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,  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





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   April 30, 2009,  10,049,196 shares
of  .01 par value Common  Stock of the issuer were
outstanding.







HAUPPAUGE DIGITAL INC. AND
SUBSIDIARIES




INDEX




PART I. FINANCIAL
INFORMATION





Page
      no.Item
      1. Financial StatementsCondensed
      Consolidated Balance Sheets –
                                    March
      31, 2009 (unaudited) and September 30, 2008
                                  
                                  4Condensed
      Consolidated Statements of Operations -
                                    Three
      Months ended March 31, 2009 (unaudited) and 2008
    (unaudited)
                                  
                                  5Condensed
      Consolidated Statements of Operations -
                                    Six
      Months ended March 31, 2009 (unaudited) and 2008
    (unaudited)
                                  
                                  6Condensed
      Consolidated Statements of Other Comprehensive Income (Loss)
                                    Three
      Months and Six Months ended March 31, 2009 (unaudited) and 2008
      (unaudited)
                                  
                                  7Condensed
      Consolidated Statements of Cash Flows-Six Months ended
                                    March
      31, 2009 (unaudited) and 2008 (unaudited)
                                  
                                  8Notes
      to Condensed 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
                  
                  27Signatures




3


PART I. FINANCIAL
INFORMATION




Item
1. Financial Statements


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                      2009
                      (unaudited)
                    
                    
                    September 30 ,
                      2008Assets:Cash
      and cash  equivalents
                    
                    $
                    10,560,463
                    
                    
                    $
                    14,191,721Trade
      receivables, net of  various allowances
                    
                    
                    5,185,711
                    
                    
                    
                    6,932,400Other
      non trade receivables
                    
                    
                    1,936,815
                    
                    
                    
                    2,316,057Inventories
                    
                    
                    10,481,388
                    
                    
                    
                    12,236,166Deferred
      tax asset-current
                    
                    
                    1,133,073
                    
                    
                    
                    1,133,073Prepaid
      expenses and other current assets
                    
                    
                    1,098,599
                    
                    
                    
                    1,093,406Total  current
      assets
                    
                    
                    30,396,049
                    
                    
                    
                    37,902,823Intangible
      assets, net of amortization
                    
                    
                    5,073,520
                    
                    
                    
                    -Property,
      plant and equipment, net
                    
                    
                    874,467
                    
                    
                    
                    769,288Security
      deposits and other non current assets
                    
                    
                    108,400
                    
                    
                    
                    102,227Deferred
      tax asset-non current
                    
                    
                    887,611
                    
                    
                    
                    887,611Total
      assets
                    
                    $
                    37,340,047
                    
                    
                    $
                    39,661,949Liabilities
      and  Stockholders’  Equity:Current
      Liabilities:Accounts
      payable
                    
                    $
                    8,029,573
                    
                    
                    $
                    10,406,836Accrued
      expenses –license  fees
                    
                    
                    9,405,906
                    
                    
                    
                    7,952,244Accrued
      expenses – other
                    
                    
                    2,806,214
                    
                    
                    
                    2,256,099Note
      payable
                    
                    
                    1,875,045
                    
                    
                    
                    -Income
      taxes payable
                    
                    
                    109,649
                    
                    
                    
                    58,234Total
      current  liabilities
                    
                    
                    22,226,387
                    
                    
                    
                    20,673,413Stockholders'
      Equity:Common
      stock, $.01 par value; 25,000,000 shares authorized,
      10,803,938  and 10,784,717  issued,
      respectively
                    
                    
                    108,039
                    
                    
                    
                    107,847Additional
      paid-in capital
                    
                    
                    16,993,478
                    
                    
                    
                    16,709,201Retained
      earnings
                    
                    
                    4,234,312
                    
                    
                    
                    7,938,695Accumulated
      other comprehensive loss
                    
                    
                    (3,817,832
                    )
                    
                    
                    (3,362,870
                    )Treasury
      Stock, at cost, 759,579 shares
                    
                    
                    (2,404,337
                    )
                    
                    
                    (2,404,337
                    )Total
      stockholders' equity
                    
                    
                    15,113,660
                    
                    
                    
                    18,988,536Total  liabilities
      and  stockholders' equity
                    
                    $
                    37,340,047
                    
                    
                    $
                    39,661,949





See accompanying notes to condensed
consolidated financial statements


4


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three months ended
      March 31,2009
                        
                        
                        2008Net
      sales
                        
                        $
                        12,733,429
                        
                        
                        $
                        17,512,692Cost  of
      sales
                        
                        
                        9,769,150
                        
                        
                        
                        14,173,271Gross
      profit
                        
                        
                        2,964,279
                        
                        
                        
                        3,339,421Selling,
      general and  administrative expenses
                        
                        
                        3,861,671
                        
                        
                        
                        3,950,288Research
      and development expenses
                        
                        
                        1,267,848
                        
                        
                        
                        978,939Loss  from
      operations
                        
                        
                        (2,165,240
                        )
                        
                        
                        (1,589,806
                        )Other  income:Interest  income
                        
                        
                        5,156
                        
                        
                        
                        10,623Interest
      (expense)
                        
                        
                        (28,646
                        )
                        
                        
                        -Foreign
      currency  gain (loss)
                        
                        
                        296,675
                        
                        
                        
                        (4,344
                        )Total  other
      income
                        
                        
                        273,185
                        
                        
                        
                        6,279Loss
      before taxes
                        
                        
                        (1,892,055
                        )
                        
                        
                        (1,583,527
                        )Tax  provision
      (benefit)
                        
                        
                        40,015
                        
                        
                        
                        (58,449
                        )Net
      income (loss)
                        
                        $
                        (1,932,070
                        )
                        
                        $
                        (1,525,078
                        )Net
      income (loss)  per share:Basic
                        
                        $
                        (0.19
                        )
                        
                        $
                        (0.15
                        )Diluted
                        
                        $
                        (0.19
                        )
                        
                        $
                        (0.15
                        )





See
accompanying notes to condensed  consolidated financial
statements


5





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Six months ended
    March 31,2009
                          
                          
                          2008Net
      sales
                          
                          $
                          30,022,109
                          
                          
                          $
                          54,560,153Cost  of
      sales
                          
                          
                          24,459,569
                          
                          
                          
                          43,079,671Gross
      profit
                          
                          
                          5,562,540
                          
                          
                          
                          11,480,482Selling,
      general and  administrative expenses
                          
                          
                          7,700,567
                          
                          
                          
                          8,502,856Research
      and development expenses
                          
                          
                          2,113,490
                          
                          
                          
                          1,892,696Income
      (loss)  from operations
                          
                          
                          (4,251,517
                          )
                          
                          
                          1,084,930Other  income
      (expense):Interest  income
                          
                          
                          9,625
                          
                          
                          
                          16,817Interest
      (expense)
                          
                          
                          (28,646
                          )
                          
                          
                          -Foreign
      currency  gain (loss)
                          
                          
                          643,677
                          
                          
                          
                          (31,953
                          )Total
      other income (expense)
                          
                          
                          624,656
                          
                          
                          
                          (15,136
                          )Income
      (loss) before taxes
                          
                          
                          (3,626,861
                          )
                          
                          
                          1,069,794Tax  provision
                          
                          
                          77,522
                          
                          
                          
                          131,883Net
      income (loss)
                          
                          $
                          (3,704,383
                          )
                          
                          $
                          937,911Net
      income (loss)  per share:Basic
                          
                          $
                          (0.37
                          )
                          
                          $
                          0.09Diluted
                          
                          $
                          (0.37
                          )
                          
                          $
                          0.09





See
accompanying notes to condensed  consolidated financial
statements


6


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONDENSED  CONSOLIDATED
STATEMENTS OF OTHER  COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





Three
      months ended March 31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (1,932,070
                  )
                  
                  $
                  (1,525,078
                  )Foreign
      currency translation gain ( loss)
                  
                  
                  (319,673
                  )
                  
                  
                  337,240Forward
      exchange contracts marked to market gain
                  
                  
                  (17,060
                  )
                  
                  
                  (85,617
                  )Other  comprehensive
      loss
                  
                  $
                  (2,268,803
                  )
                  
                  $
                  (1,273,455
                  )





Six
      months ended March 31,2009
                
                
                2008Net
      income (loss)
                
                $
                (3,704,383
                )
                
                $
                937,911Foreign
      currency translation loss
                
                
                (492,636
                )
                
                
                (125,767
                )Forward
      exchange contracts marked to market gain (loss)
                
                
                37,674
                
                
                
                (46,824
                )Other  comprehensive
      income ( loss)
                
                $
                (4,159,345
                )
                
                $
                765,320





See
accompanying notes to condensed consolidated financial
statements


7





HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


CONDENSED  CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six months ended March
      31,2009
                    
                    
                    2008Net
      income (loss)
                    
                    $
                    (3,704,383
                    )
                    
                    $
                    937,911Adjustments
      to reconcile net income (loss) to net cash used
      in  operating  activities:Depreciation
      and amortization
                    
                    
                    129,878
                    
                    
                    
                    130,562Amortization
      of intangible assets
                    
                    
                    188,709
                    
                    
                    
                    -Inventory
      reserve
                    
                    
                    -
                    
                    
                    
                    650,000Bad
      debt expense
                    
                    
                    -
                    
                    
                    
                    120,000Stock
      based  compensation expense
                    
                    
                    265,187
                    
                    
                    
                    278,358Other
      non cash items
                    
                    
                    (6,129
                    )
                    
                    
                    8,172Changes
      in current assets and liabilities, net of effects of
      acquisition:Accounts
      receivable
                    
                    
                    2,125,931
                    
                    
                    
                    15,068,670Inventories
                    
                    
                    1,754,778
                    
                    
                    
                    (3,105,202
                    )Prepaid
      expenses and other current assets
                    
                    
                    (5,193
                    )
                    
                    
                    (525,208
                    )Accounts
      payable
                    
                    
                    (2,614,412
                    )
                    
                    
                    (13,415,396
                    )Accrued
      expenses  and other current liabilities
                    
                    
                    1,648,481
                    
                    
                    
                    (403,696
                    )Total
      adjustments
                    
                    
                    3,487,230
                    
                    
                    
                    (1,193,740
                    )Net
      cash used in  operating activities
                    
                    
                    (217,153
                    )
                    
                    
                    (255,829
                    )Cash
      Flows From Investing Activities:PCTV
      acquisition
                    
                    
                    (2,345,500
                    )
                    
                    
                    -Purchases
      of property, plant and equipment
                    
                    
                    (7,926
                    )
                    
                    
                    (199,211
                    )Net
      cash used in investing activities
                    
                    
                    (2,353,426
                    )
                    
                    
                    (199,211
                    )Cash
      Flows From Financing Activities:Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (40,832
                    )Payments  on
      note payable
                    
                    
                    (624,999
                    )
                    
                    
                    -Proceeds
      from the exercise of stock options and employee  stock
      purchases
                    
                    
                    19,282
                    
                    
                    
                    396,310Net
      cash  provided by (used in)  financing
      activities
                    
                    
                    (605,717
                    )
                    
                    
                    355,478Effect
      of exchange rates on cash
                    
                    
                    (454,962
                    )
                    
                    
                    (172,591
                    )Net  decrease  in
      cash and cash equivalents
                    
                    
                    (3,631,258
                    )
                    
                    
                    (272,153
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    14,191,721
                    
                    
                    
                    11,581,657Cash
      and cash equivalents, end of period
                    
                    $
                    10,560,463
                    
                    
                    $
                    11,309,504Supplemental
      disclosures:Interest
      paid
                    
                    $
                    28,646
                    
                    
                    
                    -Income
      taxes paid
                    
                    $
                    21,354
                    
                    
                    $
                    188,094Note
      payable to Avid Technology, Inc.
                    
                    $
                    2,500,000
                    
                    
                    
                    -





See accompanying notes to condensed
consolidated financial statements


8


HAUPPAUGE DIGITAL, INC.
AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Note
1.  Basis of  Presentation





The
accompanying unaudited condensed 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 six  ended  March
31, 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 condensed
consolidated  financial statements to conform to the current
classifications.




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  March
31, 2009 and September 30, 2008 consisted of :


9


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





March 31,
                  
                  
                  September
      30,2009
                  
                  
                  2008Trade
      receivables
                  
                  $
                  9,273,930
                  
                  
                  $
                  11,668,214Allowances
      and reserves
                  
                  
                  (4,088,219
                  )
                  
                  
                  (4,735,814
                  )Total
      trade receivables
                  
                  
                  5,185,711
                  
                  
                  
                  6,932,400Receivable
      from contract manufacturers
                  
                  
                  1,599,941
                  
                  
                  
                  1,795,225GST
      and VAT taxes receivables
                  
                  
                  290,382
                  
                  
                  
                  484,086Other
                  
                  
                  46,492
                  
                  
                  
                  36,746Total
      non trade receivables
                  
                  $
                  1,936,815
                  
                  
                  $
                  2,316,057




Note
3.   Foreign Currency Translations and Transactions





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





The
financial position and results of operations of the Company’s European
subsidiaries are determined using Euros as the functional
currency.  Assets and liabilities of these subsidiaries are translated
at the exchange rate in effect at each period  end.  Income
statement accounts are translated at the prevailing average spot
rate.   Translation adjustments arising from the translation to
U.S. dollars at differing exchange rates  are included in the
accumulated other comprehensive loss account in stockholders’ equity. Gains and
losses resulting from  transactions that are denominated in currencies
other than Euros are included in earnings as a component of other
income.  The Company had a translation loss of $3,346,325 recorded on
the balance sheet  as of September 30, 2008. For the six months ended
March 31, 2009, the Company  recorded on the balance sheet a deferred
translation loss of $492,636, resulting in a translation loss of $3,838,961
recorded as a component of accumulated other comprehensive loss as
of  March 31, 2009.




Note
4.  Inventories





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





March
      31,
                  
                  
                  September
      30,2009
                  
                  
                  2008Component
      parts
                  
                  $
                  3,791,438
                  
                  
                  $
                  4,561,140Finished
      goods
                  
                  
                  6,689,950
                  
                  
                  
                  7,675,026$
                  10,481,388
                  
                  
                  $
                  12,236,166




Note
5.  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:


10


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Three
      months ended
                
                
                Six
      months endedMarch
      31,
                
                
                March
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008Weighted
      average shares outstanding-basic
                
                
                10,043,876
                
                
                
                9,980,866
                
                
                
                10,039,434
                
                
                
                9,918,434Number
      of shares issued on the assumed exercise of  stock
      options
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                268,700Weighted
      average shares outstanding-diluted
                
                
                10,043,876
                
                
                
                9,980,866
                
                
                
                10,039,434
                
                
                
                10,187,134





Options
to purchase 1,767,744  and 1,631,244 shares of common
stock,  at  prices for both periods ranging
from  $1.05 to $8.75,  were outstanding for the three months
ended March 31, 2009 and 2008, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.





Options
to purchase 1,767,744  and 831,000 shares of common
stock,  at  prices  ranging from  $1.05
to $8.75 and $3.56 to  $8.75, respectively,  were
outstanding for the six months ended March 31, 2009 and 2008, respectively, but
were not included in the computation of diluted earnings per share because they
were anti-dilutive.




Note
6.  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


March 31,
2009,  appearing in the equity section under  “ Accumulated
other  comprehensive loss” was a  loss
of  $3,817,832, which consisted of a deferred translation loss of
$3,838,961 and a deferred gain of $21,129 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  March 31, 2009:





Accumulated other comprehensive
      loss
                    
                    Balance
      as of
                    
                    
                    Oct
      08 to Mar 09
                    
                    
                    Balance
      as ofFiscal 2009 activity
                    
                    Sept 30, 2008
                    
                    
                    gains (losses)
                    
                    
                    March 31, 2009Translation  losses
                    
                    $
                    (3,346,325
                    )
                    
                    $
                    (492,636
                    )
                    
                    $
                    (3,838,961
                    )FAS
      133 mark to market adjustment gain (loss)
                    
                    
                    (16,545
                    )
                    
                    
                    37,674
                    
                    
                    
                    21,129$
                    (3,362,870
                    )
                    
                    $
                    (454,962
                    )
                    
                    $
                    (3,817,832
                    )




Note
7. 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.


11


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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.





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
8.  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 tuners


·
            Digital  TV
      tuners, and combination analog and digital TV
  tuners


·
            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.


12


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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.





Sales
by functional category are as follows:





Three
      months ended March 31,
                    
                    
                    Six
      months ended March 31,Product line sales
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Analog
      TV tuner sales
                    
                    $
                    678,880
                    
                    
                    $
                    2,599,757
                    
                    
                    $
                    2,044,463
                    
                    
                    $
                    7,446,088Digital
      and combination analog and digital
      TV  tuner  sales
                    
                    
                    11,210,311
                    
                    
                    
                    14,886,688
                    
                    
                    
                    26,470,036
                    
                    
                    
                    45,592,085Other
      non-TV tuner products
                    
                    
                    844,238
                    
                    
                    
                    26,247
                    
                    
                    
                    1,507,610
                    
                    
                    
                    1,521,980Total
      sales
                    
                    $
                    12,733,429
                    
                    
                    $
                    17,512,692
                    
                    
                    $
                    30,022,109
                    
                    
                    $
                    54,560,153




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 March 31,
                  
                  
                  Six
      months ended March 31,Geographic region
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008The
      Americas
                  
                  
                  57
                  %
                  
                  
                  50
                  %
                  
                  
                  48
                  %
                  
                  
                  50
                  %Europe
                  
                  
                  40
                  %
                  
                  
                  47
                  %
                  
                  
                  48
                  %
                  
                  
                  48
                  %Asia
                  
                  
                  3
                  %
                  
                  
                  3
                  %
                  
                  
                  4
                  %
                  
                  
                  2
                  %Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %





Note
9. Tax provision





The
Company’s   tax provision for the three  months
ended  December 31, 2008 and 2007 is as follows:





Three months ended March
31,
                    
                    
                    Six months ended March 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Federal
      income tax (benefit)
                    
                    $
                    -
                    
                    
                    $
                    (100,000
                    )
                    
                    $
                    -
                    
                    
                    $
                    -Tax  expense
      on international  operations
                    
                    
                    30,015
                    
                    
                    
                    36,551
                    
                    
                    
                    57,522
                    
                    
                    
                    114,883State
      taxes
                    
                    
                    10,000
                    
                    
                    
                    5,000
                    
                    
                    
                    20,000
                    
                    
                    
                    17,000Tax
      provision (benefit)
                    
                    $
                    40,015
                    
                    
                    $
                    (58,449
                    )
                    
                    $
                    77,522
                    
                    
                    $
                    131,883





Note
10. Recent Accounting  Pronouncements





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 March  31, 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 6).  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 SFASNo. 157
will have on its non-financial assets and non-financial liabilities on its
consolidated financial statements.


13


HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities- An Amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS 161 requires enhanced qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
impact of SFAS 161 on its consolidated financial statements.





Note
11. 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 CONDENSED 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
March 31, 2009 the note payable to Avid Technologies Inc. was $1,875,045. The
interest paid on the note was $28,646 for three months ended March 31,
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 condensed 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  March 31,
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Three
      months
                
                
                Three
      months
                
                
                Six
      months
                
                
                Six
      monthsended
                
                
                ended
                
                
                ended
                
                
                endedMarch
      31,
                
                
                March 31,
                
                
                March 31,
                
                
                March 31,Pro forma statements:
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
                
                $
                12,733,429
                
                
                $
                28,535,692
                
                
                $
                41,045,109
                
                
                $
                76,606,153Net  (loss)
                
                $
                (1,932,070
                )
                
                $
                (3,393,078
                )
                
                $
                (4,402,393
                )
                
                $
                (2,798,089
                )Net  (loss)
      per shareBasic
                
                $
                (0.19
                )
                
                $
                (0.34
                )
                
                $
                (0.44
                )
                
                $
                (0.28
                )Diluted
                
                $
                (0.19
                )
                
                $
                (0.34
                )
                
                $
                (0.44
                )
                
                $
                (0.28
                )





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 CONDENSED 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 MARCH  31, 2009 COMPARED TO THREE MONTH
PERIOD ENDED MARCH 31, 2008





Results
of operations for the three months ended  March 31, 2009 compared to
March 31, 2008 are as follows:




Three
                
                
                ThreeMonths
                
                
                MonthsEnded
                
                
                Ended
                
                
                Variance
                
                
                Percentage
      of sales3/31/09
                
                
                3/31/08
                
                
                $
                
                
                
                2009
                
                
                2008
                
                
                VarianceNet
      sales
                
                $
                12,733,429
                
                
                $
                17,512,692
                
                
                $
                (4,779,263
                )
                
                
                100.00
                %
                
                
                100.00
                %
                
                
                -Cost
      of sales
                
                
                9,769,150
                
                
                
                14,173,271
                
                
                
                (4,404,121
                )
                
                
                76.72
                %
                
                
                80.93
                %
                
                
                -4.21
                %Gross
      profit
                
                
                2,964,279
                
                
                
                3,339,421
                
                
                
                (375,142
                )
                
                
                23.28
                %
                
                
                19.07
                %
                
                
                4.21
                %Gross
      profit %
                
                
                23.28
                %
                
                
                19.07
                %
                
                
                4.21
                %Selling,
      general and administrative expenses:Sales
      and marketing
                
                
                2,444,174
                
                
                
                2,672,798
                
                
                
                (228,624
                )
                
                
                19.19
                %
                
                
                15.26
                %
                
                
                3.93
                %Technical
      support
                
                
                135,600
                
                
                
                152,760
                
                
                
                (17,160
                )
                
                
                1.06
                %
                
                
                0.87
                %
                
                
                0.19
                %General  and
      administrative
                
                
                1,007,759
                
                
                
                1,029,489
                
                
                
                (21,730
                )
                
                
                7.92
                %
                
                
                5.88
                %
                
                
                2.04
                %Amortization
      of intangible assets
                
                
                188,709
                
                
                
                -
                
                
                
                188,709
                
                
                
                1.49
                %
                
                
                0.00
                %
                
                
                1.49
                %Stock
      compensation
                
                
                85,429
                
                
                
                95,241
                
                
                
                (9,812
                )
                
                
                0.68
                %
                
                
                0.54
                %
                
                
                0.14
                %Total
      selling, general and administrative expenses
                
                
                3,861,671
                
                
                
                3,950,288
                
                
                
                (88,617
                )
                
                
                30.34
                %
                
                
                22.55
                %
                
                
                7.79
                %Research
      and development expenses
                
                
                1,220,683
                
                
                
                935,001
                
                
                
                285,682
                
                
                
                9.59
                %
                
                
                5.34
                %
                
                
                4.25
                %Research
      & development  stock compensation
                
                
                47,165
                
                
                
                43,938
                
                
                
                3,227
                
                
                
                0.36
                %
                
                
                0.26
                %
                
                
                0.10
                %Total
      expenses
                
                
                5,129,519
                
                
                
                4,929,227
                
                
                
                200,292
                
                
                
                40.29
                %
                
                
                28.15
                %
                
                
                12.14
                %Net
      operating loss
                
                
                (2,165,240
                )
                
                
                (1,589,806
                )
                
                
                (575,434
                )
                
                
                -17.01
                %
                
                
                -9.08
                %
                
                
                -7.94
                %Other
      income (expense) :Interest
      income
                
                
                5,156
                
                
                
                10,623
                
                
                
                (5,467
                )
                
                
                0.04
                %
                
                
                0.06
                %
                
                
                -0.02
                %Interest
      (expense)
                
                
                (28,646
                )
                
                
                -
                
                
                
                (28,646
                )
                
                
                -0.22
                %
                
                
                0.00
                %
                
                
                -0.22
                %Foreign
      currency
                
                
                296,675
                
                
                
                (4,344
                )
                
                
                301,019
                
                
                
                2.32
                %
                
                
                -0.02
                %
                
                
                2.34
                %Total
      other income (expense)
                
                
                273,185
                
                
                
                6,279
                
                
                
                266,906
                
                
                
                2.14
                %
                
                
                0.04
                %
                
                
                2.10
                %Loss  before
      taxes
                
                
                (1,892,055
                )
                
                
                (1,583,527
                )
                
                
                (308,528
                )
                
                
                -14.87
                %
                
                
                -9.04
                %
                
                
                -5.84
                %Taxes
      provision (benefit)
                
                
                40,015
                
                
                
                (58,449
                )
                
                
                98,464
                
                
                
                0.31
                %
                
                
                -0.33
                %
                
                
                0.64
                %Net
      income  (loss)
                
                $
                (1,932,070
                )
                
                $
                (1,525,078
                )
                
                $
                (406,992
                )
                
                
                -15.18
                %
                
                
                -8.71
                %
                
                
                -6.47
                %





Net sales
for the three months ended March 31 2009 decreased $4,779,263 compared to the
three months ended March  31, 2008 as shown in the table
below.





Increase
                  
                  
                  Increase(decrease)
                  
                  
                  (decrease)
                  
                  
                  Percentage
      of sales byThree
      Months
                  
                  
                  Three
      Months
                  
                  
                  Dollar
                  
                  
                  dollar
                  
                  
                  Geographic
      regionended 3/31/09
                  
                  
                  ended 3/31/08
                  
                  
                  Variance
                  
                  
                  variance %
                  
                  
                  2009
                  
                  
                  2008The
      Americas
                  
                  
                  7,233,329
                  
                  
                  
                  8,683,186
                  
                  
                  
                  (1,449,857
                  )
                  
                  
                  -17
                  %
                  
                  
                  57
                  %
                  
                  
                  50
                  %Europe
                  
                  
                  5,136,179
                  
                  
                  
                  8,215,667
                  
                  
                  
                  (3,079,488
                  )
                  
                  
                  -37
                  %
                  
                  
                  40
                  %
                  
                  
                  47
                  %Asia
                  
                  
                  363,921
                  
                  
                  
                  613,839
                  
                  
                  
                  (249,918
                  )
                  
                  
                  -41
                  %
                  
                  
                  3
                  %
                  
                  
                  3
                  %Total
                  
                  $
                  12,733,429
                  
                  
                  $
                  17,512,692
                  
                  
                  $
                  (4,779,263
                  )
                  
                  
                  -27
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




18




Net sales
to customers in The  Americas were 57%  and 50% of net sales
for the three months ended March   31, 2009 and 2008,
respectively.  Net sales to customers in Europe were
40%  and 47%  of net sales for the three months
ended  March 31, 2009 and 2008, respectively.   Net
sales to customers in Asia were 3%  net sales for the three months
ended March  31, 2009  and  2008,
respectively.  We experienced a decrease in unit sales of about 35%
while the change in sales mix increased the average sales price by about
12%.





Factors
driving the  decline in  sales for the second 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 $375,142 for the three months ended
March  31, 2009 compared to the  three months ended
March  31, 2008.





The
decrease in the gross profit is detailed below:





Increase (decrease)Lower
      sales
                  
                  $
                  (1,459,582
                  )Decrease
      in the Euro exchange rate
                  
                  
                  (779,100
                  )Lower
      production and production related expenses
                  
                  
                  625,524Higher
      gross profit due favorable sales mix
                  
                  
                  1,238,016Total  decrease
      in gross profit
                  
                  $
                  (375,142
                  )





Gross
profit percentage for the three months  ended March  31,
2009 was 23.28 % compared to 19.07% for the three  months
ended  March 31, 2008, resulting in a  gross profit increase
of  4.21%.


The
increase in  gross profit  percentage is detailed
below:





Increase (decrease)Higher
      gross profit due favorable sales mix
                  
                  
                  9.37
                  %Decrease
      in the Euro exchange rate
                  
                  
                  (5.77
                  )%Production
      and production related expenses
                  
                  
                  0.61
                  %Net
      increase in gross profit  percentage
                  
                  
                  4.21
                  %





Selling,
general and administrative expenses





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




Three
      months ended March 31,Dollar
      Costs
                            
                            
                            Percentage
      of Sales2009
                            
                            
                            2008
                            
                            
                            Decrease
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            IncreaseSales
      and marketing
                            
                            $
                            2,444,174
                            
                            
                            $
                            2,672,798
                            
                            
                            $
                            (228,624
                            )
                            
                            
                            19.19
                            %
                            
                            
                            15.26
                            %
                            
                            
                            3.93
                            %Technical  support
                            
                            
                            135,600
                            
                            
                            
                            152,760
                            
                            
                            
                            (17,160
                            )
                            
                            
                            1.06
                            %
                            
                            
                            0.87
                            %
                            
                            
                            0.19
                            %General
      and administrative
                            
                            
                            1,007,759
                            
                            
                            
                            1,029,489
                            
                            
                            
                            (21,730
                            )
                            
                            
                            7.92
                            %
                            
                            
                            5.88
                            %
                            
                            
                            2.04
                            %Amortization
      of intangible assets
                            
                            
                            188,709
                            
                            
                            
                            -
                            
                            
                            
                            188,709
                            
                            
                            
                            1.49
                            %
                            
                            
                            0.00
                            %
                            
                            
                            1.49
                            %Stock
      compensation
                            
                            
                            85,429
                            
                            
                            
                            95,241
                            
                            
                            
                            (9,812
                            )
                            
                            
                            0.68
                            %
                            
                            
                            0.54
                            %
                            
                            
                            0.14
                            %Total
                            
                            $
                            3,861,671
                            
                            
                            $
                            3,950,288
                            
                            
                            $
                            (88,617
                            )
                            
                            
                            30.34
                            %
                            
                            
                            22.55
                            %
                            
                            
                            7.79
                            %


19


Selling,
general and administrative expenses decreased $ 88,617 from the prior year’s
fiscal second quarter.  Sales and marketing expense decreased
$228,624, which was primarily driven by the decrease in Euro compared to the
U.S. dollar.   Lower sales resulted in expenses related to sales,
such as commissions and marketing development
and  advertising  expense to decrease by
$26,643.  Lower travel and industry show expenses contributed $43,353
to the expense reduction. Offsetting these decreases was an increase of $ 88,045
in sales and marketing 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  of $21,730 was primarily due lower
professional fees, primarily for  legal and consulting  fees
of  $45,113, a decrease in bad debt expense of  $20,000
related to the February 2008 liquidation of CompUSA included in last year’s
fiscal second quarter  results, a decrease in compensation expense of
$41,172 due to staff reductions, a reduction of $20,547 in insurance expense due
to lower negotiated premiums, and lower building maintenance expenses
of  $10,085. These decreases were somewhat offset by $140,000 paid to
Avid Technology, Inc. pursuant to a transitional services
agreement.  There also was $188,709 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  $285,682.  Higher  compensation expense
of $419,950 for  personnel expenses related to PCTV employees hired in
connection with  the acquisition of the PCTV business from Avid
Technology, Inc., offset by $ 55,950 in lower compensation expense due to staff
reductions and $77,256 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  March 31, 2009 and 2008 is as
follows:





Three months ended March
31,2009
                  
                  
                  2008Federal
      income tax (benefit)
                  
                  $
                  -
                  
                  
                  $
                  (100,000
                  )Tax  expense  on
      international  operations
                  
                  
                  30,015
                  
                  
                  
                  36,551State
      taxes
                  
                  
                  10,000
                  
                  
                  
                  5,000Tax
      provision
                  
                  $
                  40,015
                  
                  
                  $
                  (58,449
                  )





We
recorded a net loss of  $1,743,361, for the three  months
ended March 31, 2009, which resulted in basic and diluted net loss per share of
$0.17  on weighted average basic and diluted shares
of  10,043,876  compared to a net loss of $1,525,078 for the
three months ended March 31, 2008, which resulted in  basic and
diluted net loss per share of $0.15,  on weighted
average  basic and diluted shares
of  9,980,866.





Options
to purchase 1,767,744  and 1,631,244 shares of common
stock,  at  prices for both periods ranging
from  $1.05 to $8.75,  were outstanding for the three months
ended March 31, 2009 and 2008, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.




20




SIX  MONTH
PERIOD  ENDED MARCH  31, 2009 COMPARED TO SIX MONTH
PERIOD


ENDED
MARCH 31, 2008





Results
of operations for the six months ended  March 31, 2009 compared to
March 31, 2008 are as follows:




Six
                
                
                SixMonths
                
                
                MonthsEnded
                
                
                Ended
                
                
                Variance
                
                
                Percentage
      of sales3/31/09
                
                
                3/31/08
                
                
                $
                
                
                
                2009
                
                
                2008
                
                
                VarianceNet
      sales
                
                $
                30,022,109
                
                
                $
                54,560,153
                
                
                $
                (24,538,044
                )
                
                
                100.00
                %
                
                
                100.00
                %
                
                
                -Cost
      of sales
                
                
                24,459,569
                
                
                
                43,079,671
                
                
                
                (18,620,102
                )
                
                
                81.47
                %
                
                
                78.96
                %
                
                
                2.51
                %Gross
      profit
                
                
                5,562,540
                
                
                
                11,480,482
                
                
                
                (5,917,942
                )
                
                
                18.53
                %
                
                
                21.04
                %
                
                
                -2.51
                %Gross
      profit %
                
                
                18.53
                %
                
                
                21.04
                %
                
                
                -2.51
                %Selling,
      general and administrative expenses:Sales
      and marketing
                
                
                5,203,465
                
                
                
                5,922,650
                
                
                
                (719,185
                )
                
                
                17.33
                %
                
                
                10.86
                %
                
                
                6.47
                %Technical
      support
                
                
                270,984
                
                
                
                302,767
                
                
                
                (31,783
                )
                
                
                0.90
                %
                
                
                0.55
                %
                
                
                0.35
                %General  and
      administrative
                
                
                1,866,552
                
                
                
                2,086,957
                
                
                
                (220,405
                )
                
                
                6.22
                %
                
                
                3.83
                %
                
                
                2.39
                %Amortization
      of intangible assets
                
                
                188,709
                
                
                
                -
                
                
                
                188,709
                
                
                
                0.63
                %
                
                
                0.00
                %
                
                
                0.63
                %Stock
      compensation
                
                
                170,857
                
                
                
                190,482
                
                
                
                (19,625
                )
                
                
                0.57
                %
                
                
                0.34
                %
                
                
                0.23
                %Total
      selling, general and administrative expenses
                
                
                7,700,567
                
                
                
                8,502,856
                
                
                
                (802,289
                )
                
                
                25.65
                %
                
                
                15.58
                %
                
                
                10.07
                %Research
      and development expenses
                
                
                2,019,160
                
                
                
                1,804,820
                
                
                
                214,340
                
                
                
                6.73
                %
                
                
                3.31
                %
                
                
                3.42
                %Research
      & development  stock compensation
                
                
                94,330
                
                
                
                87,876
                
                
                
                6,454
                
                
                
                0.31
                %
                
                
                0.16
                %
                
                
                0.15
                %Total
      expenses
                
                
                9,814,057
                
                
                
                10,395,552
                
                
                
                (581,495
                )
                
                
                32.69
                %
                
                
                19.05
                %
                
                
                13.64
                %Net
      operating income (loss)
                
                
                (4,251,517
                )
                
                
                1,084,930
                
                
                
                (5,336,447
                )
                
                
                -14.16
                %
                
                
                1.99
                %
                
                
                -16.15
                %Other
      income (expense) :Interest
      income
                
                
                9,625
                
                
                
                16,817
                
                
                
                (7,192
                )
                
                
                0.03
                %
                
                
                0.03
                %
                
                
                0.00
                %Interest
      (expense)
                
                
                (28,646
                )
                
                
                -
                
                
                
                (28,646
                )
                
                
                -0.10
                %
                
                
                0.00
                %
                
                
                -0.10
                %Foreign
      currency
                
                
                643,677
                
                
                
                (31,953
                )
                
                
                675,630
                
                
                
                2.15
                %
                
                
                -0.06
                %
                
                
                2.21
                %Total
      other income (expense)
                
                
                624,656
                
                
                
                (15,136
                )
                
                
                639,792
                
                
                
                2.08
                %
                
                
                -0.03
                %
                
                
                2.11
                %Income
      (loss)  before taxes
                
                
                (3,626,861
                )
                
                
                1,069,794
                
                
                
                (4,696,655
                )
                
                
                -12.08
                %
                
                
                1.96
                %
                
                
                -14.04
                %Taxes  on
      income (loss)
                
                
                77,522
                
                
                
                131,883
                
                
                
                (54,361
                )
                
                
                0.26
                %
                
                
                0.24
                %
                
                
                0.02
                %Net
      income  (loss)
                
                $
                (3,704,383
                )
                
                $
                937,911
                
                
                $
                (4,642,294
                )
                
                
                -12.34
                %
                
                
                1.72
                %
                
                
                -14.06
                %





Net sales
for the six months ended March 31, 2009 decreased $24,538,044 compared to the
six months ended March 31, 2008 as shown in the table below.





Increase
                  
                  
                  Increase(decrease)
                  
                  
                  (decrease)
                  
                  
                  Percentage
      of sales bySix Months
                  
                  
                  Six
      Months
                  
                  
                  Dollar
                  
                  
                  Dollar
                  
                  
                  Geographic
      regionended 3/31/09
                  
                  
                  ended 3/31/08
                  
                  
                  Variance
                  
                  
                  variance %
                  
                  
                  2009
                  
                  
                  2008The
      Americas
                  
                  
                  14,506,454
                  
                  
                  
                  27,384,971
                  
                  
                  
                  (12,878,517
                  )
                  
                  
                  -47
                  %
                  
                  
                  48
                  %
                  
                  
                  50
                  %Europe
                  
                  
                  14,541,478
                  
                  
                  
                  25,998,787
                  
                  
                  
                  (11,457,309
                  )
                  
                  
                  -44
                  %
                  
                  
                  48
                  %
                  
                  
                  48
                  %Asia
                  
                  
                  974,177
                  
                  
                  
                  1,176,395
                  
                  
                  
                  (202,218
                  )
                  
                  
                  -17
                  %
                  
                  
                  4
                  %
                  
                  
                  2
                  %Total
                  
                  $
                  30,022,109
                  
                  
                  $
                  54,560,153
                  
                  
                  $
                  (24,538,044
                  )
                  
                  
                  -45
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




21




Net sales
to customers in The  Americas were 48%  and 51% of net sales
for the six months ended March   31, 2009 and 2008,
respectively.  Net sales to customers in Europe were 48% of net sales
for the six months ended  March  31, 2009 and 2008,
respectively.   Net sales to customers in Asia were 4% and 2% of
net sales for the six months ended March  31,
2009  and  2008, respectively.  We experienced a
decrease in unit sales of about 35% while the change in sales mix increased the
average sales price by about 12%.





Factors
driving the  decline in  sales for the six months ended
March 31,  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 $5,917,942 for the  six months ended
March  31, 2009 compared to the  six months ended
March  31, 2008.





The
decrease in  the gross profit are detailed below:





Increase (decrease)Lower
      sales
                  
                  $
                  (7,254,202
                  )Decrease
      in the Euro exchange rate
                  
                  
                  (1,663,834
                  )Lower
      production and production related expenses
                  
                  
                  1,444,871Higher
      gross profit due favorable sales mix
                  
                  
                  1,555,223Total  decrease
      in gross profit
                  
                  $
                  (5,917,942
                  )





Gross
profit percentage for the six
months  ended  March  31, 2009 was 18.53 %
compared to 21.04% for the six  months
ended  March  31, 2008, resulting in a  gross
profit decrease of  2.51%.





The
decrease in the gross profit  percentage are detailed
below:





Increase
      (decrease)Lower  gross
      profit due favorable sales mix
                    
                    
                    4.89
                    %Decrease
      in the Euro exchange rate
                    
                    
                    (5.25
                    )%Production
      and production related expenses
                    
                    
                    (2.15
                    )%Net
      increase in gross profit  percentage
                    
                    
                    (2.51
                    )%





Selling,
general and administrative expenses





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





Six months
      ended March 31,Dollar Costs
                            
                            
                            Percentage of Sales2009
                            
                            
                            2008
                            
                            
                            Decrease
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            IncreaseSales
      and marketing
                            
                            $
                            5,203,465
                            
                            
                            $
                            5,922,650
                            
                            
                            $
                            (719,185
                            )
                            
                            
                            17.33
                            %
                            
                            
                            10.86
                            %
                            
                            
                            6.47
                            %Technical  support
                            
                            
                            270,984
                            
                            
                            
                            302,767
                            
                            
                            
                            (31,783
                            )
                            
                            
                            0.90
                            %
                            
                            
                            0.55
                            %
                            
                            
                            0.35
                            %General
      and administrative
                            
                            
                            1,866,552
                            
                            
                            
                            2,086,957
                            
                            
                            
                            (220,405
                            )
                            
                            
                            6.22
                            %
                            
                            
                            3.83
                            %
                            
                            
                            2.39
                            %Amortization
      of intangible assets
                            
                            
                            188,709
                            
                            
                            
                            -
                            
                            
                            
                            188,709
                            
                            
                            
                            0.63
                            %
                            
                            
                            0.00
                            %
                            
                            
                            0.63
                            %Stock
      compensation
                            
                            
                            170,857
                            
                            
                            
                            190,482
                            
                            
                            
                            (19,625
                            )
                            
                            
                            0.57
                            %
                            
                            
                            0.34
                            %
                            
                            
                            0.23
                            %Total
                            
                            
                            7,700,567
                            
                            
                            
                            8,502,856
                            
                            
                            
                            (802,289
                            )
                            
                            
                            25.65
                            %
                            
                            
                            15.58
                            %
                            
                            
                            10.07
                            %




22




Selling,
general and administrative expenses decreased $ 802,289  compared to
the same period in the  prior fiscal year.  Sales and
marketing expense decreased $719,185.  The  decrease in the
Euro compared to the U.S. dollar accounted
for   $419,079  of
the  decrease.    Lower sales resulted in expenses
related to sales, such as commissions and marketing development
and  advertising  expense to decrease by
$432,270.  Lower travel and industry show expenses of $42,569, and
lower expenses of $59,920 for our European  sales offices also
contributed to the expense reduction . Offsetting these decreases was in
increase of $152,335 in personnel   related expenses for
Hauppauge Computer Works employees and  $ 88,045 in personnel
related  expenses for  PCTV employees hired in connection
with the acquisition of the PCTV business from Avid Technology,
Inc.





The  decrease  in
general and administrative expense  of $220,405 was primarily due
lower professional fees, primarily for  legal and
consulting  fees of  $137,967, a decrease in bad debt
expense of  $120,000 related to the February 2008 liquidation of
CompUSA, a decrease in compensation expense of $49,420 due to staff reductions,
a reduction of $40,928 in insurance expense due to lower negotiated premiums and
lower building maintenance expenses of  $13,142. These decreases were
somewhat offset by $140,000 paid to Avid Technology, Inc. pursuant to a
transitional services agreement.  There also was $188,709 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  $214,340.  Higher
compensation expense of $419,950 for  personnel expenses related to
PCTV employees hired in connection with the acquisition of the PCTV business
from Avid Technology, Inc., offset by $81,042 in lower compensation expense due
to staff reductions and $123,247 less in project development expenses due to a
lower volume of programs in progress for fiscal 2009




Tax
provision





Our  tax
provision for the six months ended March  31, 2009 and 2008 is as
follows:





Six months ended December
    31,2009
                  
                  
                  2008Federal
      income tax expense
                  
                  $
                  -
                  
                  
                  $
                  -Tax  expense  on
      international  operations
                  
                  
                  57,522
                  
                  
                  
                  114,883State
      taxes
                  
                  
                  20,000
                  
                  
                  
                  17,000Tax
      provision
                  
                  $
                  77,522
                  
                  
                  $
                  131,883





We
recorded a net loss of  $3,515,674, for the six months ended March 31,
2009, which resulted in basic and diluted net loss per share of
$0.35  on weighted average basic and diluted shares
of  10,039,434  compared to a net income of $937,911 for the
six months ended March  31, 2008, which resulted in  basic
and diluted net income per share of $0.09  on weighted
average  basic and diluted shares of 9,918,434 and 10,187,134,
respectively.





Options
to purchase 1,767,744  and 831,000 shares of common
stock,  at  prices  ranging from  $1.05
to $8.75 and $3.56 to  $8.75, respectively,  were
outstanding for the six months ended March 31, 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  March 31,
2009 and September 30, 2008 is set forth below:





March 31, 2009
                  
                  
                  September 30, 2008Cash
                  
                  $
                  10,560,463
                  
                  
                  $
                  14,191,721Working
      Capital
                  
                  
                  8,169,662
                  
                  
                  
                  17,229,410Stockholders’
      Equity
                  
                  
                  15,113,660
                  
                  
                  
                  18,988,536





We had
cash and cash equivalents as of March 31, 2009 of $10,560,463, a decrease
of  $3,631,258 from September 30, 2008.





The
decrease  in cash was due to :





Sources of cash:Decrease  in  accounts
      receivable
                        
                        $
                        2,125,931Decrease
      in inventory
                        
                        
                        1,754,778Proceeds
      from employee stock purchases
                        
                        
                        19,282Less cash used for:PCTV
      acquisition-net of note payable
                        
                        
                        (2,345,500
                        )Net
      loss adjusted for non cash items
                        
                        
                        (3,126,738
                        )Decrease   in  accounts
      payable and accrued expenses
                        
                        
                        (965,931
                        )Effect
      of exchange rates on cash
                        
                        
                        (454,962
                        )Payment
      on note payable to Avid Technologies Inc.
                        
                        
                        (624,999
                        )Increase  in
      prepaid expenses and other current assets
                        
                        
                        (5,193
                        )Capital
      equipment purchases
                        
                        
                        (7,926
                        )Net
      cash decrease
                        
                        $
                        (3,631,258
                        )





Net cash
of $217,153 used in operating activities was due to the net loss adjusted for
non cash items of $3,126,738,  a decrease in accounts payable and
accrued expense of $965,931 plus an increase in prepaid expenses and other
current assets of  $5,193,  offset  by a decrease
in accounts receivable  and a decrease in inventory
of  $2,125,931 and  $1,754,778,
respectively.   The  decrease in  accounts
receivable  was due to a  decrease  in
sales  between the first fiscal quarter of fiscal 2009
and  the  second  fiscal quarter of
2009.




24





Cash of
$2,353,426 was used to in investment activities.  Of this amount,
$2,345,500 was used for the acquisition of the PCTV business and $7,926 was used
to purchase fixed assets. The $2,345,500  used for the PCTV
acquisition consisted
of   $2,238,000  paid  against the $5,000,000
purchase price and $107,500  disbursed in payment of direct expenses
of the acquisition. We also incurred a Note Payable to Avid Technology, Inc. of
$2,500,000, of which $624,999 in payments have been made against the note
..  Cash of $19,282 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 March  31, 2009:





Payments
      due by periodTotal
                  
                  
                  Less than 1 year
                  
                  
                  1-3 years
                  
                  
                  3 to 5 yearsNote
      payable to Avid Technology Inc. (1)
                  
                  $
                  1,875,045
                  
                  
                  $
                  1,875,045Operating
      lease obligations
                  
                  $
                  1,465,963
                  
                  
                  $
                  513,309
                  
                  
                  $
                  867,628
                  
                  
                  $
                  85,026Total
                  
                  $
                  3,341,008
                  
                  
                  $
                  2,388,354
                  
                  
                  $
                  867,628
                  
                  
                  $
                  85,026




(1)
              See
      Note 11 to our condensed 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





Evaluation
of 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 March 31,
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 second  fiscal quarter ended
March  31. 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





(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.


27


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:May 15,
      2009
                By
                /s/Kenneth PlotkinKENNETH  PLOTKINChief
      Executive Officer, Chairman of theBoard,
      President (Principal Executive
Officer)





Date:
      May 15,
      2009
                  By
                  /s/Gerald TucciaroneGERALD
      TUCCIARONETreasurer,
      Chief Financial Officer,(Principal
      Financial Officer and PrincipalAccounting
      Officer) and
Secretary


28