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



                                    FORM 10-Q

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



For the quarterly period ended:        June 30,  2001
                                       ------------------

                                       OR



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



For the transition period from _______ to ________



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



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

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

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



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


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

As of August 8,  2001,  8,934,619  shares of .01 par value  Common  Stock of the
registrant were outstanding, not including treasury shares.

<PAGE>

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

                                      INDEX
                                      -----


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

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

Condensed Consolidated Balance Sheets-
   June 30, 2001 (unaudited) and September 30, 2000                       3

Condensed Consolidated Statements of Income-
  Nine  Months ended June 30, 2001 (unaudited) and 2000 (unaudited)       4

Condensed Consolidated Statements of Income-
  Three Months ended June  30, 2001 (unaudited)  and 2000 (unaudited)     5

Condensed Consolidated Statements of Cash Flows-
  Nine Months ended June  30, 2001 (unaudited) and 2000 (unaudited)       6

Notes to Condensed Consolidated Financial Statements                      7-12

Item 2. Management's Discussion and Analysis of  Financial Condition      12-19
           and Results of Operations

Item 3. Quantitiative and Qualitative Disclosures about Market Risks      19-20

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

Item 1.  Legal Proceedings                                                20-21

Item 6.  Exhibits and Reports on form 8-K                                 22

SIGNATURES                                                                23
----------

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

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

Item 1.  Financial Statements

<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                                    2001              September 30,
                                                                                (Unaudited)              2000
                                                                              ----------------    -------------------
<S>                                                                                <C>                      <C>
 CURRENT ASSETS:
     Cash and cash  equivalents                                               $  3,664,428         $  2,744,855
     Accounts receivable, net of allowance for doubtful accounts
       of   $183,000 and $165,000                                                2,427,415            6,172,993
     Inventories                                                                12,601,588           12,289,975
     Life insurance proceeds receivable                                          1,000,000                    -
     Prepaid expenses and other current assets                                     860,178              456,431
     Income taxes receivable                                                     1,428,071            1,496,045
     Deferred tax assets                                                         1,447,933            1,267,797
     Net fair value of forward exchange contracts                                  273,177                    -
                                                                                   -------            ---------
                Total current assets                                            23,702,790           24,428,096

    Property, plant and equipment-net                                              904,074              977,030
    Goodwill and intangible assets-net                                             744,869              824,519
    Security deposits and other non current assets                                  85,228               85,228
                                                                                    ------               ------
                                                                              $ 25,436,961         $ 26,314,873
                                                                              ============         ============


 LIABILITIES AND STOCKHOLDERS' EQUITY:

 CURRENT LIABILITIES:
    Accounts payable                                                          $  8,375,451         $ 10,481,714
    Accrued expenses                                                             1,457,360              952,482
    Loan payable                                                                   660,000            1,000,000
    Income taxes payable                                                                 -              227,000
                                                                                 ---------              -------
              Total current liabilities                                         10,492,811           12,661,196
                                                                                ----------           ----------

 STOCKHOLDERS' EQUITY:
    Common stock $.01 par value; 25,000,000 shares authorized,  9,354,458
       and 9,312,578  issued as of  June 30,  2001  and September 30, 2000          93,545               93,126
    Additional paid-in capital                                                  12,137,160           12,046,421
    Retained earnings                                                            4,307,716            2,848,194
    Accumulated other comprehensive income                                        (260,207)                   -
   Treasury Stock, at cost, 429,602 shares                                      (1,334,064)          (1,334,064)
                            -------                                             ----------           ----------
              Total stockholders' equity                                        14,944,150           13,653,677
                                                                                ----------           ----------
                                                                              $ 25,436,961         $ 26,314,873
                                                                              ============         ============

</TABLE>
                                       3

     See accompanying notes to condensed consolidated financial statements

<PAGE>

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


<TABLE>
<CAPTION>

                                                                                     Nine Months Ended June 30,
                                                                                      2001              2000
                                                                                   (Unaudited)       (Unaudited)
                                                                               ------------------ -----------------
<S>                                                                                <C>                   <C>

Net Sales                                                                     $ 41,773,593         $ 53,291,070
Cost  of  Sales                                                                 32,866,647           43,682,784
                                                                                ----------           ----------
      Gross Profit                                                               8,906,946            9,608,286

Selling, General and  Administrative Expenses                                    7,849,728            8,801,365
Research  and  Development Expenses                                              1,094,832            1,177,749
Litigation settlement                                                              212,500                    -
                                                                                   -------            ---------
     Loss from operations                                                         (250,114)            (370,828)

 Other Income (expense):

 Interest income                                                                    26,811               91,591
 Interest expense                                                                  (26,546)                   -
 Foreign currency transaction losses                                               (10,129)            (158,824)
 Life insurance claim                                                            1,000,000                    -
Other income                                                                         7,200                    -
                                                                                     -----             --------
   Other Income (expense)                                                          997,336              (67,233)
                                                                                   -------              -------
      Income (loss) before income tax benefit                                      747,222             (438,061)
Income tax benefit                                                                (508,300)            (417,000)
                                                                                  --------             --------
      Income (loss) before cumulative effect of a change in accounting
  principle                                                                      1,255,522              (21,061)
      Cumulative effect of a change in accounting principle, net
  of taxes of  $115,000                                                            204,000                    -
                                                                                   -------             --------
       Net income (loss)                                                      $  1,459,522        $     (21,061)
                                                                              ============        =============
Net income per share results-basic:
Income before cumulative effect of a change in accounting principle                  $0.14                $0.00
Cumulative effect of a change in accounting principle                                $0.02                    -
                                                                                     -----                -----
      Net income per share-basic                                                     $0.16                $0.00
                                                                                     =====                =====
Net income per share results-diluted:
Income before cumulative effect of a change in accounting principle                  $0.14                $0.00
Cumulative effect of a change in accounting principle                                $0.02                    -
                                                                                     -----                -----
     Net income per share-diluted                                                    $0.16                $0.00
                                                                                     =====                =====
</TABLE>

                                       4

      See accompanying notes to condensed consolidated financial statements

<PAGE>

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


<TABLE>
<CAPTION>

                                                                                   Three Months Ended June 30,
                                                                                      2001             2000
                                                                                  (Unaudited)      (Unaudited)
                                                                                -------------      -------------

<S>                                                                                 <C>                  <C>
Net Sales                                                                     $  9,382,610         $ 11,722,224
Cost  of  Sales                                                                  7,649,976           11,015,087
                                                                                 ---------           ----------
    Gross Profit                                                                 1,732,634              707,137

Selling, General and  Administrative Expenses                                    2,385,838            2,935,229
Research  and  Development Expenses                                                353,804              414,924
Litigation settlement                                                              212,500                    -
                                                                                   -------            ---------
    Loss from operations                                                        (1,219,508)          (2,643,016)

Other Income (expense):
   Interest income                                                                   8,265               23,838
   Interest expense                                                                 (6,826)                   -
   Foreign currency transaction gains (losses)                                     109,895              (67,502)
   Life insurance claim                                                          1,000,000                    -
   Other income                                                                      7,200                    -
                                                                                     -----            ---------
Other Income (expense)                                                           1,118,534              (43,664)
                                                                                 ---------              -------
      Loss before income tax benefit                                              (100,974)          (2,686,680)
Income tax benefit                                                                (296,000)            (932,000)
                                                                                  --------             --------
     Net  income (loss)                                                          $ 195,026          $(1,754,680)
                                                                                 =========          ===========
Net income (loss)  per share results:
Basic                                                                                $0.02               $(0.20)
Diluted                                                                              $0.02               $(0.20)
                                                                                     =====               ======
</TABLE>

                                       5

      See accompanying notes to condensed consolidated financial statements

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>

                                                                                      Nine months ended June 30,
                                                                                        2001              2000
                                                                                    (Unaudited)         (Unaudited)
                                                                                   ------------       -------------
<S>                                                                                  <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                  $  1,459,522       $    (21,061)
                                                                                   ------------       ------------
    Adjustments to reconcile net income (loss) to net cash provided by (used in)
       operating activities:
Depreciation and amortization                                                           303,865            185,369
Provision for uncollectible accounts receivable                                          10,000             30,000
Deferred tax benefits                                                                  (180,136)          (689,805)
Other non cash items                                                                     28,503             50,512

Changes in current assets and liabilities:
Accounts receivable                                                                  3, 735,578          1,492,405
Income taxes receivable                                                                  67,974                  -
Inventories                                                                            (311,613)         1,021,275
Life insurance receivable                                                            (1,000,000)                 -
Prepaid expenses and other  current assets                                             (403,747)          (283,560)
Net fair value of forward exchange contracts                                           (273,177)                 -
Accumulated other comprehensive income                                                 (260,207)                 -
Other assets                                                                                  -            (15,286)
Accounts payable and other current liabilities                                       (1,828,385)        (4,597,359)
                                                                                     ----------         ----------
                                                                                       (111,345)        (2,806,449)
                                                                                       --------         ----------
Net cash provided by (used in) operating activities                                   1,348,177         (2,827,510)
                                                                                      ---------         ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash acquired                                                    -           (803,445)
Purchases of property, plant and equipment                                             (151,259)          (353,698)
                                                                                       --------           --------
Net cash used in investing activities                                                  (151,259)        (1,157,143)
                                                                                       --------         ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from employee stock purchases                                                   62,655            446,858
Loan repayments-net of borrowings                                                      (340,000)                 -
                                                                                       --------         ----------
Net cash (used in) provided by  financing activities                                   (277,345)           446,858
                                                                                       --------            -------
Net  increase (decrease)  in cash and cash equivalents                                  919,573         (3,537,795)
Cash and Cash Equivalents, beginning of period                                        2,744,855          6,122,922
                                                                                      ---------          ---------
Cash and Cash Equivalents, end of period                                            $ 3,664,428        $ 2,585,127
                                                                                    ===========        ===========
SUPPLEMENTAL DISCLOSURES:

Interest paid                                                                         $  24,546                  -
Income taxes paid                                                                         4,506        $   414,677
                                                                                          =====        ===========
</TABLE>

                                       6

      See accompanying notes to condensed consolidated financial statements

<PAGE>

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

NOTE 1.  BASIS OF PRESENTATION

     The accompanying  unaudited  condensed  consolidated  financial  statements
included  herein  have been  prepared  in  accordance  with  generally  accepted
accounting  principles  for interim  period  reporting in  conjunction  with the
instructions to Form 10-Q.  Accordingly,  these statements do not include all of
the information required by generally accepted accounting  principles for annual
financial  statements.  In the  opinion  of  management,  all known  adjustments
(consisting  of normal  recurring  accruals and  reserves)  necessary to present
fairly the  financial  position,  results of  operations  and cash flows for the
three and nine  month  period  ended  June 30,  2001 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,
2000 Form 10-K.

     On October 1, 2001, the Company adopted the classification requirements for
shipping  and  handling  fees  and  costs as  required  under  EITF  No.  00-10,
"Accounting  for Shipping and  Handling  Fee Costs."  Accordingly,  shipping and
handling fee costs,  which  historically  were included in Selling,  General and
Administrative  expenses, are recorded in Cost of Sales. Prior periods have been
restated to conform with this presentation.

     The  operating  results for the three and nine month  period ended June 30,
2001 are not  necessarily  indicative  of the  results  to be  expected  for the
September 30, 2001 year end.

DERIVATIVE FINANCIAL INSTRUMENTS

     The Company  uses  derivatives  to reduce its exposure to  fluctuations  in
foreign  currencies.  Derivative  products,  such as  foreign  currency  forward
contracts,  are used to hedge the foreign currency market  exposures  underlying
forecasted sales transactions with customers.  The Company's accounting policies
for  these  instruments  are based on its  designation  of such  instruments  as
hedging  transactions.  The  Company  does not  enter  into such  contracts  for
speculative  purposes.  The Company records all derivatives on the balance sheet
at net fair value.  As of June 30, 2001, a current asset of $273,177  reflecting
the net fair value of the  Company's  derivatives  was  recorded  on the balance
sheet.

     For derivative  instruments that are designated and qualify as a fair value
hedge (i.e.,  hedging the exposure to changes in the fair value of an asset or a
liability or an identified  portion thereof that is attributable to a particular
risk),  the gain or loss on the derivative  instrument as well as the offsetting
gain or loss on the hedged item  attributable  to the hedged risk are recognized
in  earnings  in  the  current  period.  For  derivative  instruments  that  are
designated  and  qualify as a cash flow hedge  (i.e.,  hedging  the  exposure of
variability in expected  future cash flows that is  attributable to a particular
risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component  of  Accumulated  Comprehensive  Income (a  component of
stockholders'  equity)  and  reclassified  into  earnings  in the same period or
periods during which the hedged transaction affects earnings. The remaining gain
or loss on the derivative  instrument,  if any (i.e the ineffective  portion and
any portion of the derivative  excluded from the assessment of effectiveness) is
recognized in earnings in the current  period.  For derivative  instruments  not
designated as hedging  instruments,  changes in their fair values are recognized
in earnings in the current period.

                                       7

<PAGE>

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

FOREIGN CURRENCY TRANSLATION TRANSACTIONS

     An Asian  subsidiary  of the Company  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.  Certain
assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each month end.  Income  statement  accounts are  translated at the
average rate of exchange  prevailing during the month.  Translation  adjustments
arising  from the use of  differing  exchange  rates  from  period to period are
included in the accumulated other comprehensive  income account in stockholders'
equity.  Gains and losses resulting from valuation  changes against the Euro for
revenue  and expense  accounts on the  European  books that are  denominated  in
currencies  other than Euros are  included in  earnings  as a  component  of net
income.

ACCUMULATED OTHER  COMPREHENSIVE INCOME

     Other comprehensive  income refers to foreign currency  denominated assets,
liabilities,  revenues,  expenses,  gains and  losses  translated  at  different
foreign  currency  to US  dollar  rates.  Under  generally  accepted  accounting
principles,  foreign  currency  revenue and expense items are translated to U.S.
dollars at an average  translation  rate.  Current  assets and  liabilities  are
translated at month end rates, and accounts that are historical in nature,  such
as fixed assets and  shareholders'  equity,  are translated at historical rates.
The gains or losses resulting from using these different rates are excluded from
net income and are recorded  directly as an adjustment to shareholders'  equity.
As of June 30, 2001, the Company recorded a charge to  shareholders'  equity for
accumulated other comprehensive  income of $260,207,  related to the translation
of foreign currency denominated revenue, expense and balance sheet items.

NOTE 2.  INVENTORIES

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

                               June  30,           September 30,
                                 2001                 2000
                                 -----                ----
     Component Parts        $ 3,468,524           $ 6,059,247
     Work in Progress            50,530               111,446
     Finished Goods           9,082,534             6,119,282
                              ---------             ---------
                            $12,601,588           $12,289,975
                            ===========           ===========

NOTE 3.  NET INCOME PER SHARE

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

                                       8
<PAGE>

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

NOTE 3.  NET INCOME PER SHARE-CONTINUED

                                                     Three Months Ended
                                                          June  30,
                                                   2001            2000
                                                   ----            ----

Weighted average shares outstanding-basic      8,920,504           8,874,211
Number of shares issued on the assumed
    exercise of stock options                    243,992                   -
                                                 -------           ---------
Weighted average shares outstanding-diluted    9,164,496           8,874,211
                                               ---------           ---------

                                                     Nine Months Ended
                                                         June  30,
                                                  2001             2000
                                                  ----             ----
Weighted average shares outstanding-basic      8,903,812           8,822,336
Number of shares issued on the assumed
   exercise of stock options                     367,683                   -
                                                 -------           ---------
Weighted average shares outstanding-diluted    9,271,495           8,822,336
                                               =========           =========

     Options to purchase  1,636,726 shares were outstanding as of June 30, 2001.
Options to purchase  590,222,  and 530,222  shares of common  stock,  ranging in
prices from $3.94 to $10.06, were outstanding for the three month and nine month
period ended June 30, 2001, but were not included in the  computation of diluted
earnings  per  share  because  they  were  anti-dilutive.  Options  to  purchase
1,462,226  shares of common stock were  outstanding as of June 30, 2000 but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

NOTE 4.  BUSINESS ACQUISITION

     On June 1, 2000 the  Company  acquired  certain  assets of EsKape Labs Inc.
("EsKape"),   a  California   based  Company   specializing   in  designing  and
manufacturing  television and video products for Apple Macintosh computers.  The
purchased  assets expands and  complements  the Company's  product line into the
Macintosh  market.  The cash price for the acquisition,  which was accounted for
under the purchase method,  was approximately  $900,000,  including $100,000 for
direct transaction costs and a restrictive covenant totaling $50,000. The excess
of the acquisition  cost over the fair value of identifiable  assets acquired is
being  amortized  on a straight  line basis over 10 years,  and the  restrictive
covenant on a straight line basis over 2 years.

     In  addition  to the price  paid for the  acquired  assets,  pursuant  to a
purchase  agreement  which was amended March 7, 2001,  the agreement  calls for
contingent  additional  consideration,  which  if  earned  will  be  treated  as
additional purchase price, as follows:

     -    For the twelve months commencing November 1, 2000, the purchaser shall
          pay to the  seller  an earn out  equal to  16.25% of net sales of such
          product, as defined in the purchase agreement,  which are in excess of
          $4,000,000.

     -    In no event shall an earn out be paid if the net sales for such period
          are $4,000,000 or less

     -    In no event  shall  the  additional  consideration  exceed  $2,600,000

                                        9
<PAGE>

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

NOTE 4.  BUSINESS ACQUISITION-CONTINUED

     -    Any additional consideration due the seller shall be paid in Hauppauge
          Stock, valued at $11.50 and subject to customary adjustments for stock
          splits,  stock  dividends  and the like.  If the issuance of shares in
          payment of the additional  consideration  results in the seller or its
          authorized successors owing more than 5% of the issued and outstanding
          shares  of  Hauppauge,  the  purchaser  may,  at its sole  discretion,
          substitute cash for any portion of the additional  consideration which
          would  result in the  seller  being the  holder of more than 5% of the
          then outstanding  shares of Hauppauge stock. Upon  determination  that
          the earn out has been achieved,  the Company will use the current fair
          value of the Company's stock in valuing the shares issued.

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS

     On October 1, 2000, the Company adopted  Statement of Financial  Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended and interpreted,  which requires that all derivatives be
recorded on the  balance  sheet at fair value.  The  Company has  reflected  the
impact  from the  adoption  of SFAS 133 as a  cumulative  effect  of a change in
accounting principle, net of the related tax expense.

     The Company has significant  international  sales in foreign currencies and
continues its policy of hedging  forecasted  sales with foreign currency forward
contracts  that  expire  within six months.  These  derivative  instruments  are
employed,  based on management's judgement concerning the trade off between risk
and cost,  in an attempt to  eliminate  or  minimize  certain  foreign  currency
exposures that can be identified and quantified.

     For the three and nine months  ended June 30,  2001,  the Company  recorded
approximately  $226,000 and  $1,014,000  as an increase to net sales  related to
changes in the fair value of its derivative contracts.

NOTE 6. OTHER  COMPREHENSIVE INCOME

     Net  comprehensive  income for the three months and nine months ended June,
2001 and June 30, 2000 is as follows:

<TABLE>
<CAPTION>

                                                      Three months ended                 Nine months ended
                                                    June 30,         June 30,       June 30,          June 30,
                                                     2001             2000            2001             2000
                                                     ----             ----            ----             ----
<S>                                                  <C>              <C>             <C>               <C>
Net income (loss)                                 $ 195,026     $(1,754,680)      $ 1,459,522       $ (21,061)
Foreign currency translation adjustments           (297,382)              -          (260,207)              -
                                                   --------     -----------          --------       ----------
Net comprehensive income                          $(102,366)    $(1,754,680)      $ 1,199,315       $ (21,061)
                                                  =========     ===========       ===========       =========

</TABLE>

NOTE 7.  RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting   Bulletin  No.101  (SAB101),   "Revenue   Recognition  in  Financial
Statements". SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting  principles to revenue recognition in financial  statements.
In  October  2000,  the  SEC  issued  additional  written  guidance  to  further
supplement SAB 101. Based on the SEC's latest timeline for implementing SAB 101,
the  Company  would be  required  to comply  with the  guidelines  in the fourth
quarter of fiscal 2001.  The adoption of this bulletin is not expected to have a
material effect on the consolidated financial statements.

                                       10
<PAGE>

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

NOTE 7.  RECENT ACCOUNTING PRONOUNCEMENTS-CONTINUED

     In April 2001,  the  Emerging  Issues Task Force  ("EITF")  issued EITF No.
00-25,  "Vendor Income Statement  Characterization  of  Consideration  Paid to a
Reseller of the Vendor's Products," which addresses whether consideration from a
vendor to a  reseller  of the  vendor's  products  is (a) an  adjustment  of the
selling prices of the vendor's products and, therefore,  should be deducted from
revenue when recognized in the vendor's income  statement or (b) a cost incurred
by the vendor for assets or services received from the reseller and,  therefore,
should be  included  as a cost or an expense  when  recognized  in the  vendor's
income  statement.  EITF  00-25  should be  applied  no later  than in annual or
interim financial  statements for periods beginning after December 15, 2001. The
Company is  currently  evaluating  the  impact  that EITF 00-25 will have on its
results of operations and cash flows.

     In June 2001,  the Financial  Accounting  Standards  Board  finalized  FASB
Statements No. 141, Business  Combinations (SFAS 141), and No. 142, Goodwill and
Other  Intangible  Assets (SFAS 142).  SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize  acquired  intangible assets apart from
goodwill if the  acquired  intangible  assets meet  certain  criteria.  SFAS 141
applies to all  business  combinations  initiated  after  June 30,  2001 and for
purchase  business  combinations  completed  on or after July 1,  2001.  It also
requires,  upon adoption of SFAS 142, that the Company  reclassify  the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires that the Company  identify  reporting units for the
purposes of assessing  potential  future  impairments of goodwill,  reassess the
useful  lives  of  other  existing  recognized   intangible  assets,  and  cease
amortization of intangible  assets with an indefinite useful life. An intangible
asset  with an  indefinite  useful  life  should be  tested  for  impairment  in
accordance  with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal  years  beginning  after  December  15,  2001 to all  goodwill  and other
intangible assets recognized at that date,  regardless of when those assets were
initially  recognized.  SFAS 142 requires the Company to complete a transitional
goodwill  impairment  test six months from the date of adoption.  The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

     The Company's  previous business  combinations were accounted for using the
purchase  method.  As of June 30, 2001,  the net carrying  amount of goodwill is
$722,169 and other intangible assets is $22,700. Amortization expense during the
nine-month  period  ended June 30, 2001 was $79,650.  Currently,  the Company is
assessing but has not yet  determined  how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.

                                       11
<PAGE>

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

NOTE 8.  LITIGATION SETTLEMENT

     In 1997,  the  Company  licensed a file  conversion  library for use in its
WinTV applications.

     On June 14, 2001, the Company received notice that Accusoft Corporation had
commenced  an action  against it in the  United  States  District  Court for the
District of Massachusetts (the "District Court"),  alleging that the Company had
infringed  Accusoft's  copyright in certain software in violation of Title 17 of
the United States Code, had violated the terms of its software license by making
excess copies of the software without paying additional royalties,  and by using
the software for unauthorized purposes.

     On July 31, 2001, the Company and Accusoft reached a settlement and release
of all claims  against  the Company in  exchange  for payment of the  settlement
amount of $212,500.

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

Results of Operations
---------------------

Nine Month Period ended June 30, 2001 versus June 30, 2000
----------------------------------------------------------

     Sales for the nine months ended June 30, 2001 were $41,773,593  compared to
$53,291,070 for the prior year, a decrease of $11,517,477 or 22%, comprised of a
40%  decrease  in domestic  sales,  a 19%  decrease in European  sales and a 82%
increase in Asian sales.

The primary forces causing the decrease were:

-       Reduction in analog  board sales
-       Sluggish worldwide economic conditions
-       Lower average Euro to dollar  exchange rates

     Unit sales for the nine months ended June 30, 2001  decreased  about 17% to
approximately  624,000 as compared to approximately  752,000 for the prior year.
Sales to domestic  customers were 21% of net sales compared to 28% for the prior
year. Sales to European  customers were 71% of net sales compared to 69% for the
same period of the prior year.  Sales to Asian  customers were 8% compared to 3%
for the prior year.

     Gross profit for the nine month  period ended June 30, 2001 was  $8,906,946
compared to $9,608,286 for the prior year, a decrease of $ 701,340, comprised of
a  $2,293,130  decrease  due to lower  sales and a $591,790  increase  due to an
increase in the gross  profit  percentage  and an  increase  due to a $1 million
inventory  reserve  booked in the third quarter of fiscal 2000. The gross profit
percentage was 21.32% for the nine months ended June 30, 2001 compared to 18.03%
for the prior year.  The increase in the gross margin  percentage was mainly due
to:

-         Cost  savings  obtained  from the shifting of product pack out from an
          outside third party to the Company's distribution center in Ireland
-         Larger sales mix of higher gross margin product
-         Inventory reserve booked during the third quarter of fiscal 2000

                                       12
<PAGE>


Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------

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

<TABLE>
<CAPTION>

                                                           Nine months ended June  30,
                                                           ---------------------------
                                          Dollar Costs                                 Percentage of Sales
                                          ------------                                 -------------------
                                                                   Increase                                     Increase/
                                   2001                2000       (Decrease)           2001           2000     (Decrease)
                                   ----                ----        ----------          ----           ----     ----------
<S>                                <C>                  <C>          <C>               <C>            <C>         <C>
Sales and Promotional          $ 4,996,234          5,934,385    $ (938,151)           11.9%          11.1%       .8%
Customer Support                   292,476            370,186       (77,710)             .7%            .7%        -%
General and Admin                2,561,018          2,496,794        64,224             6.2%           4.7%      1.5%
                                 ---------          ---------        ------             ---            ---       ---
    Total                      $ 7,849,728        $ 8,801,365    $ (951,637)           18.8%          16.5%      2.3%

</TABLE>

Selling  General  and  Administrative   expenses  decreased  $951,637  from  the
comparable period of the prior year. As a percentage of sales, Selling,  General
and Administrative expenses for the nine months ended June 30, 2001 increased by
2.3% when compared to the comparable period in the prior year.

The decrease in sales and promotional expense of $938,151 was mainly due to:

-    Lower advertising costs of $481,622 due to lower co-operative advertising
-    Reduced European sales office costs of $239,676
-    Lower commission payments of $ 238,381 due to lower sales
-    Increased  compensation  costs of $ 23,666  due to the  addition  of Eskape
     personnel

Customer  Support  costs  decreased  $77,710  mainly  due to lower  compensation
expense of $71,934

     The  increase  in  General  and  Administrative  expenses  of $ 64,224  was
primarily due to:

-    Increase in compensation costs of $ 164,189 related to the hiring of an MIS
     Director,  an in house  attorney,  the  compensation  costs  related to the
     addition of Eskape Labs administrative personnel and contractual increases
-    Increased  amortization costs of $118,496 mainly due to the amortization of
     goodwill and intangible assets related to the Eskape acquisition
-    Decreased  professional  fees of $182,664 related to termination of outside
     consulting agreements and lower legal costs relating to legal fees incurred
     for a patent  infringement  suit and legal costs related to the start up of
     the Company's Luxembourg operation.

     Research and development  expenses decreased $82,917 or approximately 7.0%.
The decrease was due to lower worldwide compensation costs and less material and
contract services consumed.

Litigation settlement
---------------------

     In 1997,  the  Company  licensed a file  conversion  library for use in its
WinTV applications.

     On June 14, 2001, the Company received notice that Accusoft Corporation had
commenced  an action  against it in the  United  States  District  Court for the
District of

                                       13
<PAGE>

Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------

Litigation settlement-continued
-------------------------------

Massachusetts  (the "District  Court"),  alleging that the Company had infringed
Accusoft's  copyright in certain software in violation of Title 17 of the United
States Code,  had violated  the terms of its software  license by making  excess
copies of the software  without paying  additional  royalties,  and by using the
software for unauthorized purposes.

     On July 31, 2001, the Company and Accusoft reached a settlement and release
of all claims against  company in exchange for payment of the settlement  amount
of $212,500.

     The Company had net other income for the nine months ended June 30, 2001 of
$997,336 compared to net other expense for the prior year of $67,233 as detailed
below:

                                             Nine  months         Nine months
                                            Ended 6/30/01        Ended 6/30/00
                                            -------------        -------------
Interest income                             $   26,811           $   91,591
Interest expense                               (26,546)                   -
Foreign currency transaction (losses)          (10,129)            (158,824)
Life insurance claim                         1,000,000                    -
Other                                            7,200                    -
                                                 -----           ----------
Total other income                          $  997,336           $  (67,233)

     The increase in net other income was due to foreign  currency  transactions
and an accrual for insurance  proceeds collected on July 23, 2001 from a key man
life insurance  policy on Ken Aupperle,  offset somewhat by interest  expense on
borrowings outstanding.

         The Company recorded an income tax benefit of $508,300, for the nine
months ended June 30, 2001 compared to an income tax benefit of $417,000 for
prior year. Due to the higher U.S. effective tax rate, the tax benefit on the
loss attributable to the Company's U.S. operations offset the tax liability
attributable to the Company's international operations.

     The Company's net tax benefit for the nine months ended June 30, 2001 is as
follows:

                                                           June 30
                                                    2001             2000
                                                    ---------------------
Tax (benefit) attributable to U.S operations   $ (665,000)      $ (701,000)
Tax on Asian operations                            44,200                -
Tax  expense to European operations               112,500          284,000
                                                  -------          -------
         Net tax (benefit)                     $ (508,300)      $ (417,000)

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

     As a result of the  above,  the  Company  recorded  net income for the nine
months ended June 30, 2001 of  $1,459,522,  which  resulted in basic and diluted
income  per  share of $0.16 on  weighted  average  basic and  diluted  shares of
8,903,812 and 9,271,495,  respectively,  compared to a net loss of $(21,061) for
the nine months  ended June 30,  2000,  which  resulted in  breakeven  basic and
diluted earnings per share on weighted average shares of 8,822,336.

                                       14
<PAGE>

Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------

Three Month Period ended June 30, 2001 versus  June 30, 2000
------------------------------------------------------------

     Sales for the three months ended June 30, 2001 were $9,382,610  compared to
$11,722,224 for the prior year's third quarter, a decrease of $2,339,614 or 20%,
comprised of a 14% decrease in domestic  sales, a 25% decrease in European sales
and a 16% increase in Asian sales.

The primary forces causing the decrease were:

-       Reduction in analog  board sales
-       Sluggish worldwide economic conditions
-       Lower average Euro to dollar  exchange rates

     Unit sales for the three months ended June 30, 2001 decreased  about 22% to
approximately  129,000 as compared to approximately  166,000 for the prior year.
Sales to domestic customers for the third quarter were 30% of net sales compared
to 28% for the prior year's third quarter.  Sales to European customers were 63%
of net sales for the third quarter compared to 67% for the comparable quarter of
the prior year.  Sales to Asian customers were 7% for the quarter ended June 30,
2001 compared to 5% for the prior year's third quarter.

     Gross profit for the three month period ended June 30, 2001 was  $1,732,634
as compared to $707,137  an  increase of $  1,025,497,  comprised  of a $340,648
decrease due to lower sales, a $366,145 increase due to an increase in the gross
profit  percentage and an increase due to a $1 million  inventory reserve booked
in the third quarter of fiscal 2000. The gross profit  percentage was 18.47% for
the three  months  ended June 30, 2001  compared to 6.03 % for the prior  year's
second quarter. The increase in the gross margin percentage was mainly due to :

-    Cost savings obtained from the shifting of product pack out from an outside
     third party to the Company's distribution center in Ireland

-    Larger sales mix of higher gross margin product

-    Inventory reserve booked during the third quarter of fiscal 2000

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

<TABLE>
<CAPTION>

                                                           Three months ended June 30,
                                                           ---------------------------
                                         Dollar Costs                               Percentage of Sales
                                         ------------                               -------------------
                                                                 Increase                                 Increase/
                                  2001             2000         (Decrease)           2001       2000     (Decrease)
                                  ----             ----          ----------          ----       ----     ----------
<S>                                <C>              <C>             <C>               <C>        <C>        <C>
Sales and Promotional        $ 1,414,878        1,815,109       $ (400,231)          15.1%      15.4%      (.3%)
Customer Support                  98,149          117,622          (19,473)           1.0%       1.0%        -%
General and Admin                872,811        1,002,498         (129,687)           9.3%       8.6%       .7%
                                 -------        ---------         --------            ---        ---        --
    Total                    $ 2,385,838      $ 2,935,229       $ (549,391)          25.4%      25.0%       .4%

</TABLE>

Selling  General  and  Administrative   expenses  decreased  $549,391  from  the
comparable quarter of the prior fiscal year. As a percentage of sales,  Selling,
General and  Administrative  expenses  for the three  months ended June 30, 2001
increased by .4% from the comparable quarter of the prior year.

                                       15
<PAGE>

Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------

The decrease in sales and promotional expense of $400,231 was mainly due to:

-    Lower advertising cost of $243,377 due to lower co-op advertising

-    Lower European sales office costs of $11,363

-    Lower commission payments of $ 59,955 due to lower sales

-    Lower compensation costs of $ 57,351 due to a personnel  restructuring plan
     initiated during the second quarter of fiscal 2001

Customer Support costs decreased $19,473 mainly due to lower  compensation costs
of $19,573.

The decrease in General and  Administrative  expenses of $ 129,687 was primarily
due to:

-    Decreased  compensation costs of $ 35,770 due to a personnel  restructuring
     plan initiated during the second quarter of fiscal 2001

-    Increased  amortization costs of $35,903 mainly due to the  amortization of
     goodwill and intangible assets related to the Eskape acquisition

-    Decreased professional fees of $67,639 relate to the termination of outside
     consulting agreements and lower legal costs relating to legal fees incurred
     for a patent  infringement  suit and legal costs related to the start up of
     the Company's Luxembourg operation.

     Research  and  development  expenses  decreased  $61,120  or  approximately
14.7%.  The decrease  was due to lower  worldwide  compensation  costs and less
material and contract services consumed.

Litigation settlement
---------------------

     See discussion above in the " Management's Discussion and Analysis" section
for the nine months ended June 30, 2001.

     The Company had net other  income for the three  months ended June 30, 2001
of  $1,118,534  compared  to net other  expense for the prior year of $43,664 as
detailed below:

                                                Three  months     Three months
                                                Ended 6/30/01     Ended 6/30/00
                                                -------------     ------------
Interest income                                 $    8,265        $    23,838
Interest expense                                    (6,826)                 -
Foreign currency transaction gains (losses)        109,895            (67,502)
Life insurance claim                             1,000,000                  -
Other                                                7,200                  -
                                                ----------        -----------
Total other income                              $1,118,534        $   (43,664)

     The increase in net other income was due to foreign  currency  transactions
and an accrual for insurance  proceeds collected on July 23, 2001 from a key man
life insurance  policy on Ken Aupperle,  offset somewhat by interest  expense on
borrowings outstanding.

     The Company  recorded  an income tax  benefit of  $296,000  for the quarter
ended June 30, 2001  compared to an income tax benefit of $932,000 for the three
months ended June 30, 2000.  Due to the higher U.S.  effective tax rate, the tax
benefit on the loss attributable to the Company's U.S. operations offset the tax
liability of attributable to the Company's international operations.

                                       16
<PAGE>

Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------

The  Company's  net tax benefit for the three  months  ended June 30, 2001 is as
follows:

                                                                 June 30,
                                                       2001                2000
                                                       ------------------------
Tax (benefit) attributable to U.S operations           $ (296,000)    $(871,000)
Tax expense attributable to European operations                 -       (61,000)
                                                       -----------    ----------
         Net tax (benefit)                             $ (296,000)    $(932,000)

     As a result of the above,  the  Company  recorded  net income for the three
months  ended June 30,  2001 of  $195,026,  which  resulted in basic and diluted
income  per  share of $0.02 on  weighted  average  basic and  diluted  shares of
8,920,504 and 9,164,496,  respectively,  compared to a net loss of  $(1,754,680)
for the three months ended June 30,  2000,  which  resulted in basic and diluted
loss per share of $0.20 on weighted average shares of 8,874,211.

     Since the Company sells primarily to the consumer  market,  the Company has
experienced  certain  revenue  trends.  The  Company has  historically  recorded
stronger  sales results during the Company's  first fiscal  quarter  (October to
December),  which due to the holiday  season,  is a strong  quarter for computer
equipment sales. The Company  experienced this trend in each of the fiscal years
ended  September 30, 2000 and  September  30, 1999.  In addition,  the Company's
international  sales,  mostly in the European  market,  were 71%, 73% and 72% of
sales for the years ended 2000,  1999 and 1998,  respectively.  Due to this, the
Company's  sales for its fourth  fiscal  quarter  (July to  September)  can be
potentially impacted by the reduction of activity experienced with Europe during
the July and August summer holiday period.

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

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

The  Company's  cash,  working  capital  and  stockholders'  equity  position is
disclosed below:

                                  June  30, 2001          September 30, 2000
                                  --------------          ------------------

Cash                              $  3,664,428            $   2,744,855
Working capital                     13,209,979               11,766,900
Stockholders' equity                14,944,150               13,653,677

The significant  items of cash provided by and cash (used in) for the nine month
period ended June 30, 2001 are detailed below:

<TABLE>
<CAPTION>

<S>                                                                               <C>
Net income (adjusted for non cash items), excluding deferred tax benefits    $  1,801,890
Other comprehensive income                                                       (260,207)
Deferred tax benefit                                                             (180,136)
Loan repayments-net of borrowings                                                (340,000)
Decrease in current  liabilities-net                                           (1,828,385)
Life insurance proceeds receivable                                             (1,000,000)
Decrease in current assets-net                                                  2,815,015
Purchase of Property, Plant & Equipment                                          (151,259)
Other                                                                              62,655

</TABLE>

                                       17
<PAGE>

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

     Net cash of $ 1,348,177 provided by operating  activities was primarily due
to net income  adjusted for non cash items of $1,801,890 and the decrease in net
current  assets of  $2,815,015  offset by a decrease in current  liabilities  of
$1,828,385,  and increases in other comprehensive income,  deferred tax benefits
and  insurance  proceeds  receivable  of  $260,207,   $180,136  and  $1,000,000,
respectively.  Other  items of cash  consumption  included  $340,000 in net loan
repayments and $151,259 used to purchase fixed assets.

     On July 12,  2000,  the Company  signed an agreement  with Chase  Manhattan
Bank,  providing  the Company with a $6,500,000  credit  facility.  The facility
allows the Company,  at its option, to borrow at the prime rate, which was 6.75%
at June 30, 2001, or 1.25% above the London Interbank Offered Rate "LIBOR".  The
facility is secured by the assets of the Company and on April 5, 2001,  the line
of credit was renewed by Chase for another year,  expiring on March 31, 2002. As
of June 30, 2001, $660,000 was outstanding under this line of credit.

     On November 8, 1996, the Company  approved a stock  repurchase  program for
the repurchase of up to 600,000 shares of its own Common Stock.  The repurchased
shares will be used by the Company for certain employee benefit programs.  As of
June 30, 2001,  429,602 treasury shares valued at $1,334,064 at an average price
of $ 3.11 were held by the Company as treasury shares.

     The  Company  believes  that its  current  cash  position,  its  internally
generated  cash flow and its line of credit  will be  sufficient  to satisfy the
Company's anticipated operating needs for at least the ensuing twelve months.

     In January, Ken Aupperle, the Company's President passed away unexpectedly.
The Company had previously  obtained life  insurance  policies on its two senior
executives.  The policies relating to Mr. Aupperle, for which the Company is the
beneficiary,  total  $2,000,000.  At such time that the  Company  is  reasonably
assured that the insurance proceeds will be received,  the Company will record a
one-time non-operating income item for such insurance proceeds. On July 23, 2001
the  Company  received  $1 million in proceeds  from one of the  policies.  This
amount has been  recognized  in other income and as a receivable  on the balance
sheet as of June 30, 2001.

     On July 20, 2001, the Company received  $1,382,213 pursuant to a tax refund
claim  generated by the carryback of the fiscal 2000 net operating  loss against
fiscal 1999 and 1998 taxable income.

Inflation
---------

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

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

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting   Bulletin  No.101  (SAB101),   "Revenue   Recognition  in  financial
Statements". SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting  principles to revenue recognition in financial  statements.
In  October  2000,  the  SEC  issued  additional  written  guidance  to  further
supplement SAB 101. Based on the SEC's latest timeline for implementing SAB 101,
the  Company  would be  required  to comply  with the  guidelines  in the fourth
quarter of fiscal 2001. The adoption of this bulletin is not expected to have an
effect on the consolidated financial statements.

                                       18
<PAGE>

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

     In April 2001,  the  Emerging  Issues Task Force  ("EITF")  issued EITF No.
00-25,  "Vendor Income Statement  Characterization  of  Consideration  Paid to a
Reseller of the Vendor's Products," which addresses whether consideration from a
vendor to a  reseller  of the  vendor's  products  is (a) an  adjustment  of the
selling prices of the vendor's products and, therefore,  should be deducted from
revenue when recognized in the vendor's income  statement or (b) a cost incurred
by the vendor for assets or services received from the reseller and,  therefore,
should be  included  as a cost or an expense  when  recognized  in the  vendor's
income statement EITF 00-25 should be applied no later than in annual or interim
financial  statements for periods beginning after December 15, 2001. The Company
is currently  evaluating  the impact that EITF 00-25 will have on its results of
operations and cash flows.

     In June 2001,  the Financial  Accounting  Standards  Board  finalized  FASB
Statements No. 141, Business  Combinations (SFAS 141), and No. 142, Goodwill and
Other  Intangible  Assets (SFAS 142).  SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business  combinations  initiated  after June 30, 2001.  SFAS 141
also requires that the Company recognize  acquired  intangible assets apart from
goodwill if the  acquired  intangible  assets meet  certain  criteria.  SFAS 141
applies to all  business  combinations  initiated  after  June 30,  2001 and for
purchase  business  combinations  completed  on or after July 1,  2001.  It also
requires,  upon adoption of SFAS 142, that the Company  reclassify  the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires,  among other things,  that companies no longer  amortize
goodwill,  but instead  test  goodwill  for  impairment  at least  annually.  In
addition,  SFAS 142 requires that the Company  identify  reporting units for the
purposes of assessing  potential  future  impairments of goodwill,  reassess the
useful  lives  of  other  existing  recognized   intangible  assets,  and  cease
amortization of intangible  assets with an indefinite useful life. An intangible
asset  with an  indefinite  useful  life  should be  tested  for  impairment  in
accordance  with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal  years  beginning  after  December  15,  2001 to all  goodwill  and other
intangible assets recognized at that date,  regardless of when those assets were
initially  recognized.  SFAS 142 requires the Company to complete a transitional
goodwill  impairment  test six months from the date of adoption.  The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

     The Company's  previous business  combinations were accounted for using the
purchase  method.  As of June 30, 2001,  the net carrying  amount of goodwill is
$722,169 and other intangible assets is $22,700. Amortization expense during the
nine-month  period  ended June 30, 2001 was $79,650.  Currently,  the Company is
assessing but has not yet  determined  how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.

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

     Due  to  extensive  sales  to  European  customers   denominated  in  local
currencies,  the  Company is a net  receiver of  currencies  other than the U.S.
dollar and as such  benefits  from a weak dollar and is adversely  affected by a
strong dollar  relative to the major worldwide  currencies,  especially the Euro
and British Pound Sterling. Consequently, changes in exchange

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

rates expose the Company to market risks resulting from the  fluctuations in the
foreign  currency  exchange rates to the U.S.  dollar.  The Company  attempts to
reduce these risks by entering  into foreign  currency  forward  contracts  with
financial  institutions to protect against  currency  exchange risks  associated
with its foreign denominated accounts receivable.

     The strength or weakness of the U.S.  dollar  against the value of the Euro
and British Pound Sterling impact the Company's  revenues and financial results.
Changes in exchange  rates may  positively  or  negatively  affect the Company's
revenues,  gross  margins,  operating  income and retained  earnings  (which are
expressed  in U.S.  dollars).  Where it deems  prudent,  the Company  engages in
hedging   programs   aimed  at  limiting,   in  part,  the  impact  of  currency
fluctuations.  Primarily  selling  foreign  currencies  through  forward  window
contracts,  the Company  attempts to hedge its foreign  sales  against  currency
fluctuations.

     These hedging  activities  provide only limited protection against currency
exchange  risks.  Factors that could impact the  effectiveness  of the Company's
programs include  volatility of the currency markets and availability of hedging
instruments. The contracts the Company procures are specifically entered into as
a hedge against existing or anticipated  exposure based on forecasted sales. The
Company does not enter into  contracts for  speculative  purposes.  Although the
Company  maintains  these  programs  to reduce the impact of changes in currency
exchange rates,  when the U.S. dollar sustains a strengthening  position against
the  currencies in which the Company sells it products,  the Company's  revenues
can be adversely affected.

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

     Certain statements in this Release constitute "forward-looking  statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking  statements.  Such factors  include,  among other things,  those
described in the Company's filings with the Securities and Exchange  Commission,
including  but not limited to the  Company's  Annual Report in Form 10-K for the
fiscal year ended September 30, 2000.

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

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

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

     On October 6, 1998, the Company  received  notice that AII had commenced an
action  against it and multiple other  defendants in the United States  District
Court for the Northern  District of Illinois (the  "District  Court"),  alleging
that the certain of the Company's products

                                       19
<PAGE>

Legal Proceedings-continued
---------------------------

infringed  on  certain  patent  rights  allegedly  owned by the  plaintiff  (the
"Complaint").  The  Complaint  sought  unspecified  compensatory  and  statutory
damages  with  interest.  The Company  denied such  allegations  and  vigorously
defended this action.

     On December 22, 1998,  the Company filed its answer (the  "Answer").  Among
other  things,  pursuant to the Answer,  the  Company  denied that its  products
infringed  AII's patent rights and asserted  certain  affirmative  defenses.  In
addition,  the Answer included a counterclaim  challenging the validity of AII's
alleged patent rights. On March 5, 1999, the Company joined a Motion for Partial
Adjudication  of  Claim  Construction  Issues,  filed  by one  of  the  multiple
defendants.  The  Motion  provided  the  defendants'  interpretation  of certain
limitations  of the claims at issue.  On February 17, 2000,  the District  Court
granted the Motion en toto. On June 20, 2000,  AII and the Company,  inter alia,
entered into an Agreed Motion to Entry of Judgment,  where AII  stipulated  that
based on the District Court's claim construction,  certain claim elements in the
claims at issue were not present in the Company's accused products.

     On June 26, 2000,  the District Court granted the Agreed Motion and entered
a Final Judgment of Non-infringement as to the Company.

     On July 25,  2000,  AII  filed a Notice of  Appeal  with the U.S.  Court of
Appeals for the Federal  Circuit,  appealing the District Court's Order granting
the Motion  for  Partial  Adjudication  of Claim  Construction  Issues and Order
entering  Final  Judgment  of  Non   infringement.   AII  filed  its  Brief  for
Plaintiff-Appellant  on October 13, 2000, while the Company joined the Brief for
Defendants-  Appellees,  filed on December 22, 2000. As with the prior action in
the District Court, the Company intends to defend this action vigorously.

     On July 16, 2001, the Federal  Circuit  entered a Circuit Rule 36 Judgement
of Affirmance  Without Opinion.  Accordingly,  the Federal Circuit affirmed the
District Court's finding of  non-infringement of all claims against the Company.
AII has until  October 14, 2001  (extendable  until  December  13, 2001 for good
cause) to file a petition  with the U.S.  Supreme Court for a Writ of Certiorari
to review the judgement from the Federal Circuit.

     Notwithstanding the foregoing,  because of the uncertainties of litigation,
no  assurances  can be given as to the outcome of AII's  appeal.  It is possible
that  the U.S.  Court  of  Appeals  for the  Federal  Circuit  may  reverse  the
District's  Court's  rulings and remand the case back to the District  Court. In
such  an  event,  and  if  the  Company  were  not to  prevail  in the  remanded
litigation,  the Company could be required to pay significant damages to AII and
could be enjoined from further use of such  technology  as it presently  exists.
Although a negative  outcome in the AII litigation would have a material adverse
affect on the  Company,  including,  but not  limited  to,  its  operations  and
financial condition, the Company believes that, if it is held that the Company's
products  infringe  AII's patent  rights,  the Company  would  attempt to design
components  to replace the  infringing  components or would attempt to negotiate
with AII to utilize its system,  although  no  assurances  can be given that the
Company would be successful in these attempts.  At the present time, the Company
can not assess the possible cost of designing and  implementing  a new system or
obtaining rights from AII.

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

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

     None

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

     (1) Form 8-K filed with the Securities and Exchange  Commission on July 20,
2001.

                                       20
<PAGE>


                                   SIGNATURES
                                   ----------

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


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



Date: August  20,  2001                 By:/s/ Kenneth Plotkin
      ------------------                   ---------------------------
                                           KENNETH  PLOTKIN
                                           President and
                                           Chief Executive Officer


Date: August 20,  2001                  By: /s/ Gerald Tucciarone
      -----------------                    ---------------------------
                                           GERALD TUCCIARONE
                                           Treasurer and Chief
                                           Financial Officer


<PAGE>