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,
2010
 
 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 definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act).
 
  ̈  LARGE
      ACCELERATED FILER
               ̈  ACCELERATED  FILER ̈
      NON-ACCELERATED FILER
              x  SMALLER
      REPORTING COMPANY
 (Do not
check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined
in  Rule12b-2 of the Exchange Act).
 
  ̈
YES              x  NO
 
 As of
April 30, 2010, 10,069,070 shares of .01 par value Common Stock of the issuer
were outstanding.
  
  HAUPPAUGE DIGITAL INC. AND
SUBSIDIARIES
  INDEX
 
 Page no.PART I. FINANCIAL
    INFORMATIONItem
      1. Financial Statements
                              3Consolidated
      Balance Sheets –
                                March
      31, 2010 (unaudited) and September 30, 2009
                              3Consolidated
      Statements of Operations -
                                Three
      Months ended March 31, 2010 (unaudited) and 2009
    (unaudited)
                              4Consolidated
      Statements of Operations -
                                Six
      Months ended March 31, 2010 (unaudited) and 2009
    (unaudited)
                              5Consolidated
      Statements of Other Comprehensive Loss
                                Three
      Months and Six Months ended March 31, 2010 (unaudited) and 2009
      (unaudited)
                              6Consolidated
      Statements of Cash Flows - Six Months ended March 31, 2010 (unaudited) and
      2009 (unaudited)
                              7Notes
      to Consolidated Financial Statements
                              8-16Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                              17Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
                              26Item  4T.
      Controls and Procedures
                              26PART II.  OTHER
      INFORMATIONItem
      6. Exhibits
                              28Signatures
                              29
  2
  PART I. FINANCIAL
INFORMATION
  Item
1. Financial Statements
 HAUPPAUGE
DIGITAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 March 31,
                                2010
                                (unaudited)
                              
                              
                              September 30 ,
                                2009Assets:Cash
      and cash equivalents
                              
                              $
                              8,712,496
                              
                              
                              $
                              8,368,342Trade
      receivables, net of various allowances
                              
                              
                              7,335,968
                              
                              
                              
                              9,770,584Other
      non trade receivables
                              
                              
                              4,263,465
                              
                              
                              
                              4,116,392Inventories
                              
                              
                              9,961,418
                              
                              
                              
                              8,616,800Deferred
      tax asset-current
                              
                              
                              1,297,574
                              
                              
                              
                              1,297,574Prepaid
      expenses and other current assets
                              
                              
                              1,145,158
                              
                              
                              
                              928,680Total
      current assets
                              
                              
                              32,716,079
                              
                              
                              
                              33,098,372Intangible
      assets, net
                              
                              
                              4,318,684
                              
                              
                              
                              4,696,102Property,
      plant and equipment, net
                              
                              
                              641,754
                              
                              
                              
                              757,488Security
      deposits and other non current assets
                              
                              
                              108,070
                              
                              
                              
                              108,088Deferred
      tax asset-non current
                              
                              
                              887,611
                              
                              
                              
                              887,611Total
      assets
                              
                              $
                              38,672,198
                              
                              
                              $
                              39,547,661Liabilities
      and Stockholders’ Equity:Current
      Liabilities:Accounts
      payable
                              
                              $
                              12,392,648
                              
                              
                              $
                              12,478,625Accrued
      expenses fees
                              
                              
                              5,681,983
                              
                              
                              
                              5,753,546Accrued
      expenses
                              
                              
                              9,716,484
                              
                              
                              
                              8,131,263Note
      payable
                              
                              
                              0
                              
                              
                              
                              625,045Income
      taxes payable
                              
                              
                              209,332
                              
                              
                              
                              224,316Total
      current liabilities
                              
                              
                              28,000,447
                              
                              
                              
                              27,212,795Stockholders'
      Equity:Common
      stock, $.01 par value; 25,000,000 shares authorized, 10,825,296 and
      10,814,042 issued, respectively
                              
                              
                              108,253
                              
                              
                              
                              108,140Additional
      paid-in capital
                              
                              
                              17,498,372
                              
                              
                              
                              17,276,651Retained
      earnings (deficit)
                              
                              
                              (441,750
                              )
                              
                              
                              795,674Accumulated
      other comprehensive loss
                              
                              
                              (4,088,787
                              )
                              
                              
                              (3,441,262
                              )Treasury
      Stock, at cost, 759,579 shares
                              
                              
                              (2,404,337
                              )
                              
                              
                              (2,404,337
                              )Total
      stockholders' equity
                              
                              
                              10,671,751
                              
                              
                              
                              12,334,866Total
      liabilities and stockholders' equity
                              
                              $
                              38,672,198
                              
                              
                              $
                              39,547,661
  See accompanying notes to
consolidated financial statements
  3
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three months ended
      March 31,2010
                      
                      
                      2009Net
      sales
                      
                      $
                      13,847,079
                      
                      
                      $
                      12,733,429Cost
      of sales
                      
                      
                      9,981,288
                      
                      
                      
                      9,769,150Gross
      profit
                      
                      
                      3,865,791
                      
                      
                      
                      2,964,279Selling,
      general and administrative expenses
                      
                      
                      3,777,737
                      
                      
                      
                      3,861,671Research
      and development expenses
                      
                      
                      1,005,101
                      
                      
                      
                      1,267,848Loss
      from operations
                      
                      
                      (917,047
                      )
                      
                      
                      (2,165,240
                      )Other
      income (expense):Interest
      income
                      
                      
                      1,435
                      
                      
                      
                      5,156Interest
      expense
                      
                      
                      -
                      
                      
                      
                      (28,646
                      )Foreign
      currency gain
                      
                      
                      61,875
                      
                      
                      
                      296,675Total
      other income
                      
                      
                      63,310
                      
                      
                      
                      273,185Loss
      before tax provision
                      
                      
                      (853,737
                      )
                      
                      
                      (1,892,055
                      )Tax
      provision
                      
                      
                      49,136
                      
                      
                      
                      40,015Net
      loss
                      
                      $
                      (902,873
                      )
                      
                      $
                      (1,932,070
                      )Net
      loss per share:Basic
      and diluted
                      
                      $
                      (0.09
                      )
                      
                      $
                      (0.19
                      )
 
 See
accompanying notes to consolidated financial statements
  4
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Six months ended
    March 31,2010
                            
                            
                            2009Net
      sales
                            
                            $
                            31,725,437
                            
                            
                            $
                            30,022,109Cost
      of sales
                            
                            
                            22,637,249
                            
                            
                            
                            24,459,569Gross
      profit
                            
                            
                            9,088,188
                            
                            
                            
                            5,562,540Selling,
      general and administrative expenses
                            
                            
                            8,110,260
                            
                            
                            
                            7,700,567Research
      and development expenses
                            
                            
                            2,175,172
                            
                            
                            
                            2,113,490Loss
      from operations
                            
                            
                            (1,197,244
                            )
                            
                            
                            (4,251,517
                            )Other
      income (expense):Interest
      income
                            
                            
                            2,894
                            
                            
                            
                            9,625Interest
      expense
                            
                            
                            (4,347
                            )
                            
                            
                            (28,646
                            )Foreign
      currency gain
                            
                            
                            61,635
                            
                            
                            
                            643,677Total
      other income
                            
                            
                            60,182
                            
                            
                            
                            624,656Loss
      before tax provision
                            
                            
                            (1,137,062
                            )
                            
                            
                            (3,626,861
                            )Tax
      provision
                            
                            
                            100,362
                            
                            
                            
                            77,522Net
      loss
                            
                            $
                            (1,237,424
                            )
                            
                            $
                            (3,704,383
                            )Net
      loss per share:Basic
      and diluted
                            
                            $
                            (0.12
                            )
                            
                            $
                            (0.37
                            )
 
 See
accompanying notes to consolidated financial statements
  5
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OTHER COMPREHENSIVE LOSS
 (UNAUDITED)
 
 Three
      months ended March 31,2010
                    
                    
                    2009Net
      loss
                    
                    $
                    (902,873
                    )
                    
                    $
                    (1,932,070
                    )Foreign
      currency translation loss
                    
                    
                    (546,772
                    )
                    
                    
                    (319,673
                    )Forward
      exchange contracts marked to market gain (loss)
                    
                    
                    23,911
                    
                    
                    
                    (17,060
                    )Other
      comprehensive loss
                    
                    $
                    (1,425,734
                    )
                    
                    $
                    (2,268,803
                    )
 
 Six
      months ended March 31,2010
                            
                            
                            2009Net
      loss
                            
                            $
                            (1,237,424
                            )
                            
                            $
                            (3,704,383
                            )Foreign
      currency translation loss
                            
                            
                            (669,012
                            )
                            
                            
                            (492,636
                            )Forward
      exchange contracts marked to market gain
                            
                            
                            21,487
                            
                            
                            
                            37,674Other
      comprehensive loss
                            
                            $
                            (1,884,949
                            )
                            
                            $
                            (4,159,345
                            )
 
 See
accompanying notes to consolidated financial statements
  6
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended
      March 31,2010
                        
                        
                        2009Net
      loss
                        
                        $
                        (1,237,424
                        )
                        
                        $
                        (3,704,383
                        )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                        
                        
                        138,468
                        
                        
                        
                        129,878Amortization
      of intangible assets
                        
                        
                        377,418
                        
                        
                        
                        188,709Stock
      compensation expense
                        
                        
                        212,502
                        
                        
                        
                        265,187Sales
      reserve, net
                        
                        
                        223,300
                        
                        
                        
                        -Bad
      debt reserve
                        
                        
                        40,000
                        
                        
                        
                        -Other
      non cash items
                        
                        
                        18
                        
                        
                        
                        (6,129
                        )Changes
      in current assets and liabilities, net of effects of
      acquisition:Accounts
      receivable
                        
                        
                        1,354,543
                        
                        
                        
                        2,125,931Inventories
                        
                        
                        (674,918
                        )
                        
                        
                        1,754,778Prepaid
      expenses and other current assets
                        
                        
                        (216,478
                        )
                        
                        
                        (5,193
                        )Accounts
      payable
                        
                        
                        (1,527,858
                        )
                        
                        
                        (2,614,412
                        )Accrued
      expenses and other current liabilities
                        
                        
                        2,826,842
                        
                        
                        
                        1,648,481Total
      adjustments
                        
                        
                        2,753,837
                        
                        
                        
                        3,487,230Net
      cash provided by (used in) operating activities
                        
                        
                        1,516,413
                        
                        
                        
                        (217,153
                        )Cash
      Flows From Investing Activities:PCTV
      acquisition
                        
                        
                        (511,332
                        )
                        
                        
                        (2,970,499
                        )Purchases
      of property, plant and equipment
                        
                        
                        (22,734
                        )
                        
                        
                        (7,926
                        )Net
      cash used in investing activities
                        
                        
                        (534,066
                        )
                        
                        
                        (2,978,425
                        )Cash
      Flows From Financing Activities:Proceeds
      from the exercise of stock options and employee stock
      purchases
                        
                        
                        9,332
                        
                        
                        
                        19,282Net
      cash provided by financing activities
                        
                        
                        9,332
                        
                        
                        
                        19,282Effect
      of exchange rates on cash
                        
                        
                        (647,525
                        )
                        
                        
                        (454,962
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        344,154
                        
                        
                        
                        (3,631,258
                        )Cash
      and cash equivalents, beginning of period
                        
                        
                        8,368,342
                        
                        
                        
                        14,191,721Cash
      and cash equivalents, end of period
                        
                        $
                        8,712,496
                        
                        
                        $
                        10,560,463Supplemental
      disclosures:Interest
      paid
                        
                        $
                        4,347
                        
                        
                        $
                        28,646Income
      taxes paid
                        
                        $
                        106,451
                        
                        
                        $
                        21,354Note
      payable to Avid Technology, Inc.
                        
                        $
                        -
                        
                        
                        $
                        2,500,000
 
 See
accompanying notes to consolidated financial statements
  7
 
 HAUPPAUGE DIGITAL INC. AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Note
1.  Basis of Presentation
 
 The
accompanying unaudited consolidated financial statements for Hauppauge Digital
Inc. and subsidiaries (collectively, the “Company”) included herein have been
prepared in accordance with generally accepted accounting principles for interim
period reporting in conjunction with the instructions to Form 10-Q. Accordingly,
these statements do not include all of the information required by generally
accepted accounting principles for annual financial statements. In the opinion
of management, all known adjustments (consisting of normal recurring accruals
and reserves) necessary to present fairly the Company’s consolidated financial
position, results of operations and cash flows as of and for the interim periods
have been included. It is suggested that these interim statements be read in
conjunction with the financial statements and related notes included in the
Company's September 30, 2009 Form 10-K.
 
 The
operating results for the three and six months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the September 30, 2010
year end.
 
 Certain
reclassifications have been made to prior consolidated financial statements to
conform to the current classifications.
 
 Management
has evaluated subsequent events after the balance sheet date through the
issuance of the financial statements for appropriate accounting and disclosure
through the filing date of this Form 10-Q.
  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, 2010 and September
30, 2009 consisted of:
  8
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 March 31,
                    
                    
                    September
      30,2010
                    
                    
                    2009Trade
      receivables
                    
                    $
                    12,165,660
                    
                    
                    $
                    13,893,804Allowances
      and reserves
                    
                    
                    (4,829,692
                    )
                    
                    
                    (4,123,220
                    )Total
      trade receivables
                    
                    
                    7,335,968
                    
                    
                    
                    9,770,584Receivable
      from contract manufacturers
                    
                    
                    3,590,656
                    
                    
                    
                    2,933,918GST
      and VAT taxes receivables
                    
                    
                    598,557
                    
                    
                    
                    1,134,331Other
                    
                    
                    74,252
                    
                    
                    
                    48,143Total
      non trade receivables
                    
                    $
                    4,263,465
                    
                    
                    $
                    4,116,392
  Note
3.  Inventories
 
 Inventories
have been valued at the lower of average cost or market on a first in first out
basis. The components of inventory consist of:
 
 March 31,
                      
                      
                      September
      30,2010
                      
                      
                      2009Component
      parts
                      
                      $
                      3,255,847
                      
                      
                      $
                      2,799,723Finished
      goods
                      
                      
                      6,705,571
                      
                      
                      
                      5,817,077$
                      9,961,418
                      
                      
                      $
                      8,616,800
  Note
4.  Intangible Assets
 
 The
following is a summary of intangible assets as of March 31, 2010:
 Net
                    
                    
                    WeightedPurchase
                    
                    
                    Accumulated
                    
                    
                    Book
                    
                    
                    average
      remainingAsset description
                    
                    cost
                    
                    
                    Amortization
                    
                    
                    Value
                    
                    
                    life (in years)Customer
      relationships
                    
                    $
                    1,644,353
                    
                    
                    $
                    (171,287
                    )
                    
                    $
                    1,473,066
                    
                    
                    
                    10.75Value
      of technology
                    
                    
                    1,849,897
                    
                    
                    
                    (330,339
                    )
                    
                    
                    1,519,558
                    
                    
                    
                    5.75Covenant
      not to compete
                    
                    
                    1,767,979
                    
                    
                    
                    (441,919
                    )
                    
                    
                    1,326,060
                    
                    
                    
                    3.75Total
      intangible assets
                    
                    $
                    5,262,229
                    
                    
                    $
                    (943,545
                    )
                    
                    $
                    4,318,684
                    
                    
                    
                    8.03
 
 Amortization
expense totaled approximately $377,000 for the six months ended March 31, 2010.
Amortization expense is expected to be approximately $755,000 for each of the
fiscal years ended September 30, 2010, 2011, 2012 and 2013, respectively, and
$490,000 for the year ended September 30, 2014.
  9
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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:
 
 Three
      months ended
                    
                    
                    Six
      months endedMarch 31,
                    
                    
                    March 31,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Weighted
      average shares outstanding-basic
                    
                    
                    10,065,344
                    
                    
                    
                    10,043,876
                    
                    
                    
                    10,062,545
                    
                    
                    
                    10,039,434Number
      of shares issued on the assumed exercise of stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Weighted
      average shares outstanding-diluted
                    
                    
                    10,065,344
                    
                    
                    
                    10,043,876
                    
                    
                    
                    10,062,545
                    
                    
                    
                    10,039,474
 
 Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75 were outstanding for the three months and six
months ended March 31, 2010 and 2009, respectively, but were not included in the
computation of diluted earnings per share because they were
anti-dilutive.
  Note
6.  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 average rate
during the year. Translation adjustments arising from the translation to U.S.
Dollars at differing exchange rates are included in the accumulated other
comprehensive income (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 $3,441,262 recorded on the balance sheet as of September 30,
2009. For the six months ended March 31, 2010 the Company recorded on the
balance sheet translation losses of $669,012, resulting in an accumulated
translation loss of $4,110,274 recorded as a component of accumulated other
comprehensive income as of March 31, 2010.
  10
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Note
7. Derivatives and Hedging Activities
 
 For each
of the fiscal years ended September 30, 2009 and 2008 and the six months ended
March 31, 2010, at least 40 % of the Company’s sales were generated by its
European subsidiary and were invoiced and collected in local currency, which was
primarily the Euro. On the supply side, since the Company predominantly deals
with North American and Asian suppliers and contract manufacturers,
approximately 95% of the Company’s inventory required to support its European
sales are purchased and paid in U.S. Dollars. The combination of sales billed in
Euros supported by inventory purchased in U.S. dollars results in an absence of
a natural local currency hedge. Consequently, the Company’s financial results
are subject to market risks resulting from the fluctuations in the Euro to U.S.
Dollar exchange rates.
 
 The
Company attempts 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 its European
sales.
 
 The
Company does not try to hedge against all possible foreign currency exposures
because of the inherent difficulty in estimating the volatility of the Euro. The
contracts the Company procures are specifically entered into to as a hedge
against forecasted or existing foreign currency exposure. The Company does not
enter into contracts for speculative purposes. Although the Company maintains
these programs to reduce the short term impact of changes in currency exchange
rates, long term strengthening or weakening of the U.S. Dollar against the Euro
impacts the Company’s sales, gross profit, operating income and retained
earnings. Factors that could impact the effectiveness of the Company’s hedging
program are:
 
 ·
              volatility
      of the currency markets
 ·
              availability
      of hedging instruments
 ·
              accuracy
      of the Company’s inventory
forecasts
 
 Additionally,
there is the risk that foreign exchange fluctuations will make the Company’s
products less competitive in foreign markets, which would substantially reduce
the Company’s sales.
 
 As
of March 31, 2010, the Company had foreign currency contracts outstanding of
approximately $393,000 against the delivery of the Euro. These contracts expire
each month through June 30, 2010. The Company had no forward exchange contracts
outstanding as of September 30, 2009.
 
 The
Company’s accounting policies for these instruments designate such instruments
as cash flow hedging transactions. The Company does not enter into such
contracts for speculative purposes. The Company records all derivative gains and
losses on the balance sheet as a component of stockholders’ equity under the
caption “Accumulated other comprehensive loss.” For the six months ended March
31, 2010, the Company recorded on the balance sheet a mark to market deferred
forward exchange gain of $21,487.
  11
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Note
8. Revenue recognition
 
 The
Company sells through a sales channel which is comprised 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 typically given 30 to 45 day payment terms. Those customers deemed as
large credit risks either pay in advance or issue the Company a letter of
credit.
 
 The
Company requires the customer to submit a purchase order to the Company. The
price of the product and payment terms are fixed per the terms of the purchase
order. Upon shipment of the order to the customer, the title to the goods is
passed to the customer. The customer is legally obligated to pay for the order
within the payment terms stated on the customer’s purchase order. The obligation
to insure the boards and the cost of any pilferage while in the customer’s
possession is the responsibility of the customer. The Company sells analog,
hybrid video recorders or digital computer boards that are stocked on the
shelves of retailers and are subject to the normal consumer traffic that retail
stores attract. Aside from normal store promotions such as advertisements in the
store’s circular, the Company has no further obligation to assist in the resale
of the products.
 
 The
Company offers some of its customers a right of return. The Company’s accounting
complies with FASB ASC 605-15 (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 the seasonal nature of the business coupled with the
changing economic environment, management exercises some judgment with regard to
the historical data when calculating 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 FASB ASC
605-50 ( EITF 01-09), “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products)”.
  Note
9.  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.
  12
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
Company’s products fall under three product categories:
 
 ·
              Analog
      TV tuner boards
 ·
              Digital
      TV tuner, and combination analog and digital TV tuner,
    boards
 ·
              Other
      non-TV tuner products
 
 The
Company’s Analog TV tuner products are TV tuner modules which can be added to a
PC and enable a PC user, among other things, to watch and record analog cable TV
in a resizable window on a PC.
 
 The
Company’s digital TV and combination analog and digital tuner products are TV
tuner modules which enable a PC user, among other things, to watch and record
analog cable TV and digital TV in a resizable window on a PC.
 
 The
Company’s other non-TV tuner products enable a PC user, among other things, to
video conference, watch and listen to PC based videos, music and pictures on a
TV set through a home network, and record TV shows on a PC for playback on
portable video players.
 
 Sales by
functional category are as follows:
 
 Three
      months ended March 31,
                      
                      
                      Six
      months ended March 31,Product line sales
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Analog
      TV tuner products
                      
                      $
                      135,719
                      
                      
                      $
                      678,880
                      
                      
                      $
                      430,189
                      
                      
                      $
                      2,044,463Digital
      and combination analog and digital TV tuner products
                      
                      
                      11,799,562
                      
                      
                      
                      11,210,311
                      
                      
                      
                      27,588,278
                      
                      
                      
                      26,470,036Other
      non-TV tuner products
                      
                      
                      1,911,798
                      
                      
                      
                      844,238
                      
                      
                      
                      3,706,970
                      
                      
                      
                      1,507,610Total
      sales
                      
                      $
                      13,847,079
                      
                      
                      $
                      12,733,429
                      
                      
                      $
                      31,725,437
                      
                      
                      $
                      30,022,109
  The
Company sells its products through a North American and international network of
distributors and retailers. It maintains sales offices in Europe and Asia. Sales
percent by geographic region are as follows:
 
 Three
      months ended March 31,
                      
                      
                      Six
      months ended March 31,Geographic region
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009The
      Americas
                      
                      
                      45
                      %
                      
                      
                      57
                      %
                      
                      
                      44
                      %
                      
                      
                      48
                      %Europe
                      
                      
                      52
                      %
                      
                      
                      40
                      %
                      
                      
                      53
                      %
                      
                      
                      48
                      %Asia
                      
                      
                      3
                      %
                      
                      
                      3
                      %
                      
                      
                      3
                      %
                      
                      
                      4
                      %Total
                      
                      
                      100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %
  13
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Note
10. Tax provision
 
 The
Company’s tax provision for the three months and six months ended March 31, 2010
and 2009 is as follows:
 
 Three
      months ended March 31,
                    
                    
                    Six
      months ended March 31,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Tax
      expense on international operations
                    
                    $
                    39,136
                    
                    
                    $
                    30,015
                    
                    
                    $
                    80,362
                    
                    
                    $
                    57,522State
      taxes
                    
                    
                    10,000
                    
                    
                    
                    10,000
                    
                    
                    
                    20,000
                    
                    
                    
                    20,000Tax
      provision
                    
                    $
                    49,136
                    
                    
                    $
                    40,015
                    
                    
                    $
                    100,362
                    
                    
                    $
                    77,522
 
 Note
11. Accrued expense- fees
 
 The
Company uses technology licensed from third parties in certain products. The
Company enters into agreements to license this technology, and in return for the
use of the technology, the Company incurs a license fee for each unit sold that
includes the licensors’ technology. The licensing amount per unit varies by
licensor. The Company is obligated to provide the licensor with reports which
quantify the licenses used and these reports are subject to audits by the
licensor. The Company recognizes and estimates the amount of licensing fees owed
to third parties based on products sold that include software and technology
licensed from these third parties. The Company uses all available applicable
information in determining these estimates and thus the accrued amounts are
subject to change as new information is made available to the Company. The
licensing fees are accounted for as a component of product cost and are charged
to cost of sales. As of March 31, 2010 and September 30, 2009 the amount of
accrued expenses relating to these license agreements amounted to $5,681,983 and
$5,753,546, respectively.
 
 Note
12. Fair Value Measurements
 
 Effective
October 1, 2008 the Company adopted ASC 820-10, Fair Value Measurements, for
financial assets and liabilities. This ASC defines fair value, establishes a
framework for measuring fair value, and expands the related disclosure
requirements. The ASC indicates, among other things, that a fair value
measurement assumes a transaction to sell an asset or transfer a liability
occurs in the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market for the asset or liability. The
Company also adopted the provisions of ASC 820-10 with respect to its
non-financial assets and liabilities during the first quarter of fiscal 2010. In
order to increase consistency and comparability in fair value measurements, ASC
820-10 establishes a hierarchy for observable and unobservable inputs used to
measure fair value into three broad Levels, which are described
below:
 
 • Level
1: Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
 • Level
2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
 • Level
3: Unobservable inputs are used when little or no market data is available. The
fair value hierarchy gives the lowest priority to Level 3
inputs.
  14
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment
of fair value.
 
 At
March 31, 2010, 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 7).
 
 Additionally,
on a nonrecurring basis, the Company uses fair value measures when analyzing
asset impairment. Long-lived assets and certain identifiable intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If it is determined
such indicators are present and the review indicates that the assets will not be
fully recoverable, based on undiscounted estimated cash flows over the remaining
amortization periods, their carrying values are reduced to estimated fair value.
Measurements based on undiscounted cash flows are considered to be Level 3
inputs.
  The
carrying amount of cash, accounts receivables and accounts payables and other
short-term financial instruments approximate their fair value due to their
short-term nature.
 
 Note
13. 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.
 
 Because
the acquisition was completed on December 24, 2008, results from the operations
of the PCTV business effectively started on January 1, 2009. The following
unaudited pro forma results assume the acquisition occurred on October 1, 2008.
The pro forma results do not purport to represent what the Company’s results of
operations actually would have been if the transactions set forth above had
occurred on the date indicated or what the Company’s results of operations will
be in future periods. The financial results for the periods prior to the
acquisition were based on internal financial statements as provided by the
Sellers.
  15
 
 HAUPPAUGE
DIGITAL INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (Unaudited)
 Six
      monthsendedMarch 31,Pro forma statements:
                        
                        2009Revenue
                        
                        $
                        41,045,109Net
      loss
                        
                        $
                        (4,402,393
                        )Net  loss
      per shareBasic
      net loss per share
                        
                        $
                        (0.44
                        )Diluted
      net loss per share
                        
                        $
                        (0.44
                        )
  16
 
 ITEM
2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 THREE
MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTH PERIOD ENDED MARCH
31, 2009
 
 Results
of operations for the three months ended March 31, 2010 compared to March 31,
2009 is as follows:
 
 Three
                      
                      
                      ThreeMonths
                      
                      
                      MonthsEnded
                      
                      
                      Ended
                      
                      
                      Variance
                      
                      
                      Percentage
      of sales3/31/10
                      
                      
                      3/31/09
                      
                      
                      $
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      VarianceNet
      Sales
                      
                      $
                      13,847,079
                      
                      
                      $
                      12,733,429
                      
                      
                      $
                      1,113,650
                      
                      
                      
                      100.00
                      %
                      
                      
                      100.00
                      %
                      
                      
                      -Cost
      of sales
                      
                      
                      9,981,288
                      
                      
                      
                      9,769,150
                      
                      
                      
                      212,138
                      
                      
                      
                      72.08
                      %
                      
                      
                      76.72
                      %
                      
                      
                      -4.64
                      %Gross
      Profit
                      
                      
                      3,865,791
                      
                      
                      
                      2,964,279
                      
                      
                      
                      901,512
                      
                      
                      
                      27.92
                      %
                      
                      
                      23.28
                      %
                      
                      
                      4.64
                      %Gross
      Profit %
                      
                      
                      27.92
                      %
                      
                      
                      23.28
                      %
                      
                      
                      4.64
                      %Expenses:Sales
      & marketing
                      
                      
                      2,406,232
                      
                      
                      
                      2,356,129
                      
                      
                      
                      50,103
                      
                      
                      
                      17.38
                      %
                      
                      
                      18.50
                      %
                      
                      
                      -1.12
                      %Sales
      & marketing-PCTV
                      
                      
                      112,924
                      
                      
                      
                      88,045
                      
                      
                      
                      24,879
                      
                      
                      
                      0.82
                      %
                      
                      
                      0.69
                      %
                      
                      
                      0.13
                      %Technical
      support
                      
                      
                      123,329
                      
                      
                      
                      135,600
                      
                      
                      
                      (12,271
                      )
                      
                      
                      0.89
                      %
                      
                      
                      1.06
                      %
                      
                      
                      -0.17
                      %General &
      administrative
                      
                      
                      808,853
                      
                      
                      
                      864,058
                      
                      
                      
                      (55,205
                      )
                      
                      
                      5.84
                      %
                      
                      
                      6.79
                      %
                      
                      
                      -0.95
                      %General &
      administrative-PCTV
                      
                      
                      69,234
                      
                      
                      
                      143,701
                      
                      
                      
                      (74,467
                      )
                      
                      
                      0.50
                      %
                      
                      
                      1.13
                      %
                      
                      
                      -0.63
                      %Amortization
      of intangible assets
                      
                      
                      188,709
                      
                      
                      
                      188,709
                      
                      
                      
                      0
                      
                      
                      
                      1.36
                      %
                      
                      
                      1.48
                      %
                      
                      
                      -0.12
                      %Selling,
      general and administrative stock compensation expense
                      
                      
                      68,456
                      
                      
                      
                      85,429
                      
                      
                      
                      (16,973
                      )
                      
                      
                      0.49
                      %
                      
                      
                      0.67
                      %
                      
                      
                      -0.18
                      %Total
      selling, general and administrative expense
                      
                      
                      3,777,737
                      
                      
                      
                      3,861,671
                      
                      
                      
                      (83,934
                      )
                      
                      
                      27.28
                      %
                      
                      
                      30.32
                      %
                      
                      
                      -3.04
                      %Research
      and development
                      
                      
                      524,483
                      
                      
                      
                      790,265
                      
                      
                      
                      (265,782
                      )
                      
                      
                      3.79
                      %
                      
                      
                      6.21
                      %
                      
                      
                      -2.42
                      %Research
      and development-PCTV
                      
                      
                      442,823
                      
                      
                      
                      430,418
                      
                      
                      
                      12,405
                      
                      
                      
                      3.20
                      %
                      
                      
                      3.38
                      %
                      
                      
                      -0.18
                      %Research
      and development stock compensation expense
                      
                      
                      37,795
                      
                      
                      
                      47,165
                      
                      
                      
                      (9,370
                      )
                      
                      
                      0.27
                      %
                      
                      
                      0.37
                      %
                      
                      
                      -0.10
                      %Total
      expenses
                      
                      
                      4,782,838
                      
                      
                      
                      5,129,519
                      
                      
                      
                      (346,681
                      )
                      
                      
                      34.54
                      %
                      
                      
                      40.28
                      %
                      
                      
                      -5.74
                      %Net
       loss from operations
                      
                      
                      (917,047
                      )
                      
                      
                      (2,165,240
                      )
                      
                      
                      1,248,193
                      
                      
                      
                      -6.62
                      %
                      
                      
                      -17.00
                      %
                      
                      
                      10.38
                      %Other
      income :Interest
      income
                      
                      
                      1,442
                      
                      
                      
                      5,156
                      
                      
                      
                      (3,714
                      )
                      
                      
                      0.01
                      %
                      
                      
                      0.04
                      %
                      
                      
                      -0.03
                      %Interest
      (expense)
                      
                      
                      0
                      
                      
                      
                      (28,646
                      )
                      
                      
                      28,646
                      
                      
                      
                      0.00
                      %
                      
                      
                      -0.22
                      %
                      
                      
                      0.22
                      %Foreign
      currency
                      
                      
                      61,868
                      
                      
                      
                      296,675
                      
                      
                      
                      (234,807
                      )
                      
                      
                      0.45
                      %
                      
                      
                      2.33
                      %
                      
                      
                      -1.88
                      %Total
      other income
                      
                      
                      63,310
                      
                      
                      
                      273,185
                      
                      
                      
                      (209,875
                      )
                      
                      
                      0.46
                      %
                      
                      
                      2.15
                      %
                      
                      
                      -1.69
                      %Loss
      before tax provision
                      
                      
                      (853,737
                      )
                      
                      
                      (1,892,055
                      )
                      
                      
                      1,038,318
                      
                      
                      
                      -6.16
                      %
                      
                      
                      -14.85
                      %
                      
                      
                      8.69
                      %Income
      tax provision
                      
                      
                      49,136
                      
                      
                      
                      40,015
                      
                      
                      
                      9,121
                      
                      
                      
                      0.35
                      %
                      
                      
                      0.31
                      %
                      
                      
                      0.04
                      %Net
      loss
                      
                      $
                      (902,873
                      )
                      
                      $
                      (1,932,070
                      )
                      
                      $
                      1,029,197
                      
                      
                      
                      -6.51
                      %
                      
                      
                      -15.16
                      %
                      
                      
                      8.65
                      %
  17
 
 Net sales
for the three months ended March 31, 2010 increased $1,113,650 compared to the
three months ended March 31, 2009 as shown in the table below.
 
 Increase
                      
                      
                      Increase(decrease)
                      
                      
                      (decrease)
                      
                      
                      Percentage
      of sales byThree
      Months
                      
                      
                      Three
      Months
                      
                      
                      dollar
                      
                      
                      dollar
                      
                      
                      geographic
      regionended 3/31/10
                      
                      
                      ended 3/31/09
                      
                      
                      variance
                      
                      
                      variance %
                      
                      
                      2010
                      
                      
                      2009The
      Americas
                      
                      $
                      6,318,133
                      
                      
                      $
                      7,233,329
                      
                      
                      $
                      (915,196
                      )
                      
                      
                      -13
                      %
                      
                      
                      45
                      %
                      
                      
                      57
                      %Europe
                      
                      
                      7,141,656
                      
                      
                      
                      5,136,179
                      
                      
                      
                      2,005,477
                      
                      
                      
                      39
                      %
                      
                      
                      52
                      %
                      
                      
                      40
                      %Asia
                      
                      
                      387,290
                      
                      
                      
                      363,921
                      
                      
                      
                      23,369
                      
                      
                      
                      6
                      %
                      
                      
                      3
                      %
                      
                      
                      3
                      %Total
                      
                      $
                      13,847,079
                      
                      
                      $
                      12,733,429
                      
                      
                      $
                      1,113,650
                      
                      
                      
                      9
                      %
                      
                      
                      100
                      %
                      
                      
                      100
                      %
 
 The
sales increase was attributable to increased international sales due to the
addition of customers acquired in the PCTV acquisition, increased sales to
computer manufacturers and a strengthening of the Euro exchange rate against the
U.S. dollar. A favorable mix of higher sales priced product contributed to a
1.67% increase in the average sales price while units sales increased by about
14.50%.
 
 Gross
profit
 
 Gross
profit increased $901,512 for the three months ended March 31, 2010 compared to
the same period in the prior year. The increase in gross profit was due
to:
 
 The
increase in the gross profit is detailed below:
 
 Increase (decrease)Increased
      sales
                    
                    $
                    380,244Increase
      due to strengthening of the Euro exchange rate
                    
                    
                    357,452Higher
      gross profit due to favorable sales mix, including PCTV
      products
                    
                    
                    266,591Higher
      production and production related expenses
                    
                    
                    (102,775
                    )Total
      increase in gross profit
                    
                    $
                    901,512
 
 Gross
profit percentage for the three months ended March 31, 2010 was 27.92 % compared
to 23.28% for the three months ended March 31, 2009, resulting in a gross profit
percentage increase of 4.64%.
 The
increase in gross profit percentage is detailed below:
 
 Increase (decrease)Higher
      gross profit due to favorable sales mix, including PCTV
      products
                    
                    
                    2.68
                    %Increase
      due to strengthening of the Euro exchange rate
                    
                    
                    1.83
                    %Production
      and production related expenses
                    
                    
                    0.13
                    %Net
      increase in gross profit percentage
                    
                    
                    4.64
                    %
  18




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 Sales2010
                  
                  
                  2009
                  
                  
                  Decrease
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  IncreaseSales
      and marketing-HCW
                  
                  $
                  2,406,232
                  
                  
                  $
                  2,356,129
                  
                  
                  $
                  50,103
                  
                  
                  
                  17.38
                  %
                  
                  
                  18.50
                  %
                  
                  
                  -1.12
                  %Sales
      and marketing-PCTV
                  
                  
                  112,924
                  
                  
                  
                  88,045
                  
                  
                  
                  24,879
                  
                  
                  
                  0.82
                  %
                  
                  
                  0.69
                  %
                  
                  
                  0.13
                  %Technical
      support
                  
                  
                  123,329
                  
                  
                  
                  135,600
                  
                  
                  
                  (12,271
                  )
                  
                  
                  0.89
                  %
                  
                  
                  1.06
                  %
                  
                  
                  -0.17
                  %General
      and administrative-HCW
                  
                  
                  808,853
                  
                  
                  
                  864,058
                  
                  
                  
                  (55,205
                  )
                  
                  
                  5.84
                  %
                  
                  
                  6.79
                  %
                  
                  
                  -0.95
                  %General
      and administrative-PCTV
                  
                  
                  69,234
                  
                  
                  
                  143,701
                  
                  
                  
                  (74,467
                  )
                  
                  
                  0.50
                  %
                  
                  
                  1.13
                  %
                  
                  
                  -0.63
                  %Amortization
      of intangible assets
                  
                  
                  188,709
                  
                  
                  
                  188,709
                  
                  
                  
                  0
                  
                  
                  
                  1.36
                  %
                  
                  
                  1.48
                  %
                  
                  
                  -0.12
                  %Stock
      compensation
                  
                  
                  68,456
                  
                  
                  
                  85,429
                  
                  
                  
                  (16,973
                  )
                  
                  
                  0.49
                  %
                  
                  
                  0.67
                  %
                  
                  
                  -0.18
                  %Total
                  
                  $
                  3,777,737
                  
                  
                  $
                  3,861,671
                  
                  
                  $
                  (83,934
                  )
                  
                  
                  27.28
                  %
                  
                  
                  30.32
                  %
                  
                  
                  -3.04
                  %





Selling,
general and administrative expense decreased $83,934 from last year’s second
quarter as follows.





Excluding
the PCTV expenses and amortization of intangible assets acquired in the PCTV
acquisition, selling, general and administrative expense decreased $34,346 from
the prior year’s second quarter. Sales and marketing expense for HCW increased
$50,103, driven by a $94,316 expense increase resulting from the increase in the
Euro exchange rate compared to the U.S. dollar and an increase in sales volume
related expenses, mainly commissions and co-op advertising expense of $72,998,
offset by reductions in trade show expenses of $24,025 and lower sales office
expenses of $92,686, mainly due to personnel and overhead
reductions.





Sales and
marketing expenses related to the PCTV product line increased $24,879, primarily
due to  personnel and
overhead expenses.





The
decrease in general and administrative expense for HCW of $55,205 was primarily
due to lower professional fees, primarily for legal, consulting fees and
directors fees of $106,651 and a decrease in compensation expense of $19,147 due
to staff reductions and a 10% salary reduction, offset by higher rent expense of
$5,255, higher bad debt expense of $20,000 and higher credit costs of $45,338
due primarily for premiums paid to purchase Euro denominated option put
contracts.





General
and administrative expenses related to the PCTV product line decreased $74,467,
primarily due to expenses related to a transitional services agreement in effect
with Avid during the second fiscal quarter of 2009. This agreement was
terminated during the third fiscal quarter of 2009.





Research
and development expenses





Research
and development expense for the three months ended March 31, 2010 decreased
$262,747 from the three months ended March 31, 2009 as follows:


HCW
                  
                  
                  PCTV
                  
                  
                  TotalResearch
      and development expense-HCW
                  
                  $
                  (265,782
                  )
                  
                  $
                  0
                  
                  
                  $
                  (265,782
                  )Research
      and development expense-PCTV
                  
                  
                  0
                  
                  
                  
                  12,405
                  
                  
                  
                  12,405Stock
      compensation expense
                  
                  
                  (9,370
                  )
                  
                  
                  0
                  
                  
                  
                  (9,370
                  )Total
      research and development expense
                  
                  $
                  (275,152
                  )
                  
                  $
                  12,405
                  
                  
                  $
                  (262,747
                  )




19


Excluding
the expense of the PCTV division, research and development expense decreased
$265,782 from the prior year’s second fiscal quarter. The decrease was primarily
due to personnel and personnel related reductions and the number of development
programs in process.





Offsetting
the expense decreases were increases of $12,405 related to personnel and product
development programs of the PCTV business.




Tax
provision





Our tax
provision for the three months ended March 31, 2010 and 2009 is as
follows:





Three months ended March 31,2010
                    
                    
                    2009Tax expense on
      international operations
                    
                    $
                    39,136
                    
                    
                    $
                    30,015State
      taxes
                    
                    
                    10,000
                    
                    
                    
                    10,000Tax
      provision
                    
                    $
                    49,136
                    
                    
                    $
                    40,015




Summary





We
recorded a net loss of $902,873, for the three months ended March 31, 2010,
which resulted in basic and diluted net loss per share of $0.09 on weighted
average basic and diluted shares of 10,065,344 compared to a net loss of
$1,932,070 for the three months ended March 31, 2009, which resulted in basic
and diluted net loss per share of $0.19 on weighted average basic and diluted
shares of 10,043,876.





Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended
March 31, 2010 and 2009, 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, 2010 COMPARED TO THE SIX MONTH PERIOD


ENDED
MARCH 31, 2009





Results
of operations for the six months ended March 31, 2010 compared to March 31, 2009
is as follows:





Six
                    
                    
                    SixMonths
                    
                    
                    MonthsEnded
                    
                    
                    Ended
                    
                    
                    Variance
                    
                    
                    Percentage of sales3/31/10
                    
                    
                    3/31/09
                    
                    
                    $
                    
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    VarianceNet
      Sales
                    
                    $
                    31,725,437
                    
                    
                    $
                    30,022,109
                    
                    
                    $
                    1,703,328
                    
                    
                    
                    100.00
                    %
                    
                    
                    100.00
                    %
                    
                    
                    5.67
                    %Cost
      of sales
                    
                    
                    22,637,249
                    
                    
                    
                    24,459,569
                    
                    
                    
                    (1,822,320
                    )
                    
                    
                    71.35
                    %
                    
                    
                    81.47
                    %
                    
                    
                    -10.12
                    %Gross
      Profit
                    
                    
                    9,088,188
                    
                    
                    
                    5,562,540
                    
                    
                    
                    3,525,648
                    
                    
                    
                    28.65
                    %
                    
                    
                    18.53
                    %
                    
                    
                    10.12
                    %Gross
      Profit %
                    
                    
                    28.65
                    %
                    
                    
                    18.53
                    %
                    
                    
                    10.12
                    %Expenses:Sales
      & marketing
                    
                    
                    5,307,047
                    
                    
                    
                    5,115,420
                    
                    
                    
                    191,627
                    
                    
                    
                    16.73
                    %
                    
                    
                    17.04
                    %
                    
                    
                    -0.31
                    %Sales
      & marketing-PCTV
                    
                    
                    237,637
                    
                    
                    
                    88,045
                    
                    
                    
                    149,592
                    
                    
                    
                    0.75
                    %
                    
                    
                    0.29
                    %
                    
                    
                    0.46
                    %Technical
      support
                    
                    
                    244,502
                    
                    
                    
                    270,984
                    
                    
                    
                    (26,482
                    )
                    
                    
                    0.77
                    %
                    
                    
                    0.90
                    %
                    
                    
                    -0.13
                    %General &
      administrative
                    
                    
                    1,644,530
                    
                    
                    
                    1,722,851
                    
                    
                    
                    (78,321
                    )
                    
                    
                    5.18
                    %
                    
                    
                    5.74
                    %
                    
                    
                    -0.56
                    %General
      & administrative-PCTV
                    
                    
                    162,214
                    
                    
                    
                    143,701
                    
                    
                    
                    18,513
                    
                    
                    
                    0.51
                    %
                    
                    
                    0.48
                    %
                    
                    
                    0.03
                    %Amortization
      of intangible assets
                    
                    
                    377,418
                    
                    
                    
                    188,709
                    
                    
                    
                    188,709
                    
                    
                    
                    1.19
                    %
                    
                    
                    0.63
                    %
                    
                    
                    0.56
                    %Selling,
      general and administrative stock compensation expense
                    
                    
                    136,912
                    
                    
                    
                    170,857
                    
                    
                    
                    (33,945
                    )
                    
                    
                    0.43
                    %
                    
                    
                    0.57
                    %
                    
                    
                    -0.14
                    %Total
      selling, general and administrative expense
                    
                    
                    8,110,260
                    
                    
                    
                    7,700,567
                    
                    
                    
                    409,693
                    
                    
                    
                    25.56
                    %
                    
                    
                    25.65
                    %
                    
                    
                    -0.09
                    %Research
      and development
                    
                    
                    1,152,240
                    
                    
                    
                    1,588,742
                    
                    
                    
                    (436,502
                    )
                    
                    
                    3.63
                    %
                    
                    
                    5.28
                    %
                    
                    
                    -1.65
                    %Research
      and development-PCTV
                    
                    
                    947,342
                    
                    
                    
                    430,418
                    
                    
                    
                    516,924
                    
                    
                    
                    2.99
                    %
                    
                    
                    1.43
                    %
                    
                    
                    1.56
                    %Research
      and development stock compensation expense
                    
                    
                    75,590
                    
                    
                    
                    94,330
                    
                    
                    
                    (18,740
                    )
                    
                    
                    0.24
                    %
                    
                    
                    0.30
                    %
                    
                    
                    -0.06
                    %Total
      expenses
                    
                    
                    10,285,432
                    
                    
                    
                    9,814,057
                    
                    
                    
                    471,375
                    
                    
                    
                    32.42
                    %
                    
                    
                    32.66
                    %
                    
                    
                    -0.24
                    %Loss
      from operations
                    
                    
                    (1,197,244
                    )
                    
                    
                    (4,251,517
                    )
                    
                    
                    3,054,273
                    
                    
                    
                    -3.77
                    %
                    
                    
                    -14.13
                    %
                    
                    
                    10.36
                    %Other
      income :Interest
      income
                    
                    
                    2,894
                    
                    
                    
                    9,625
                    
                    
                    
                    (6,731
                    )
                    
                    
                    0.01
                    %
                    
                    
                    0.03
                    %
                    
                    
                    -0.02
                    %Interest (expense)
                    
                    
                    (4,347
                    )
                    
                    
                    (28,646
                    )
                    
                    
                    24,299
                    
                    
                    
                    -0.01
                    %
                    
                    
                    -0.10
                    %
                    
                    
                    0.09
                    %Foreign
      currency
                    
                    
                    61,635
                    
                    
                    
                    643,677
                    
                    
                    
                    (582,042
                    )
                    
                    
                    0.19
                    %
                    
                    
                    2.14
                    %
                    
                    
                    -1.95
                    %Total
      other income
                    
                    
                    60,182
                    
                    
                    
                    624,656
                    
                    
                    
                    (564,474
                    )
                    
                    
                    0.19
                    %
                    
                    
                    2.07
                    %
                    
                    
                    -1.88
                    %Loss
      before tax provision
                    
                    
                    (1,137,062
                    )
                    
                    
                    (3,626,861
                    )
                    
                    
                    2,489,799
                    
                    
                    
                    -3.58
                    %
                    
                    
                    -12.06
                    %
                    
                    
                    8.48
                    %Income
      tax provision
                    
                    
                    100,362
                    
                    
                    
                    77,522
                    
                    
                    
                    22,840
                    
                    
                    
                    0.32
                    %
                    
                    
                    0.26
                    %
                    
                    
                    0.06
                    %Net
      loss
                    
                    $
                    (1,237,424
                    )
                    
                    $
                    (3,704,383
                    )
                    
                    $
                    2,466,959
                    
                    
                    
                    -3.90
                    %
                    
                    
                    -12.32
                    %
                    
                    
                    8.42
                    %




21


Net sales
for the six months ended March 31, 2010 increased $1,703,328 compared to the six
months ended March 31, 2009 as shown in the table below.





Increase
                    
                    
                    Increase(decrease)
                    
                    
                    (decrease)
                    
                    
                    Percentage of sales bySix Months
                    
                    
                    Six Months
                    
                    
                    dollar
                    
                    
                    dollar
                    
                    
                    Geographic regionended 3/31/10
                    
                    
                    ended 3/31/09
                    
                    
                    variance
                    
                    
                    variance %
                    
                    
                    2010
                    
                    
                    2009The
      Americas
                    
                    $
                    13,981,231
                    
                    
                    $
                    14,506,453
                    
                    
                    $
                    (525,222
                    )
                    
                    
                    -4
                    %
                    
                    
                    44
                    %
                    
                    
                    48
                    %Europe
                    
                    
                    16,954,082
                    
                    
                    
                    14,541,478
                    
                    
                    
                    2,412,604
                    
                    
                    
                    17
                    %
                    
                    
                    53
                    %
                    
                    
                    48
                    %Asia
                    
                    
                    790,124
                    
                    
                    
                    974,178
                    
                    
                    
                    (184,054
                    )
                    
                    
                    -19
                    %
                    
                    
                    3
                    %
                    
                    
                    4
                    %Total
                    
                    $
                    31,725,437
                    
                    
                    $
                    30,022,109
                    
                    
                    $
                    1,703,328
                    
                    
                    
                    6
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





The sales
increase was attributable to increased international sales due to the addition
of customers acquired in the PCTV acquisition, increased sales to computer
manufacturers and a strengthening of the Euro exchange rate against the U.S.
dollar. A favorable mix of higher sales priced product contributed to a 8.09%
increase in the average sales price while units sales increased by about
3.00%.





Gross
profit





Gross
profit increased $3,525,648 for the six months ended March 31, 2010 compared to
the same period in the prior year.  The increase in gross profit was due
to:





The
increase in the gross profit is detailed below:


Increase (decrease)Increased
      sales
                  
                  $
                  497,446Increase
      due to strengthening of the Euro exchange rate
                  
                  
                  1,143,879Higher
      gross profit due to favorable sales mix, including PCTV
      products
                  
                  
                  2,081,391Higher
      production and production related expenses
                  
                  
                  (197,068
                  )Total
      increase in gross profit
                  
                  $
                  3,525,648





Gross
profit percentage for the six months ended March 31, 2010 was 28.65 % compared
to 18.53% for the six months ended March 31, 2009, resulting in a gross profit
percentage increase of 10.12%.





The
increase in gross profit percentage is detailed below:





Increase (decrease)Higher
      gross profit due to favorable sales mix, including PCTV
      products
                      
                      
                      7.61
                      %Increase
      due to strengthening of the Euro exchange rate
                      
                      
                      2.56
                      %Production
      and production related expenses
                      
                      
                      (0.05
                      )%Net
      increase in gross profit percentage
                      
                      
                      10.12
                      %




22




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 Sales2010
                    
                    
                    2009
                    
                    
                    Decrease
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    IncreaseSales
      and marketing-HCW
                    
                    $
                    5,307,047
                    
                    
                    $
                    5,115,420
                    
                    
                    $
                    191,627
                    
                    
                    
                    16.73
                    %
                    
                    
                    17.04
                    %
                    
                    
                    -0.31
                    %Sales
      and marketing-PCTV
                    
                    
                    237,637
                    
                    
                    
                    88,045
                    
                    
                    
                    149,592
                    
                    
                    
                    0.75
                    %
                    
                    
                    0.29
                    %
                    
                    
                    0.46
                    %Technical
      support
                    
                    
                    244,502
                    
                    
                    
                    270,984
                    
                    
                    
                    (26,482
                    )
                    
                    
                    0.77
                    %
                    
                    
                    0.90
                    %
                    
                    
                    -0.13
                    %General
      and administrative-HCW
                    
                    
                    1,644,530
                    
                    
                    
                    1,722,851
                    
                    
                    
                    (78,321
                    )
                    
                    
                    5.18
                    %
                    
                    
                    5.74
                    %
                    
                    
                    -0.56
                    %General
      and administrative-PCTV
                    
                    
                    162,214
                    
                    
                    
                    143,701
                    
                    
                    
                    18,513
                    
                    
                    
                    0.51
                    %
                    
                    
                    0.48
                    %
                    
                    
                    0.03
                    %Amortization
      of intangible assets
                    
                    
                    377,418
                    
                    
                    
                    188,709
                    
                    
                    
                    188,709
                    
                    
                    
                    1.19
                    %
                    
                    
                    0.63
                    %
                    
                    
                    0.56
                    %Stock
      compensation
                    
                    
                    136,912
                    
                    
                    
                    170,857
                    
                    
                    
                    (33,945
                    )
                    
                    
                    0.43
                    %
                    
                    
                    0.57
                    %
                    
                    
                    -0.14
                    %Total
                    
                    $
                    8,110,260
                    
                    
                    $
                    7,700,567
                    
                    
                    $
                    409,693
                    
                    
                    
                    25.56
                    %
                    
                    
                    25.65
                    %
                    
                    
                    -0.09
                    %





Selling,
general and administrative expense for the six months ended March 31, 2010
increased $409,693 compared to the same period in the prior year.





Excluding
the PCTV expenses and amortization of intangible assets acquired in the PCTV
acquisition, selling, general and administrative expense increased $52,879 over
the prior year. Sales and marketing expense for HCW increased $191,627, driven
by a $302,577 expense increase resulting from the increase in the Euro exchange
rate compared to the U.S. dollar and an increase in sales volume related
expenses, mainly commissions and co-op advertising expense of $170,500, offset
by reductions in trade show expenses of $47,178, lower sales office expenses of
$207,783 mainly due to personnel and overhead reductions, and lower sales
compensation expense due to personnel reductions of $26,489.





Sales and
marketing expenses related to the PCTV product line increased $149,592. The PCTV
acquisition was finalized at the end of December 2008, so the results for six
months ended March 31, 2009 only included three months of PCTV expense while the
results for the six months ended March 31, 2010  included PCTV expenses for
six months.





The
decrease in general and administrative expense for HCW of $78,321 was primarily
due to lower professional fees, mainly for legal, consulting fees and directors
fees of $115,793 and a decrease in compensation expense of $44,640 due to staff
reductions and a 10% salary reduction, offset by higher rent expense of $6,427,
higher bad debt expense of $40,000 and higher credit costs of $35,685 due
primarily for premiums paid to purchase Euro denominated option put
contracts.





General
and administrative expenses related to the PCTV product line increased $18,513.
The PCTV acquisition was finalized at the end of December 2008, so the results
for the six months ended March 31, 2009 only included three months of PCTV
expense, while the results for the six months ended March 31, 2010
 included PCTV expenses for six months.





Amortization
of intangible assets of $188,709 was related to intangible assets acquired in
the purchase of the PCTV business. The PCTV acquisition was finalized at
the end of December 2008, so the results for the six months ended March 31, 2009
only included three months of intangible asset amortization while the results
for the six months ended March 31, 2010 included six months of intangible asset
amortization.


23


Research
and development expenses





Research
and development expense for the six months ended March 31, 2010 increased
$61,682 from the six months ended March 31, 2009 as follows:


HCW
                  
                  
                  PCTV
                  
                  
                  TotalResearch
      and development expense-HCW
                  
                  $
                  (436,502
                  )
                  
                  $
                  0
                  
                  
                  $
                  (436,502
                  )Research
      and development expense-PCTV
                  
                  
                  0
                  
                  
                  
                  516,924
                  
                  
                  
                  516,924Stock
      compensation expense
                  
                  
                  (18,740
                  )
                  
                  
                  0
                  
                  
                  
                  (18,740
                  )Total
      research and development expense
                  
                  $
                  (455,242
                  )
                  
                  $
                  516,924
                  
                  
                  $
                  61,682





Excluding
the expense of the PCTV division, research and development expense decreased
$436,502 from the same period in the prior year. The decrease was primarily due
to personnel and personnel related reductions and the number of development
programs in process.





Offsetting
the expense decreases were $516,924 in expense related to personnel and
development programs of the PCTV business acquired at the end of December 2008.
The PCTV acquisition was
finalized at the end of December 2008, so the results for the six months ended
March 31, 2009 only included three months of research and development expense,
while the results for the six months ended March 31, 2010 included six months of
research and development expense.




Tax
provision





Our tax
provision for the six months ended March 31, 2010 and 2009 is as
follows:





Six months ended March 31,2010
                  
                  
                  2009Tax expense on
      international operations
                  
                  $
                  80,362
                  
                  
                  $
                  57,522State
      taxes
                  
                  
                  20,000
                  
                  
                  
                  20,000Tax
      provision
                  
                  $
                  100,362
                  
                  
                  $
                  77,522




Summary





We
recorded a net loss of $1,237,424 for the six months ended March 31, 2010, which
resulted in basic and diluted net loss per share of $0.12 on weighted average
basic and diluted shares of 10,062,545 compared to a net loss of $3,704,383 for
the six months ended March 31, 2009, which resulted in basic and diluted net
loss per share of $0.37 on weighted average basic and diluted shares of
10,039,434.





Options
to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05
to $7.45 and from $1.05 to $8.75 were outstanding for the six months ended March
31, 2010 and 2009, respectively, but were not included in the computation of
diluted earnings per share because they were anti-dilutive.


24


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% of sales for the two years ended
September 30, 2009 and 2008 respectively,and 56% for the six months ended March
31, 2010.  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.





We target
a wide range of customer types to attempt 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, 2010 and
September 30, 2009 is set forth below:




March 31, 2010
                    
                    
                    September 30, 2009Cash
                    
                    $
                    8,712,496
                    
                    
                    $
                    8,368,342Working
      Capital
                    
                    
                    4,715,632
                    
                    
                    
                    5,885,577Stockholders’
      Equity
                    
                    
                    10,671,751
                    
                    
                    
                    12,334,866





The
Company had cash and cash equivalents as of March 31, 2010 of $8,712,496, an
increase of $344,154 from September 30, 2009.





The
increase in cash was due to:





Operating
                            
                            
                            Investing
                            
                            
                            FinancingActivities
                            
                            
                            activities
                            
                            
                            Activities
                            
                            
                            TotalSources
      of
      cash:Decrease
      in accounts receivable
                            
                            $
                            1,354,543
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            1,354,543Increase
      in accounts payable and accrued expenses
                            
                            
                            1,298,984
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,298,984Proceeds
      from employee stock purchases
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9,332
                            
                            
                            
                            9,332Total
      sources of cash
                            
                            
                            2,653,527
                            
                            
                            
                            -
                            
                            
                            
                            9,332
                            
                            
                            
                            2,662,859Less
      cash used for:Increase
      in inventory
                            
                            $
                            (674,918
                            )
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            (674,918
                            )Effect
      of exchange rates
                            
                            
                            (647,525
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (647,525
                            )PCTV
      acquisition-net of note payable
                            
                            
                            -
                            
                            
                            
                            (511,332
                            )
                            
                            
                            -
                            
                            
                            
                            (511,332
                            )Net
      loss adjusted for non cash items
                            
                            
                            (245,718
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (245,718
                            )Increase
      in prepaid expenses and other current assets
                            
                            
                            (216,478
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (216,478
                            )Capital
      equipment purchases
                            
                            
                            -
                            
                            
                            
                            (22,734
                            )
                            
                            
                            -
                            
                            
                            
                            (22,734
                            )Total
      usages of cash
                            
                            
                            (1,784,639
                            )
                            
                            
                            (534,066
                            )
                            
                            
                            -
                            
                            
                            
                            (2,318,705
                            )Net
      cash increase
                            
                            $
                            868,888
                            
                            
                            $
                            (534,066
                            )
                            
                            $
                            9,332
                            
                            
                            $
                            344,154




25





Net cash
provided by operating activities was due to an increase in accounts payable and
accrued expenses of $1,298,984 and a decrease in accounts receivable of
$1,354,543.  The decrease in accounts receivable was primarily due to lower
fiscal second quarter sales compared to fiscal first quarter sales. Offsetting
these cash increases were increases in inventory and prepaid expenses of
$674,948 and $216,478, respectively.  The increase in inventory was needed
to cover expected sales volume for the third fiscal quarter.  The net loss
adjusted for non cash items consumed $245,718 in cash.





Cash of
$534,066 was used in investing activities.  Of this amount, the Company
paid $511,332 on the note payable to Avid Technologies, Inc. and $22,734 was
used to purchase fixed assets. As of December 31, 2009, the note to Avid
Technologies, Inc. was fully paid.  Cash of $9,332 from financing
activities came from purchases of stock under our employee stock purchase
plan.





Our cash
requirements for the next twelve months will include, among other things, the
cash needed to fund our operating and working capital needs.  With the
proper execution of our business and operating plan, we believe that our cash
and cash equivalents as of March 31, 2010 and our internally generated cash will
provide us with sufficient liquidity to meet our capital needs for the next
twelve months.   Failure to meet the business and operating 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 capital
needs.  In addition, if we are able to obtain financing, there can be no
assurances that it will be on financially reasonable terms.




Future
contractual obligations





The
following table shows our contractual obligations related to lease obligations
as of March 31, 2010:


Payments due by periodTotal
                  
                  
                  Less than 1 year
                  
                  
                  1-3 years
                  
                  
                  3 to 5 yearsOperating
      lease obligations
                  
                  $
                  1,450,447
                  
                  
                  $
                  730,938
                  
                  
                  $
                  587,462
                  
                  
                  $
                  132,047




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





Item 305
of Regulation S-K “Quantitative and Qualitative Disclosures About Market Risks”
is not required for Smaller Reporting Companies.




Item
4T. Controls and procedures





Disclosure
Controls and Procedures





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


26





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,
2010.





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 our business plans or strategies, projected or anticipated benefits or
other consequences of our plans or strategies, financing plans, projected or
anticipated benefits from acquisitions that we may make, or projections
involving anticipated revenues, earnings or other aspects of our operating
results or financial position, and the outcome of any contingencies. Any such
forward-looking statements are based on current expectations, estimates and
projections of management. We intend for these forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements. Words such
as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,”
“intend,” “estimate,” and “continue,” and their opposites and similar
expressions are intended to identify forward-looking statements. We caution you
that these statements are not guarantees of future performance or events and are
subject to a number of uncertainties, risks and other influences, many of which
are beyond our control, that may influence the accuracy of the statements and
the projections upon which the statements are based. Factors that could cause
actual results to differ materially from those set forth or implied by any
forward-looking statement include, but are not limited to, the mix of products
sold and the profit margins thereon, order cancellation or a reduction in orders
from customers, competitive product offerings and pricing actions, the
availability and pricing of key raw materials, the availability of financing,
dependence on key members of management, successful integration of acquisitions,
economic conditions in the United States and abroad, as well as other risks and
uncertainties discussed in our reports filed with the Securities and Exchange
Commission, including, but not limited to, our Annual Report on Form 10-K for
the fiscal year ended September 30, 2009, our Form 10-Q for the three months
ended December 31, 2009 and this Quarterly Report. Copies of these filings are
available at www.sec.gov.




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.


27


PART
II.  OTHER INFORMATION




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
      200232.0
            
            Certification
      of  Chief Executive Officer and Chief
      Financial  Officer Pursuant to 18 U.S.C.
              Section  1350,
      as adopted pursuant to Section  906 of the
      Sarbanes-Oxley  Act
of  2002





(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.


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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.Date:
      May 14,
      2010
                    By
                    /s/Kenneth PlotkinKENNETH  PLOTKINChief
      Executive Officer, Chairman of theBoard,
      President (Principal Executive Officer)Date:
      May 14,
      2010
                    
                    By
                    /s/Gerald TucciaroneGERALD
      TUCCIARONETreasurer,
      Chief Financial Officer,(Principal
      Financial Officer and PrincipalAccounting
      Officer) and
Secretary


29