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with accounting  principles  generally accepted in the United States.
The  preparation  of these  financial  statements  requires  management  to make
estimates and judgments that affect the reported amounts of assets,  liabilities
and related  disclosure of contingent  assets and liabilities at the date of the
consolidated  financial  statements  and the  reported  amounts for revenues and
expenses during the reporting period. On an ongoing basis,  management evaluates
estimates,  including  those related to sales  provisions,  as described  above,
income  taxes,  bad debts,  inventory  reserves and  contingencies.  We base our
estimates on historical data, when available,  experience,  and on various other
assumptions  that are believed to be  reasonable  under the  circumstances,  the
combined results of which form the basis for making judgments about the carrying
values of assets  and  liabilities  that are not  readily  apparent  from  other
sources. Actual results may differ from these estimates.

Hedging  program for sales denominated in a  foreign currency
-------------------------------------------------------------

Our European subsidiary accounts for approximately 70% to 75 % of our net sales.
All of our European  sales are  denominated in local  currencies,  primarily the
Euro. As a result of this,  we are a net receiver of  currencies  other than the
U.S. dollar. Changes in the exchange  rate subject us to market risks  resulting
from the fluctuation of the Euro to the U.S.  dollar.  In an attempt to minimize
these  risks,   we  enter  into  forward   exchange   contracts  with  financial
institutions.

                                       20

<PAGE>

Hedging program for  sales denominated in a  foreign currency-continued
-----------------------------------------------------------------------

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

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

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

The functional currency of our European subsidiary is the Euro. In preparing our
consolidated  financial  statements,  we are  required to  translate  assets and
liabilities  denominated in a non functional  currency,  mainly U.S. dollars, to
Euros on the books of our European subsidiary.  This process results in exchange
gains and losses  depending  on the changes in the Euro to U.S.  exchange  rate.
Under the relevant accounting guidance,  we are obligated to include these gains
and losses on our  statement of  operations,  which we report in other income or
expense under the caption "Non  operational USD to Euro re- measurement  gain or
(loss)."

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

Future Contractual Obligations
------------------------------

The following table shows the Company's contractual obligations related to lease
obligations as of March 31, 2002:

                                            Payments due by period

Contractual obligations             Total       1 year     1-3 years   4-5 years

Operating lease obligations      $ 2,518,067  $ 659,349  $ 1,300,001   $ 558,718
                                 -----------  ---------  -----------   ---------

We  believe  that our cash and cash  equivalents  as of March  31,  2002 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.

Inflation
---------

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

                                       21

<PAGE>

Effect of New Accounting Pronouncements
---------------------------------------

In April 2001, the Emerging  Issues Task Force  ("EITF")  issued EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the  Vendor's  Products,"  which was later  codified  along with  other  similar
issues,  into EITF 01-09,  "Accounting for Consideration  Given by a Vendor to a
Customer or a Reseller of the  Vendor's  Products"  ("EITF  01-09").  EITF 01-09
clarifies the income statement  classification  of costs incurred by a vendor in
connection with the reseller's  purchase or promotion of the vendor's  products,
resulting in certain  cooperative  advertising and product placement costs. EITF
01-09 is effective for the Company in the quarter ended March 31, 2002.

The  majority of vendor  consideration  granted by the Company  relates to co-op
advertising  agreements  with  the  Company's  retail  customers.  Based  on the
requirements of EITF 01-09,  the Company has properly  included these costs as a
component  of  selling,  general  and  administrative  expenses  for all periods
presented. In the opinion of management, it appears that the effect of all other
vendor  consideration  arrangements  would  not have a  material  effect  on the
statement of operations based on the requirements of the pronouncement.

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

Due to extensive  sales to European  customers  with payment made to us in those
local  currencies and limited  expenses paid in local  currencies,  we are a net
receiver of currencies  other than the U.S.  dollar.  As such, we benefit from a
weak dollar and are negatively affected by a strong dollar relative to the major
worldwide   currencies,   especially  the  Euro  and  British  Pound   Sterling.
Consequently, changes in exchange rates expose us to market risks resulting from
the fluctuations in the foreign currency  exchange rates to the U.S. dollar.  We
attempt  to  reduce  these  risks by  entering  into  foreign  exchange  forward
contracts with financial institutions to protect against currency exchange risks
associated with our foreign denominated sales.

The strength or weakness of the U.S.  dollar  against the Euro and British Pound
Sterling impacts our financial results. Changes in exchange rates may positively
or negatively affect our revenues, gross margins,  operating income and retained
earnings  (which  are all  expressed  in U.S.  dollars).  We engage  in  hedging
programs  aimed at limiting,  in part, the impact of currency  fluctuations.  By
selling  foreign  currency  forward,  we fix the rate of exchange at the time we
enter  into  the  contract.   We  deliver  these  currencies  to  the  financial
institutions at a later date when we actually receive the foreign currency.

As of March 31, 2002, we had foreign currency forward  contracts  outstanding of
approximately  $ 7,449,000  against  delivery of the Euro. The contracts  expire
through August 2002.

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

For the three and six month periods  ended March 31, 2002 and 2001,  the Company
recorded  an  increase  to net  sales  of  approximately  $62,300  and  $66,000,
respectively, and $97,000 and $788,000, respectively.

                                       22

<PAGE>

Special Note Regarding Forward Looking Statements
-------------------------------------------------

Certain  statements  in this  Release  constitute  "forward-looking  statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking  statements.  Such factors  include,  among other things,  those
described in the Company's filings with the Securities and Exchange  Commission,
including  but not limited to the  Company's  Annual Report in Form 10-K for the
fiscal year ended September 30, 2001.

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

Item 1  Legal Proceedings
        -----------------

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

On October 6, 1998, we received  notice that AII had commenced an action against
us and multiple  other  defendants in the United States  District  Court for the
Northern District of Illinois (the "District  Court"),  alleging that certain of
our products infringed on certain patent rights allegedly owned by the plaintiff
(the "Complaint").  The Complaint sought unspecified  compensatory and statutory
damages with interest.  We denied such allegations and vigorously  defended this
action.

On December 22,  1998,  we filed our answer (the  "Answer").  We denied that our
products  infringed  AII's  patent  rights  and  asserted  certain   affirmative
defenses.

On June 26, 2000, the District Court granted the Defendant's  Motion for Partial
Adjudication  of Claim  Constructions  Issues and  entered a Final  Judgment  of
Non-infringement to us.

On July 25,  2000,  AII filed a Notice of Appeal with the U.S.  Court of Appeals
for the Federal  Circuit,  appealing  the District  Court's  Order  granting the
Motion for Partial  Adjudication of Claim Construction Issues and Order entering
Final Judgment of Non infringement.

On July 16,  2001,  the Federal  Circuit  entered a Circuit  Rule 36 Judgment of
Affirmance  Without  Opinion.  Accordingly,  the Federal  Circuit  affirmed  the
District Court's finding of non-infringement.  As of December 13, 2001, the time
limit  permitting AII to file a petition with the U.S.  Supreme Court for a Writ
of Certiorari to review the Federal Circuit judgment has lapsed. This litigation
is now over without the possibility of further appeals.

We have been informed by counsel for the estate of the late Mr. Kenneth Aupperle
("Estate")  that they have  filed a Demand  for  Arbitration  with the  American
Arbitration  Association  claiming  property rights and interest in the Company,
certain  amounts  due  and  owing  to the  Estate  based  on  various  corporate
agreements with Mr. Aupperle and certain insurance  policies,  such amount to be
no less than $2,500,000. As of the date of filing, we have not received a formal
acknowledgement from the American Arbitration Association of the said Demand for
Arbitration.  Management is unable to comment on the merits of the claim without
more  information  from the Estate  and/or its  counsel.  However,  based on the
preliminary  information  presented to us, management believes that the claim is
without merit and will vigorously defend it.

                                       23

<PAGE>

Item 6  Exhibits and Reports on Form 8-K
        --------------------------------

(a)   Exhibits
      --------

         None

(b)  Reports on form 8-K
     -------------------

         None



                                       24

<PAGE>

                                   SIGNATURES
                                   ----------

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


                             HAUPPAUGE DIGITAL, INC.
                             -----------------------
                                   Registrant

Date: May  3,  2002                              By:
      --------------                                 ---------------------------
                                                     KENNETH  PLOTKIN
                                                     President and
                                                     Chief Executive Officer




Date: May 3,  2002                               By:
     -------------                                   ---------------------------
                                                     GERALD TUCCIARONE
                                                     Treasurer and Chief
                                                     Financial Officer





                                       25

<PAGE>