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, 2003
                                -------------

                                       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
              (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.

                                Yes  X             No
                                   ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)

                                Yes                No  X
                                                     ----

As of August 6, 2003, 8,878,248 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-                                     3
   June 30,  2003 (unaudited) and September 30, 2002

Condensed Consolidated Statements of Income-
  Nine  Months ended June 30, 2003 (unaudited) and 2002 (unaudited)        4

Condensed Consolidated Statements of Income-
  Three Months ended June 30, 2003 (unaudited) and 2502 (unaudited)        5

Condensed Consolidated Statements of  Other Comprehensive Income -
  Three months and nine months ended June 30, 2003 (unaudited) and 2002
  (unaudited)                                                              6

Condensed Consolidated Statements of Cash Flow-
  Nine  Months ended June 30, 2003 (unaudited) and 2002 (unaudited)        7

Notes to Condensed Consolidated Financial Statements                       8-12

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations                                                 13-26

Item 3. Quantitative and Qualitative Disclosures about Market Risks       26-27

Item 4. Controls and Procedures                                              27

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

Item 1.  Legal Proceedings                                                 28

Item 6.  Exhibits and Reports on form 8-K                                  28

SIGNATURES                                                                 29

                                       2

<PAGE>





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

Item 1. Financial Statements


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

<S>                                                                                            <C>                <C>
                                                                                          June 30,      September 30,
                                                                                            2003            2002

                                                                                         (Unaudited)
                                                                               -----------------------------------------
Assets:

 Current Assets:
   Cash and cash  equivalents                                                         $   5,347,255   $ 4,964,522
   Accounts receivable, net of various allowances of $2,887,000                           4,085,333     5,182,738
   Income taxes receivable                                                                  175,000       501,000
   Inventories                                                                            8,312,832     8,091,495
   Prepaid expenses and other current assets                                                588,411       416,734
                                                                                      -------------   -----------
     Total current assets                                                                18,508,831    19,156,489

   Property, plant and equipment, net                                                       572,474       611,054
   Security deposits and other non current assets                                            76,216        78,616
                                                                                      -------------   -----------
                                                                                      $  19,157,521  $ 19,846,159
                                                                                      =============  ============


 Liabilities and  Stockholders'  Equity:

 Current Liabilities:
  Accounts payable                                                                    $   4,776,158  $  6,105,588
  Accrued expenses                                                                        2,198,674     1,442,475
  Income taxes payable                                                                      112,000       331,484
                                                                                      -------------  ------------
      Total current liabilities                                                           7,086,832     7,879,547

 Stockholders' Equity
  Common stock $.01 par value; 25,000,000 shares authorized, 9,414,833
   and 9,392,164  issued, respectively                                                       94,148        93,923
  Additional paid-in capital                                                             12,286,105    12,233,170
  Retained earnings                                                                         975,541       914,019
  Accumulated other comprehensive income                                                    212,111       187,074
  Treasury Stock, at cost, 542,067, and 514,317 shares, respectively                     (1,497,216)   (1,461,574)
                                                                                      -------------    ----------
      Total stockholders' equity                                                        12,070,689     11,966,612
                                                                                      -------------    ----------
                                                                                      $ 19,157,521   $ 19,846,159
                                                                                      =============  ============

</TABLE>


    See accompanying notes to consolidated financial statements

                                       3

<PAGE>

<TABLE>
<CAPTION>

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

<S>                                     <C>                                     <C>             <C>                 <C>


                                                                                        Nine months ended June  30,
                                                                                    ----------------------------------
                                                                                            2003            2002
                                                                                    ----------------------------------

Net Sales                                                                             $39,450,126        $32,924,368
Cost of Sales                                                                          29,905,216         24,512,946
                                                                                    -------------        -----------
  Gross Profit                                                                          9,544,910          8,411,422

Selling, General and Administrative Expenses                                            8,068,951          6,650,857
Research & Development Expenses                                                         1,429,171          1,128,266
                                                                                    -------------        -----------
  Income from operations                                                                   46,788            632,299

Other Income (expense):
 Interest income                                                                           13,148             28,085
 Foreign currency                                                                         (11,350)             2,318
 Non operational USD to Euro currency re-measurement                                       51,936            (82,143)
                                                                                    -------------        -----------
Other income (expense)                                                                     53,734            (51,740)
                                                                                    -------------        -----------
  Income  before taxes on income                                                          100,522            580,559
Tax provision                                                                              39,000             53,497
                                                                                    -------------        -----------
  Net income                                                                          $    61,522        $   527,062
                                                                                    -------------        -----------
Net income per shares:
  Basic and Diluted                                                                   $      0.01        $      0.06
                                                                                    =============        ============

</TABLE>

          See accompanying notes to consolidated financial statements

                                       4

<PAGE>

<TABLE>
<CAPTION>


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

<S>                                                                                     <C>     <C>    <C>    <C>

                                                                                       Three months ended June 30,
                                                                                    ----------------------------------
                                                                                            2003            2002
                                                                                    ----------------------------------

Net Sales                                                                              $10,010,782     $10,113,135
Cost of Sales                                                                            7,756,306       7,444,435
                                                                                       -----------     -----------
  Gross Profit                                                                           2,254,476       2,668,700

Selling, General and  Administrative Expenses                                            2,638,177       2,189,484
Research & Development Expenses                                                            487,847         404,829
                                                                                       -----------     -----------
  Income (loss) from operations                                                           (871,548)         74,387

Other Income (expense):
 Interest income                                                                             3,143           6,457
 Foreign currency                                                                            4,144         (15,718)
 Non operational USD to Euro currency re-measurement                                         8,796         (28,003)
                                                                                       -----------     -----------
Other income (expense)                                                                      16,083         (37,264)
                                                                                       -----------     -----------
  Income (loss) before taxes on income                                                    (855,465)         37,123
Tax provision                                                                                 -             10,997
                                                                                       -----------     -----------
  Net income (loss)                                                                    $  (855,465)    $    26,126
                                                                                       -----------     -----------

Net income (loss) per share:
  Basic and Diluted                                                                    $     (0.10)          $0.00
                                                                                       ============    ===========

</TABLE>

          See accompanying notes to consolidated financial statements

                                       5

<PAGE>

<TABLE>
<CAPTION>


                     HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
     CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)


<S>                             <C>                             <C>               <C>           <C>        <C>

                                                                                 Three months ended June 30,
                                                                                 -----------------------------
                                                                                       2003             2002
                                                                                       ----             ----

Net income (loss)                                                                  $ (855,465)    $   26,126
Forward exchange contracts marked to market                                            18,169              -
Foreign currency translation gain (loss)                                              197,917        411,902
                                                                                   ----------     ----------
Other comprehensive income (loss)                                                  $ (639,379)    $  438,028
                                                                                   ----------     ----------

                                                                                  Nine months ended June 30,
                                                                                 -----------------------------
                                                                                       2003            2002
                                                                                       ----            ----
Net income                                                                         $  61,522      $  527,062
Forward exchange contracts marked to market                                         (336,926)            -
Foreign currency translation gain (loss)                                             361,963         301,504
                                                                                   =========      ==========

Other comprehensive income                                                         $  86,559      $  828,566
                                                                                   =========      ==========

</TABLE>


See accompanying notes to consolidated financial statements

                                       6

<PAGE>

<TABLE>
<CAPTION>

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


<S>                                             <C>                     <C>     <C>     <C>     <C>    <C>

                                                                                  Nine months ended June 30,
                                                                                      2003        2002
                                                                                 ----------------------------
Net income                                                                        $   61,522      $527,062
                                                                                 ----------------------------

Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:
 Depreciation and amortization                                                       205,945       248,067
 Provision for uncollectible accounts receivable                                           -        20,000
 Other non cash items                                                                 30,903        29,507
Changes in current assets and liabilities:
 Accounts receivable                                                               1,122,442       161,301
 Income taxes receivable                                                             326,000             -
 Inventories                                                                        (221,337)    1,424,765
 Prepaid expenses and other current assets                                          (171,677)     (162,151)
 Accounts payable and other current liabilities                                     (792,715)   (1,086,858)
                                                                                   ---------     ---------
   Total adjustments                                                                 499,561       634,631
                                                                                   ---------     ---------
Net cash provided by operating activities                                            561,083     1,161,693
                                                                                   ---------     ---------

Cash Flows From Investing Activities:
  Purchases of property, plant and equipment                                        (167,365)      (62,775)
                                                                                    --------      --------
       Net cash used in investing activities                                        (167,365)      (62,775)
                                                                                    --------      --------

Cash Flows From Financing Activities:
  Proceeds from employee stock purchases                                              24,657        22,768
  Purchase of treasury stock                                                         (35,642)      (71,267)
                                                                                    --------     ---------
      Net cash used in financing activities                                          (10,985)      (48,499)
                                                                                    --------     ---------
      Net increase in cash and cash equivalents                                      382,733     1,050,419

Cash and cash equivalents, beginning of period                                     4,964,522     4,422,239
                                                                                   ---------     ---------
Cash and cash equivalents, end of period                                          $5,347,255    $5,472,658
                                                                                  ==========    ==========
Supplemental disclosures:
 Income taxes paid                                                                $   40,262    $   25,386
                                                                                  ==========    ==========
</TABLE>

 See accompanying notes to consolidated financial statements

                                       7

<PAGE>


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

Note 1.  Basis of  Presentation

The accompanying  unaudited condensed consolidated financial statements included
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles for interim period  reporting in conjunction with the instructions to
Form 10-Q.  Accordingly,  these statements do not include all of the information
required  by  generally  accepted  accounting  principles  for annual  financial
statements.  In the opinion of management,  all known adjustments (consisting of
normal  recurring  accruals  and  reserves)  necessary  to  present  fairly  the
financial position,  results of operations and cash flows for the three and nine
month periods ended June 30, 2003 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, 2002 Form 10-K.

The  operating  results for the three and nine month periods ended June 30, 2003
are not  necessarily  indicative of the results to be expected for the September
30, 2003 year end.

Note 2.  Derivative Financial Instruments

The strength or weakness of the U.S.  Dollar  against the Euro and British Pound
Sterling impacts our financial results. Changes in exchange rates may positively
or negatively affect our revenues, gross margins,  operating income and retained
earnings (which are all expressed in U.S. Dollars). We use derivatives to reduce
our exposure to fluctuations in foreign  currencies.  Foreign  currency  forward
contracts are used to hedge the foreign  currency  market  exposures  underlying
forecasted U.S. Dollar denominated inventory purchases.  As of June 30, 2003, we
had foreign currency contracts  outstanding of approximately  $1,590,900 against
the  delivery  of the Euro.  The  contracts  expire  through  August  2003.  Our
accounting  policies for these  instruments  designate such  instruments as cash
flow hedging  transactions.  We do not enter into such contracts for speculative
purposes.  We record all  derivative  gains and losses on the balance sheet as a
component  of  stockholders'   equity  under  the  caption   "Accumulated  other
comprehensive  income (loss)".  The Company  recorded a deferred gain of $18,169
for the three months ended June 30, 2003.  As of June 30, 2003, a deferred  loss
of $146,007,  reflecting the cumulative mark to market loss of our  derivatives,
was recorded as a component of  accumulated  other  comprehensive  income on the
balance sheet.

For the three months and nine months ended June 30, 2003, we recorded a decrease
in sales of $366,300 and $1,525,100, respectively, related to our contracts that
closed during these periods and the changes in the fair value of our  derivative
contracts. For the three months and nine months ended June 30, 2002, we recorded
a decrease  in sales of  $750,000  and  $653,000,  respectively,  related to our
contracts  that closed during these periods and the changes in the fair value of
our derivative contracts.

Note 3.  Inventories

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

                                   June 30,              September 30,
                                     2003                    2002
                                     ----                    ----

   Component Parts               $ 3,088,772             $2,842,460
   Work in Progress                        -                 42,616
   Finished Goods                  5,224,060              5,206,419
                                   ---------              ---------
                                 $ 8,312,832             $8,091,495
                                 ===========             ==========

                                       8

<PAGE>

<TABLE>
<CAPTION>


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


Note 4.  Net Income Per  Share

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

<S>                                                     <C>                      <C>                   <C>    <C>


                                                                        Three Months Ended      Nine months Ended
                                                                              June 30,             June 30,
                                                                        2003          2002       2003        2002
                                                                       ------        -----      -----       -----
Weighted average shares outstanding-basic                             8,869,832  8,886,755      8,863,663  8,888,926
Number of shares issued on the assumed exercise of stock options              -    155,816        143,625    168,476
                                                                      ---------  ---------      ---------  ---------
Weighted average shares outstanding-diluted                           8,869,832  9,042,571      9,007,288  9,057,402
                                                                      =========  =========      =========  =========

</TABLE>

Options to purchase  1,782,601  and  1,025,822  shares of common stock at prices
ranging $1.05 to $ 10.06 and $2.07 and $10.06,  respectively,  were  outstanding
for the three month  periods  ending June 30, 2003 and 2002,  respectively,  but
were not included in the computation of diluted  earnings per share because they
were anti-dilutive.

Options to purchase  1,028,522  and  1,025,822  shares of common stock at prices
ranging $1.88 to $ 10.06 and $2.07 and $10.06,  respectively,  were  outstanding
for the nine month periods ending June 30, 2003 and 2002, respectively, but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Note 5.  Accumulated other comprehensive income

The  Euro is the  functional  currency  of the  Company's  European  subsidiary,
Hauppauge  Digital Europe Sarl.  Assets and  liabilities of this  subsidiary are
translated  to U.S.  Dollars at the spot  exchange rate in effect at end of each
reporting  period,  while equity accounts are translated to U.S.  Dollars at the
historical rate in effect at the date of the contribution. Operating results are
translated  to U.S.  Dollars at the  average  prevailing  exchange  rate for the
period,  with the exception of sales which are translated to U.S. Dollars at the
average monthly forward exchange contract rate. The use of translating  accounts
at the spot,  historical and average  exchange rates results in foreign currency
translation gains or losses.  These translation gains losses are recorded on the
balance sheet under accumulated other comprehensive income.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same contracts  translated at the month end spot rate. The Company qualifies
for cash flow hedge  accounting  as prescribed  under FAS 133,  which allows the
Company to record the mark to market  gains and losses in the equity  section of
our balance sheet under accumulated other comprehensive income.

As of June 30, 2003,  appearing in the equity section under " Accumulated  other
comprehensive  income" was a deferred  gain of  $212,111,  which  consisted of a
deferred translation gain of $358,118 and a deferred loss of $146,007 due to the
mark to market  losses on the  difference  between the value of our open forward
exchange contracts at the contract rates versus the same contracts valued at the
period ending forward rate.

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


                                       9

<PAGE>

<TABLE>
<CAPTION>

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

Note 6. Revenue Recognition

We sell through a sales channel which consist of retailers and distributors. Our
prices are fixed consistently over the entire sales channel. The majority of our
customers are granted open payment terms. Those customers deemed as large credit
risks either pay in advance or issue us 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 product we sell is a plug
and play  computer  board that is stocked on the  shelves of  retailers,  and is
subject to the normal consumer  traffic that retail stores  attract.  Aside from
normal  store  promotions  such as end-caps  and  advertisements  in the store's
circular,  the Company has no further  obligation to assist in the resale of the
product.

The  Company  offers it  customers  a right of return,  but does not offer stock
balancing. Our accounting complies with SFAS 48 as typically at the end of every
quarter,  the Company,  based on  historical  data,  evaluates its sales reserve
level based on the  previous  six months  sales.  Due to seasonal  nature of our
business coupled with the changing economic  environment,  management  exercises
some judgement with regard to the historical data to arrive at the reserve.

Note  7.  Product segment and Geographic Information

The Company sells a family or group of products called WinTV. Using a television
signal source which can be either through a cable hookup, terrestrial antenna or
digital satellite, the WinTV family of products allow a PC user to watch TV in a
resizable  window on their PC. Our products are either sold,  or can be sold, by
the same  retailers  and  distributors  in our marketing  channel.  We also sell
product directly to OEM customers. The Company evaluates its product lines under
the functional  categories of analog and digital  products.  Sales by functional
category are as follows:

<S>                                     <C>                     <C>             <C>    <C>    <C>    <C>

                                        Three months ended June 30,             Nine months ended June 30,
                                           2003             2002                     2003           2002
                                           ----             ----                     ----           ----

Product line sales
------------------

Analog  sales                            $ 6,948,851   $  6,931,537               $ 28,371,468   $26,464,786
Digital  sales                             3,061,931      3,181,598                 11,078,658     6,459,582
                                         -----------    -----------               ------------   -----------
                                         $10,010,782   $ 10,113,135               $ 39,450,126   $32,924,368
                                         ===========   ============               ============   ===========

The Company sells its product through a worldwide  network of  distributors  and
retailers. European sales accounted for 67% and 68% of sales for the three moths
ended June 30, 2003 and 2002 and 69% and 74% of sales for the nine months  ended
June 30, 2003 and 2002, respectively.  Sales percent by geographic region are as
follows:

                                        Three months ended June 30,             Nine months ended ended June 30,
                                           2003            2002                      2003                2002
                                           ----            ----                      ----                ----

Sales percent by geographic region
----------------------------------

United States                                31%            30%                        30%               24%
Europe                                       67%            68%                        69%               74%
Asia                                          2%             2%                         1%                2%
                                            ----           ----                       ----              ----
  Total                                     100%           100%                       100%              100%
                                            ====           ====                       ====              ====

</TABLE>

                                       10


<PAGE>

<TABLE>
<CAPTION>


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

Note  8.    Stock-Based Compensation

The Company applies Accounting  Principles Board Opinion No. 25, "Accounting for
Stock  Issued  to  Employees",   ("APB  25"),  and  related  interpretations  in
accounting for its employee stock options. Under APB 25, no compensation expense
is recorded so long as the quoted  market  price of the stock at the date of the
grant is equal to the exercise price.

Pro forma  information  regarding  net  income and  earnings  per share has been
determined as if the Company had accounted for its employee  stock options under
the fair value method of Financial  Accounting Standards Board Statement No. 123
"Accounting for Stock-Based  Compensation",  ("FAS 123").  The weighted  average
fair value of options granted during the three months and nine months ended June
30, 2003 and June 30, 2002 was $0.43 and $0.42, respectively. The fair value for
these  options was estimated at the date of grant using a  Black-Scholes  option
pricing model with the following weighted average  assumptions for the three and
nine months ended June 30, 2003 and June 30, 2002:  risk-free  interest rates of
3.25%,  volatility  factor of the expected market price of the Company's  Common
Stock of 40%, assumed dividend yield of 0%, and a weighted-average expected life
of the option of 5 years.

Under the  accounting  provisions  of FAS 123, the  Company's net income and net
income per share  would have been  adjusted to the pro forma  amounts  indicated
below:

<S>                             <C>                     <C>             <C>    <C>    <C>    <C>

                                                                          Three months ended       Nine months ended
                                                                         --------------------     -------------------
                                                                          June 30,     June 30,    June 30,   June 30
                                                                           2003         2002       2003        2002
                                                                          --------   ---------    ----------  --------

Net income (loss) as reported.......................                    $ (855,465)  $  26,126    $ 61,522     $ 527,062
  Deduct: Total stock-based employee compensation expense
   determined under fair value method,  net of related taxes               (11,626)    (19,865)    (34,877)      (56,220)
                                                                        -----------  ----------   ---------   -----------

Pro forma net income (loss).........................                    $ (867,091)  $   6,261    $ 26,645     $ 470,842
                                                                        ===========  ==========   ========    ==========


Net income (loss) per share - as reported:

Basic and diluted...................................                    $   (0.10)   $    0.00     $  0.01      $   0.06
                                                                        ==========   ==========   ========    ==========

Net income (loss) per share - pro forma:

Basic and diluted...................................                    $   (0.10)   $    0.00     $  0.00      $   0.05
                                                                        =========    ==========   ========    ==========

</TABLE>

Note 9. Arrangements with Off-Balance Sheet Risk - Guarantees

In November 2002, the FASB issued  Interpretation  No. 45 (FIN 45),  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of the  Indebtedness of Others,  which clarifies the  requirements of
SFAS No. 5, Accounting for Contingencies,  relating to a guarantor's  accounting
for and  disclosures  of certain  guarantees  issued.  FIN 45 requires  enhanced
disclosures for certain guarantees. It also requires certain guarantees that are
issued or modified after December 31, 2002, including certain third-party

                                       11

<PAGE>


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

Note 9. Arrangements with Off-Balance Sheet Risk - Guarantees-continued

guarantees,  to be initially  recorded on the balance  sheet at fair value.  For
guarantees issued on or before December 31, 2002,  liabilities are recorded when
and if payments become probable and estimable.  FIN 45 has the general effect of
delaying  recognition  for a portion of the revenue  for product  sales that are
accompanied  by  certain   third-party   guarantees.   The  financial  statement
recognition provisions became effective prospectively beginning January 1, 2003.
The Company  has not entered  into any new  guarantees,  not have they  ammended
their existing guarantee since the effective date.

We occupy a facility located in Hauppauge,  New York and use it as our executive
offices and for the testing, storage, and shipping of our products. The building
is owned by a partnership  comprised of certain of our  principal  stockholders'
and is leased to us under a lease agreement  expiring on January 31, 2006, which
may be extended,  at our option, for an additional three years. The premises are
subject  to two  mortgages  which  have  been  guaranteed  by us upon  which the
outstanding  principal  amount  due as of June 30,  2003 was  $745,000.  The two
mortgages  guaranteed  expire on Janauary  31,  2010,  at which time the related
gurantees expire.

Note 10.  Recent Accounting Pronouncements

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity" (" SFAS 150").
SFAS 150 establishes  standards for how an issuer  classifies and measures three
classes of  freestanding  financial  instruments  with  characteristics  of both
liabilities  and  equity.  It  requires  that an  issuer  classify  a  financial
instrument  that is within its scope as a liability.  SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15, 2003. The Company has not entered into any financial  instruments within the
scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant
financial instruments within its scope.

                                       12

<PAGE>

<TABLE>
<CAPTION>


Item 2.   Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
Nine Month Period ended June 30, 2003 Compared to June 30, 2002
---------------------------------------------------------------
Results of operations for the nine months ended June 30, 2003 compared to June
30, 2002 are as follows:

<S>                             <C>                     <C>             <C>    <C>      <C>    <C>

                                                               Nine            Nine
                                                             Months          Months
                                                              Ended           Ended     Variance        Percentage of sales
                                                            6/30/03         6/30/02         $          2003    2002 Variance
                                                           --------       ---------    ---------       ----    ---- --------

Net Sales                                              $ 39,450,126    $ 32,924,368   $6,525,758       100.0%  100.0%     0
Cost of sales                                            29,905,216      24,512,946    5,392,270        75.8%   74.5%   1.3%
                                                       ------------      ----------   ----------       ------  ------  -----
Gross Profit                                              9,544,910       8,411,422    1,133,488        24.2%   25.5%  -1.3%
Gross Profit %                                               24.19%          25.55%       -1.36%

Costs:
Sales & Marketing                                         5,356,753       4,204,455    1,152,298        13.6%   12.8%   0.8%
Technical Support                                           314,318         287,999       26,319         0.8%    0.9%  -0.1%
General & Administrative                                  2,397,880       2,158,403      239,477         6.1%    6.6%  -0.5%
                                                      -------------      ----------    ---------        -----   -----  -----
Total Selling, General and Administrative costs           8,068,951       6,650,857    1,418,094        20.5%   20.3%   0.2%

Research & Development                                    1,429,171       1,128,266      300,905         3.6%    3.4%   0.2%
                                                      -------------      ----------    ---------        -----   -----  -----
Total Costs                                               9,498,122       7,779,123    1,718,999        24.1%   23.7%   0.4%
                                                      -------------      ----------    ---------        -----   -----  -----
Net operating income                                         46,788         632,299     (585,511)        0.1%    1.8%  -1.7%

Other income (expense)
---------------------
Interest income                                              13,148          28,085      (14,937)        0.0%    0.1%  -0.1%
Foreign currency                                            (11,350)          2,318      (13,668)        0.0%    0.0%   0.0%
Non operational USD to Euro re-measurement                   51,936         (82,143      134,079         0.1%   -0.2%   0.3%
                                                      -------------      ----------    ----------       -----   -----  -----
 Total other income (expense)                                53,734         (51,740)     105,474         0.1%   -0.1%   0.2%
                                                      -------------      ----------    ----------       -----   -----  -----
Income  before taxes                                        100,522         580,559     (480,037)        0.2%    1.7%  -1.5%
Taxes on income                                              39,000          53,497      (14,497)        0.1%    0.2%  -0.1%
                                                      -------------      ----------    ----------       -----   -----  -----
Net income                                            $      61,522      $  527,062    $ (465,540)       0.1%    1.5%  -1.4%
                                                      =============      ==========    ===========      =====   =====  =====



Net sales for the nine months ended June 30, 2003 increased  $6,525,758 compared
to last year. Domestic and European sales increased by $3,965,811 and $2,782,748
while Asian sales decreased $202,801 as follows:

                                                               Increase
                                                              (decrease)     Increase    Percentage of sales by
Location                   Nine  Months       Nine  Months     Dollar        (decrease)  Geographic region
--------                   ended 6/30/03      ended 6/30/02    Variance      Variance %    2003         2002
                           -------------      -------------    -----------   ----------    -----        ----
Domestic                   $ 11,779,917       $ 7,814,106      $ 3,965,811      51%          30%         24%
Europe                       27,127,121        24,344,373        2,782,748      11%          69%         74%
Asia                            543,088           765,889         (222,801)    -29%           1%          2%
                           ------------       -------------   -------------  ----------    -----         ---
 Total                     $ 39,450,126       $32,924,368      $ 6,525,758      20%         100%        100%
                           ============       =============   =============  ==========    =====        ====

</TABLE>

  The primary forces contributing to the sales increase were:

  o        Digital and digital satellite products:$4,619,076
  o        Analog and personal video recorder sales:$1,906,682


                                       13

<PAGE>

Nine Month Period ended June 30, 2003  Compared to June 30,  2002-continued
---------------------------------------------------------------------------

Netsales to domestic  customers  were 30% of net sales for the nine months ended
June 30, 2003 compared to 24% for the nine months ended June 30, 2002. Net sales
to European  customers  were 69% of net sales compared to 74% for same period of
last year.  Net sales to Asian  customers were 1% for the nine months ended June
30, 2003 as compared to 2% for the nine months ended June 30, 2002.

Gross profit increased $1,133,488 for the nine months ended June 30, 2003. Gross
profit percentage for the nine months ended June 30, 2003 was 24.19% compared to
25.55% for the prior year.

The increases and (decreases) in the gross profit are detailed below:

                                                                       Increase
                                                                      (decrease)
                                                                      ----------
Due to  increased  sales                                              $2,146,516
Higher  margins due to product mix                                       181,904
Third quarter fiscal 2002 inventory reserve adjustment                 (149,059)
Margin reduction due to OEM sales                                      (660,107)
Due to increases in labor related and other costs                      (385,766)
                                                                      ----------
  Total  increase  in gross profit                                    $1,133,488
                                                                      ==========

The decrease in gross  profit  percent of (1.36)% for the nine months ended June
30, 2003 compared to the nine months ended June 30, 2002 is as follows:

                                                                        Increase
                                                                      (decrease)
                                                                      ----------
Higher  margins due to product mix                                         0.46%
Third quarter fiscal 2002 inventory reserve adjustment                   (0.46)%
Margin reduction due to OEM sales                                        (1.67)%
Labor related and other costs                                              0.31%
                                                                      ----------
Net  decrease gross profit %                                             (1.36%)
                                                                      ==========

The 0.46%  improved  gross  profit  percent on  assembled  boards was  primarily
derived from unit price reductions from our suppliers and  subcontractors on our
analog product lines,  offset  somewhat by sales of lower average margin digital
products.

Although OEM sales require minimal sales and marketing support, the gross profit
margin percent is substantially less than our retail products. Our OEM sales had
an average  gross  profit  margin of about 10.24% for the nine months ended June
30, 2003.  OEM sales  accounted for about 7.24% of our sales for the nine months
ended June 30, 2003. There were no significant OEM sales for the same periods of
the previous year.  The increase in OEM sales caused a 1.67%  reduction in gross
profit margin percentage compared to last year.

During  the  latter  part  of  fiscal  2001,  the  factors  below  affected  the
realization of the Company's inventory:

o    The loss  during  the  quarter  of a long time  direct  corporate  customer
     impacted the existing  value of assembled  boards and  component  inventory
     relating to this customer
o    A change with a major contract manufacturer from consigning component parts
     to the  contract  manufacturer  to  purchasing  the  assembled  boards on a
     turnkey basis impacted the value of component inventory
o    The second  consecutive year of declining sales resulted in slower sales of
     older models
o    Engineering  changes made to our USB and Macintosh  products which rendered
     certain inventory associated with this product obsolete
o    The better use of new software  that  assisted  the Company in  identifying
     slow moving inventory

With  respect to the factors  above,  we deemed it  necessary  to  increase  our
reserve  for  obsolete  and slow  moving  inventory.  An  additional  reserve of
$1,862,766 was recorded  during the fourth quarter of fiscal 2001 and charged to
cost of sales.


                                       14

<PAGE>

<TABLE>
<CAPTION>

Nine Month Period  ended June 30, 2003 Compared to June , 2002-continued
-------------------------------------------------------------------------

During fiscal 2002, there was certain  assembled  boards and component  material
inventory  that we were able to sell through the use of a  liquidation  firm. In
recognition of this, we reduced our inventory reserve to reflect the decrease in
the obsolete inventory value due to the liquidation of such products.  There was
no similar obsolete inventory  liquidation during fiscal 2003, which resulted in
a  comparative  reduction in our gross profit  margin  percentage  1.67% between
fiscal 2003 and fiscal 2002.

The increase in the gross margin percent of 0.31% due to labor related and other
costs is related to the  increase in net sales of 19.82%  being in excess of the
increase in labor related and other costs of 15.03%.

The  chart  below   illustrates   the   components   of  Selling,   General  and
Administrative expenses:

<S>                                     <C>              <C>                    <C>             <C>     <C>    <C>

                                          Nine months ended June 30,
                                          --------------------------
                                                Dollar Costs                 Percentage of Sales
                                         --------------------------------------------- ---------
                                                                        Increase                           Increase
                                          2003        2002              (Decrease)      2003       2002    (Decrease)
                                          ----        ----              ----------      ----       ----    ----------
Sales and Marketing                   $  5,356,753  $  4,204,455        $ 1,152,298     13.6%      12.8%       0.8%
Technical Support                          314,318       287,999             26,319      0.8%       0.9%      -0.1%
General and Administrative               2,397,880     2,158,403            239,477      6.1%       6.6%      -0.5%
                                      ------------  ------------       ------------     -----      -----      -----
 Total                                $  8,068,951  $  6,650,857        $ 1,418,094     20.5%      20.3%       0.2%
                                      ============  ============       ============     =====      =====      =====

</TABLE>

Selling, General and Administrative expenses increased $1,418,094 from the prior
year. As a percentage of sales,  Selling,  General and  Administrative  expenses
increased by 0.2% when compared to the nine months ended June 30, 2002.

The increase in Sales and Marketing  expense of $1,152,298  which  accounted for
about 81% of the total increase in Selling, General and Administrative expenses,
was mainly due to:

        o Higher  advertising  costs  of  $627,757  due to  higher  sales  based
          co-operative  advertising,  higher  customer  rebate  realization  and
          increased special promotions
        o Higher  advertising costs of $235,794 due to higher translated Euro to
          U.S dollar  amounts due to the  strengthening  of the Euro against the
          USD
        o Higher commissions expense of $93,548 due to increased sales
        o Increased sales commission expense of $45,062 due to higher translated
          Euro  to U.S  dollar  amounts  due to the  strengthening  of the  Euro
          against the USD
        o Increased European sales office costs of $100,678
        o Increased  European  sales  office  costs of  $244,444  due to  higher
          translated Euro to U.S dollar amounts due to the  strengthening of the
          Euro  against  the USD
        o Lower trade show costs of $194,593  due to smaller  show  presence and
          frequency

The increase in General and  Administrative  expenses of $239,477 was  primarily
due to:

        o Addition of senior executive  officer $109,976
        o Higher  legal costs of $28,241
        o Increased travel costs of $15,540
        o Directors fees of $18,335
        o Banking fees of $51,560
        o Consulting fees for investment advice and public relations $49,009
        o Decreased amortization costs of $42,122 due to amortization in full of
          an intangible asset during fiscal 2002

Research and Development  expenses  increased $300,905 or approximately 27%. The
increase was mainly due to higher  compensation costs attributable to additional
staff and increased  material and contract  services  cost for current  projects
under  development.

                                       15

<PAGE>

Nine Month Period ended June 30, 2003 Compared to June, 2002-continued
----------------------------------------------------------------------

Other income (expense)

Net other income for the nine months ended June 30, 2003 was $53,734 compared to
net other  expense of  ($51,740)  for the nine  months  ended  June 30,  2002 as
detailed below:

                                                     Nine months ended June 30,
                                                      2003               2002
                                                      ----               ----

Interest income                                       $ 13,148         $ 28,085
Foreign currency transaction gains (losses)            (11,350)           2,318
Non operational USD to Euro currency re-measurement     51,936          (82,143)
                                                      --------         ---------
Total other income (expense)                          $ 53,734         $(51,740)
                                                      ========         =========

The decrease in total other expense was due to the lower losses  resulting  from
the Non  operational  USD to Euro currency  re-measurements  and lower  interest
income due to lower investment yields.

Non Operational USD to Euro currency re-measurement

We follow the rules  prescribed  in  paragraph  15 of SFAS 52 "Foreign  Currency
Translation", which states that accounts denominated in a currency other than an
entity's functional currency need to be re-measured into the entity's functional
currency,  and any gain or loss from this  re-measurement  are  included  in the
determination of net income.

Since the functional  currency of Hauppauge  Digital Europe Sarl ("HDE Sarl") is
the Euro,  any asset,  liability  or equity  accounts  which are  invested in or
purchased  using U.S.  Dollars or Great British  Pounds by HDE Sarl are revalued
into Euros at the end of each  period.  The gains or losses on HDE Sarl's  books
resulting from the  revaluation of U.S.  Dollar and Great British Pound accounts
into Euros are booked on the  Company's  profit and loss  statement in the other
income  (loss)  section  under the  description  " Non  operational  USD to Euro
currency re-measurement."

Primarily  due to a decrease in U.S Dollar  denominated  inventory on HDE Sarl's
books,  HDE Sarl  experienced  a net asset  decrease  for the nine month  period
ending  June 30,  2003.  The  increase  in the value of the Euro versus the U.S.
Dollar coupled with the decrease in net assets resulted in a re-measurement gain
of $51,936 for the nine months ended June 30, 2003.

Accumulated other comprehensive income (loss)

The Euro is the functional  currency of the Company's European  subsidiary,  HDE
Sarl.  Assets and liabilities of this subsidiary are translated to U.S.  Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S.  Dollars at the historical rate in effect at the
date of the  contribution.  Operating  results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S.  Dollars at the average  monthly  forward  exchange
contract rate. The use of differing  exchange rates results in foreign  currency
translation gains or losses.  Since the Euro accounts on HDE Sarl's books result
in a net asset position  (total Euro assets are in excess of Euro  liabilities),
an increase in the Euro value results in a deferred gain for the  translation of
Euro accounts to U.S.  Dollars.  The Company had a translation  loss of $(3,845)
recorded on the balance  sheet as of  September  30,  2002.  For the nine months
ended June 30, 2003, the Company recorded in other comprehensive income deferred
translation gains $361,963, resulting in a translation gain of $358,118 recorded
as a component of accumulated other comprehensive income as of June 30, 2003.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same  contracts  translated  at the  month end  forward  rate.  The  Company
qualifies  for cash flow hedge  accounting as  prescribed  under FAS 133,  which
allows the  Company to record the mark to market  gains and losses in the equity
section

                                       16

<PAGE>

<TABLE>
<CAPTION>

Nine Month Period ended June 30, 2003 Compared to June , 2002-continued
-----------------------------------------------------------------------

of our balance sheet under accumulated other  comprehensive  income. The Company
had mark to  market  gains  of  $190,919  recorded  on the  balance  sheet as of
September  30,  2002.  For the nine  months  ended June 30,  2003,  the  Company
recorded  in other  comprehensive  income  a mark to  market  loss of  $336,926,
reflecting the difference  between open contracts at September 30, 2002 and June
30, 2003. Recorded as a component of accumulated other  comprehensive  income on
the balance  sheet as of June 30, 2003 was a cumulative  mark to market loss for
open contracts of $146,007.

As stated above,  accumulated other comprehensive  income (loss) consists of two
components:

o    Translation gains and losses
o    FAS 133 mark to  market  gains  and  losses  on our open  foreign  exchange
     contracts

The table below details the gains and losses  recorded for the  components  that
make up accumulated other comprehensive income (loss):

<S>                     <C>             <C>             <C>             <C>             <C>     <C>

                                                Balance      October to     Balance     January to  Balance   April to    Balance
Accumulated other comprehensive income loss      as of      December 2002    as of      March 2003   as of    June 2003    as of
-------------------------------------------   September 30,   Gains        December 31,   Gains     March 31,   Gains     June 30,
                                                 2002         (losses)         2002     (losses)      2003     (losses)     2003
                                              ------------  -------------  -----------  ----------  --------- ---------   --------

Translation  gains and (losses)               $   (3,845)   $ 150,728      $ 146,883    $  13,318   $ 160,201  $197,917  $ 358,118
FAS 133 mark to market adjustments               190,919     (518,974)      (328,055)     163,879    (164,176)   18,169   (146,007)
                                              ----------    ---------      ---------    ---------   ---------  --------  ---------
                                              $  187,074    $(368,246)     $(181,172)   $ 177,197   $   3,975) $216,086  $ 212,111
                                              ==========    =========      =========    =========   ========== ========  =========

</TABLE>
Tax provision

Our net tax  provision  for the nine  months  ended June 30, 2003 and 2002 is as
follows:

                                                Nine months ended June 30,
                                                --------------------------
                                                  2003              2002
                                                 ------            ------
Tax (benefit) attributable to U.S operations    $ 590,000)         $(640,000)
Tax  expense  European operations                  39,000             53,497
Deferred tax asset valuation allowance            590,000            640,000
                                                ---------          ---------
Net tax provision                               $  39,000          $  53,497
                                                =========          =========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the Hauppauge  name.  For the last three fiscal years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax assets as of June 30,  2003 and we  concluded  that under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

During the nine months ended June 30, 2003, we reduced our Income Tax Receivable
and Accrued  Income Tax Payable by $326,000,  partially due to tax  examinations
and adjustments of amounts previously recorded.

As a result of all of the above items mentioned in the  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations,  we recorded net
income of $61,522 for the nine months  ended June 30,  2003,  which  resulted in
basic and diluted net income per share of $0.01 on  weighted  average  basic and
diluted  shares of  8,863,663  and  9,007,288,  respectively,  compared to a net
income of $527,062 for the nine months ended June 30,  2002,  which  resulted in
basic and  diluted  net loss per share of $0.06 on  weighted  average  basic and
diluted shares of 8,888,926 and 9,057,402, respectively.

Options to purchase  1,028,522  and  1,025,822  shares of common stock at prices
ranging $1.88 to $ 10.06 and $2.07 and $10.06,  respectively,  were  outstanding
for the nine month periods ending June 30, 2003 and 2002, respectively, but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

                                       17

<PAGE>
<TABLE>
<CAPTION>

Results of  operations-three  Month Period ended June 30, 2003  Compared to June
--------------------------------------------------------------------------------
30, 2002
--------

Results of operations  for the three months ended June 30, 2003 compared to June
30, 2002 are as follows:


<S>                                                  <C>                     <C>             <C>             <C>    <C>    <C>
                                                             Three          Three
                                                            Months         Months
                                                             Ended          Ended      Variance         Percentage of sales
                                                           6/30/03         6/30/03        $             2003    2002 Variance
                                                           -------         -------     --------         ----    -------------
Net Sales                                             $ 10,010,782    $ 10,113,135    $ (102,353)       100.0%  100.0%     0
Cost of sales                                            7,756,306       7,444,435       311,871         77.5%   73.6%   3.9%
                                                      ------------    ------------    -----------       ------  ------   ----
Gross Profit                                             2,254,476       2,668,700      (414,224)        22.5%   26.4%  -3.9%
Gross Profit %                                           22.52%          26.39%        -3.87%

Costs:
Sales & Marketing                                        1,655,344       1,332,194       323,150         16.5%   13.1%   3.4%
Technical Support                                          114,543          96,656        17,887          1.1%    0.9%   0.2%
General & Administrative                                   868,290         760,634       107,656          8.7%    7.5%   1.2%
                                                      ------------       ---------    -----------       ------   -----   ----
Total Selling, General and Administrative costs          2,638,177       2,189,484       448,693         26.3%   21.5%   4.8%
Research & Development                                     487,847         404,829        83,018          4.9%    4.0%   0.9%
                                                      ------------       ---------    -----------       ------   -----   ----
Total Costs                                              3,126,024       2,594,313       531,711         31.2%   25.5%   5.7%
                                                      ------------       ---------    -----------       ------   -----   ----
Net operating income                                      (871,548)         74,387      (945,935)        -8.7%    0.9%  -9.6%

Other income (expense)
----------------------
Interest income                                              3,143           6,457        (3,314)         0.0%    0.1%  -0.1%
Foreign currency                                             4,144         (15,718)       19,862          0.1%   -0.2%   0.3%
Non operational USD to Euro re-measurement                   8,796         (28,003)       36,799          0.1%   -0.3%   0.4%
                                                      ------------       ---------    -----------       ------   -----  -----
 Total other income (expense)                               16,083         (37,264)       53,347          0.2%   -0.4%   0.6%
                                                      ------------       ---------    -----------       ------   -----  -----
Income  before taxes                                      (855,465)         37,123      (892,588)        -8.5%    0.5%  -9.0%
Taxes on income                                                  -          10,997       (10,997)         0.0%    0.1%  -0.1%
                                                      ------------       ---------    -----------       ------   -----  -----
Net income                                            $   (855,465)      $  26,126    $ (881,591)        -8.5%    0.4%  -8.9%
                                                      ============       =========    ===========       ======   =====  =====

Net sales for the three months ended June 30, 2003 decreased  $102,353  compared
to the three months ended June 30, 2002.  European and Asian sales  decreased by
$116,319 and $83,793, while domestic sales increased $97,759 as follows:

                                                                            Increase
                                                                          (decrease)   Increase       Percentage of sales by
Location                       Three  Months      Three  Months             Dollar     (decrease)      Geographic region
------------                   ended 6/30/03      ended 6/30/02             Variance    Variance %       2003      2002
                               -------------      -------------           ----------   -----------       ----      ----
Domestic                       $  3,104,548       $   3,006,789            $ 97,759        3%             31%       30%
Europe                            6,746,029           6,862,348            (116,319)      -2%             67%       68%
Asia                                160,205             243,998             (83,793)     -34%              2%        2%
                               ------------       -------------           ----------    -----            ----      ----
 Total                         $ 10,010,782       $  10,113,135           $ (102,353)     -1%            100%      100%
                               ============       =============           ===========   =====            ====      ====

</TABLE>

        The primary forces contributing to the sales decrease were:

        o Decrease in sales of digital and digital satellite product of $119,667
        o Increase in analog and personal video recorder sales of $17,314

Net sales to domestic customers were 31% of net sales for the quarter ended June
30,  2003  compared  to 30% for the quarter  ended June 30,  2002.  Net sales to
European customers were 67% of net sales compared to 68% for the same quarter of
last year. Net sales to Asian customers were 2% for both quarters.

Gross profit decreased  $414,224 for the three months ended June 30, 2003. Gross
profit  percentage for the three months ended June 30, 2003 was 22.52%  compared
to 26.39% for the prior year's third quarter.

                                       18

<PAGE>

Results of  operations-three  Month Period ended June 30, 2003  Compared to June
--------------------------------------------------------------------------------
30, 2002-continued
------------------

The increases and (decreases) in the gross profit are detailed below:

                                                                        Increase
                                                                      (decrease)
                                                                      ----------
Due to (decreased) sales                                              $ (34,149)
Higher  margins due to product mix                                       50,619
Third quarter fiscal 2002 inventory reserve adjustment                 (151,189)
Margin reduction due to OEM sales                                      (216,523)
Due to increases in labor related and other costs                       (62,982)
                                                                      ----------
  Total  decrease in gross profit                                     $(414,224)
                                                                      ==========

The decrease in gross profit margin  percent of 3.87% for the three months ended
June 30, 2003 compared to the three months ended June 30, 2002 was as follows:

                                                                        Increase
                                                                      (decrease)
                                                                      ----------
Higher  margins due to product mix                                         0.50%
Third quarter fiscal 2002 inventory reserve adjustment                   (1.49)%
Margin reduction due to OEM sales                                        (2.16)%
Labor related and other costs                                             (.72)%
                                                                      ----------
Net  decrease in gross profit %                                          (3.87)%
                                                                      ==========

The 0.50% improved gross profit margin percent on assembled boards was primarily
derived from unit price reductions from our suppliers and  subcontractors on our
analog  product  lines,  offset  somewhat by sales of lower average gross profit
margin percentage digital products.

Although OEM sales require minimal sales and marketing support,  the margins are
substantially less than our retail products.  Our OEM sales had an average gross
profit  margin of about 12.31% for the three  months  ended June 30,  2003.  OEM
sales  accounted  for about  10.03% of our sales for the three months ended June
30,  2003.  There  were no  significant  OEM  sales  for the same  period of the
previous  year.  The  increase in OEM sales  caused a 2.16%  reduction  in gross
profit margin percent compared to last year.

During  the  latter  part  of  fiscal  2001,  the  factors  below  affected  the
realization of the Company's inventory:

o    The loss  during  the  quarter  of a long time  direct  corporate  customer
     impacted the existing  value of assembled  boards and  component  inventory
     relating to this customer
o    A change with a major contract manufacturer from consigning component parts
     to the  contract  manufacturer  to  purchasing  the  assembled  boards on a
     turnkey basis impacted the value of component inventory
o    The second  consecutive year of declining sales resulted in slower sales of
     older models
o    Engineering  changes made to our USB and Macintosh  products which rendered
     certain inventory associated with this product obsolete
o    The better use of new software  that  assisted  the Company in  identifying
     slow moving inventory

With  respect to the factors  above,  we deemed it  necessary  to  increase  our
reserve  for  obsolete  and slow  moving  inventory.  An  additional  reserve of
$1,862,766 was recorded  during the fourth quarter of fiscal 2001 and charged to
cost of sales.

During fiscal 2002, there was certain  assembled  boards and component  material
inventory  that we were able to sell through the use of a  liquidation  firm. In
recognition of this, we reduced our inventory reserve to reflect the decrease in
the obsolete inventory value due to the liquidation of such products.  There was
no similar  obsolete  inventory  liquidation  during the third quarter of fiscal
2003,  which  resulted in a  comparative  reduction in our gross  profit  margin
percentage 1.49% between the third quarters fiscal 2003 and fiscal 2002.

                                       19

<PAGE>
<TABLE>
<CAPTION>


Results of  operations-three  Month Period ended June 30, 2003  Compared to June
--------------------------------------------------------------------------------
30, 2002-continued
------------------

The  decrease  in the gross  profit  margin  percent of 0.72%  relating to labor
related  and  other  costs was due to the sales  decreasing  by 1.01%  from last
year's third quarter while labor  related and other costs  increased  7.35% over
last year's third quarter.

The  chart  below   illustrates   the   components   of  Selling,   General  and
Administrative expenses:

<S>                               <C>                   <C>                     <C>             <C>          <C>

                                  Three months ended June 30,
                                  ----------------------------
                                       Dollar Costs                                 Percentage of Sales
                                  ---------------------------------------------------------------------
                                                                    Increase                             Increase
                                     2003             2002         (Decrease)      2003       2002      (Decrease)
                                     ----             ----         ----------      ----       ----      ----------

Sales and Marketing                $ 1,655,344     $ 1,332,194    $ 323,150       16.5%      13.1%         3.4%
Technical Support                      114,543          96,656       17,887        8.7%       0.9%         0.2%
General and Administrative             868,290         760,634      107,656        8.7%       7.5%         1.2%
                                   ------------    -----------    ---------       -----      -----         ----
  Total                            $ 2,638,177     $ 2,189,484    $ 448,693       26.3%      21.5%         4.8%
                                   ============    ===========    =========       =====      =====         ====

</TABLE>

Selling,  General and Administrative  expenses increased $448,693 from the prior
year's  third  quarter.  As  a  percentage  of  sales,   Selling,   General  and
Administrative  expenses  increased  by 4.8% when  compared to the three  months
ended June 30, 2002.

The increase in Sales and  Marketing  expense of $323,150,  which  accounted for
about 72% of the total increase in Selling, General and Administrative expenses,
was mainly due to:

        o      Higher  advertising  costs of $192,544  due to higher sales based
               co-operative advertising,  higher customer rebate realization and
               increased special promotions
        o      Higher advertising costs of $57,974 due to higher translated Euro
               to  U.S  dollar  amounts  due to the  strengthening  of the  Euro
               against the USD
        o      Lower commissions expense of $18,075 due to decreased sales
        o      Increased  commission expense of $16,398 due to higher translated
               Euro to U.S dollar amounts due to the  strengthening  of the Euro
               against the USD
        o      Increased European sales office costs of $62,200
        o      Increased  European  sales  office costs of $90,468 due to higher
               translated Euro to U.S dollar amounts due to the strengthening of
               the Euro against the USD
        o      Lower  trade show costs of $64,542 due to smaller  show  presence
               and frequency

The increase in General and  Administrative  expenses of $107,656 was  primarily
due to:

        o      Addition of senior executive officer $16,177
        o      Other salary increases of $12,820
        o      Higher legal costs of $15,498
        o      Directors fees of $18,335
        o      Banking fees of $13,518
        o      Consulting  fees  for  investment  advice  and  public  relations
               $37,498
        o      Decreased  amortization  costs of $12,491 due to  amortization in
               full of an intangible asset during fiscal 2002

Research and Development  expenses  increased $83,018 or approximately  21%. The
increase was mainly due to higher  compensation costs attributable to additional
staff and increased material and contract services cost for current  development
projects.

                                       20


<PAGE>


Three Month Period ended June 30, 2003 Compared to June 30, 2002-continued
--------------------------------------------------------------------------

Other income (expense)

Net other income for the three  months ended June 30, 2003 was $16,083  compared
to net other  expense of $37,264  for the three  months  ended June 30,  2002 as
detailed below:

                                                     Three months ended June 30,
                                                          2003            2002
                                                          ----            ----

Interest income                                       $   3,143        $  6,457
Foreign currency transaction gains (losses)               4,144         (15,718)
Non operational USD to Euro currency re-measurement       8,796         (28,003)
                                                      ---------        ---------
Total other income (expense)                          $  16,083        $(37,264)
                                                      =========        =========

The increase in total other income was due to the higher  gains  resulting  from
the Non  operational  USD to Euro currency  re-measurements  and lower  interest
income due to lower investment yields.

Non Operational USD to Euro currency re-measurement

We follow the rules  prescribed  in  paragraph  16 of SFAS 52 "Foreign  Currency
Translation", which states that accounts denominated in a currency other than an
entities functional currency need to be re-measured into the entities functional
currency,  and any gain or loss from this  re-measurement  are  included  in the
determination of net income.

Since the functional  currency of Hauppauge  Digital Europe Sarl ("HDE Sarl") is
the Euro,  any asset,  liability  or equity  accounts  which are  invested in or
purchased  using U.S.  Dollars or Great British  Pounds by HDE Sarl are revalued
into Euros at the end of each  period.  The gains or losses on HDE Sarl's  books
resulting from the  revaluation of U.S.  Dollar and Great British Pound accounts
into Euros are booked in the  Company's  profit and loss  statement in the other
income  (loss)  section  under the  description  " Non  operational  USD to Euro
currency re-measurement."

Primarily  due to a decrease in U.S Dollar  denominated  inventory on HDE Sarl's
books,  HDE Sarl  experienced  a net asset  decrease  for the three month period
ending  June 30,  2003.  The  increase  in the value of the Euro versus the U.S.
Dollar coupled with the decrease in net assets resulted in a re-measurement gain
of $8,796 for the three months ended June 30, 2003.

Accumulated other comprehensive income (loss)

The Euro is the functional  currency of the Company's European  subsidiary,  HDE
Sarl.  Assets and liabilities of this subsidiary are translated to U.S.  Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S.  Dollars at the historical rate in effect at the
date of the  contribution.  Operating  results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S.  Dollars at the average  monthly  forward  exchange
contract rate. The use of differing  exchange rates results in foreign  currency
translation gains or losses.  Since the Euro accounts on HDE Sarl's books result
in a net asset position  (total Euro assets are in excess of Euro  liabilities),
an increase in the Euro value results in a deferred gain for the  translation of
Euro  accounts to U.S.  Dollars.  For the three months ended June 30, 2003,  the
Company recorded in other  comprehensive  income deferred  translation  gains of
$197,917.  Recorded as a component of accumulated other comprehensive  income on
the  balance  sheet as of June 30,  2003 was a  cumulative  translation  gain of
$358,118.

The  Company  uses  forward  exchange   contracts  to  reduce  our  exposure  to
fluctuations  in foreign  currencies.  Mark to market  gains and losses on these
open  contracts  result  from the  difference  between the USD value of our open
foreign  currency  forward  contracts at the average contract rate as opposed to
the same  contracts  translated  at the  month end  forward  rate.  The  Company
qualifies  for cash flow hedge  accounting as  prescribed  under FAS 133,  which
allows the  Company to record the mark to market  gains and losses in the equity
section

                                       21

<PAGE>
<TABLE>
<CAPTION>

Three  Month  Period  ended  June  30,  2003   Compared  to  June  30,
----------------------------------------------------------------------
2002-continued
--------------

of our balance sheet under accumulated other comprehensive income. For the three
months ended June 30, 2003, the Company recorded in other comprehensive income a
mark to market gain of $18,169, reflecting the difference between open contracts
at March 31, 2003 and June 30,  2003.  Recorded as a  component  of  accumulated
other  comprehensive  income  on the  balance  sheet as of June  30,  2003 was a
cumulative mark to market loss for open contracts of $146,007.

As stated above,  accumulated other comprehensive  income (loss) consists of two
components:

o   Translations gains and losses
o   FAS 133 mark to  market  gains  and  losses  on our open  foreign  exchange
    contracts

The table below details the gains and losses  recorded for the  components  that
make up accumulated other comprehensive income (loss):

<S>                     <C>                     <C>             <C>                             <C>             <C>             <C>

                                                Balance       October to      Balance     January to  Balance    April  to  Balance
Accumulated other comprehensive income (loss)    as of        December 2002    As of      March 2003  as of      June 2003  as of
---------------------------------------------   September 30,   Gains        December 31,  Gains      March 31,    Gains    June 30,
                                                 2002         (losses)        2002        (losses)    2003        (losses)     2003
                                               ------------- -------------  ------------  ---------- ---------   ---------- --------
Translation  gains and (losses)                $ (3,845)      $ 150,728      $  146,883   $ 13,318   $ 160,201   $ 197,917  $358,118
FAS 133 mark to market adjustments              190,919        (518,974)       (328,055)   163,879   (164,176)      18,169   146,007
                                               ------------- -------------  ------------  ---------- ---------   ---------- --------
                                               $187,074       $(368,246)     $  181,172)  $177,197   $ (3,975)   $ 216,086  $212,111
                                               ============= =============  ============  ========== =========   ========== ========

</TABLE>
Tax provision

Our net tax  provision  for the three  months ended June 30, 2003 and 2002 is as
follows:

                                                     Three months ended June 30,
                                                     ---------------------------
                                                          2003              2002
                                                         ------            -----
Tax (benefit) attributable to U.S operations         $ (377,500)     $ (163,000)
Tax  expense  European operations                             -         10, 997
Deferred tax asset valuation allowance                  377,500         163,000
                                                     -----------     -----------
Net tax provision                                    $         -     $   10,997
                                                     ===========     ===========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the Hauppauge  name.  For the last three fiscal years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax  assets as of June 30 2003 and we  concluded  that  under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

During the nine months ended June 30, 2003, we reduced our Income Tax Receivable
and Accrued  Income Tax Payable by $326,000,  partially due to tax  examinations
and adjustments of amounts previously recorded.

As a result of all of the above items mentioned in the  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations,  we recorded net
loss of $855,465 for the three months  ended June 30,  2003,  which  resulted in
basic and  diluted  net loss per share of $0.10 on  weighted  average  basic and
diluted  shares of 8,869,832,  compared to a net income of $26,126 for the three
months ended June 30, 2002,  which  resulted in breakeven  basic and diluted net
income per share on weighted  average basic and diluted  shares of 8,886,755 and
9,042,571, respectively.

Options to purchase  1,782,601  and  1,025,822  shares of common stock at prices
ranging $1.05 to $ 10.06 and $2.07 and $10.06,  respectively,  were  outstanding
for the three month  periods  ending June 30, 2003 and 2002,  respectively,  but
were not included in the computation of diluted  earnings per share because they
were anti-dilutive.

                                       22

<PAGE>
Seasonality
-----------

As our sales are primarily to the consumer market,  we have experienced  certain
seasonal revenue trends. Our peak sales quarter,  due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December),  followed
by our fourth fiscal quarter (July to September). In addition, our international
sales,  mostly in the European  market,  were 73%, 77% and 71 % of sales for the
years ended September 30, 2002, 2001 and 2000,  respectively.  Our fiscal fourth
quarter sales (July to September) can be  potentially  impacted by the reduction
of activity  experienced  in Europe  during the July and August  summer  holiday
period.

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

Liquidity and Capital Resources

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

                                                     June 30,      September 30,
                                                       2003           2002
                                                     -------          ----

Cash                                               $ 5,347,255     $  4,964,522
Working Capital                                     11,421,999       11,276,942
Stockholders' Equity                                12,070,689       11,966,612

We had cash and cash  equivalents as of June 30, 2003 of $5,347,255,  a increase
of $382,733 over September 30, 2002.

The increase was due to:

Net income adjusted for non cash items                                 $ 298,370
Decrease in accounts receivable                                        1,122,442
Decrease  in  income taxes receivable                                    326,000
Proceeds from employee stock purchases                                    24,657
Less cash used for:
Decrease in accounts payable and other current liabilities             (792,715)
Increase in inventories                                                (221,337)
Increase in prepaid expenses and other current assets                  (171,677)
Purchases of fixed assets                                              (167,365)
Purchase of treasury stock                                              (35,642)
                                                                       ---------
 Net increase in cash                                                  $ 382,733
                                                                       =========

Net cash of $561,083  provided by operating  activities  was  primarily due to a
reduction in accounts  receivable  and income tax  receivable of $1,122,442  and
$326,000,  respectively,  and net income adjusted for non cash items of $298,370
offset by cash used to fund  decreases  in accounts  payable  and other  current
liabilities  of $792,715,  increase in  inventory  of $221,337 and  increases in
prepaid  assets and other current  assets of $171,677.  The decrease in accounts
receivable  was the result of a decrease in sales of about $3.6 million  between
the quarter ended March 31, 2002 and the quarter ended June 30, 2003.

Cash of $167,365  and $35,642 was used to  purchase  fixed  assets and  purchase
treasury  stock.  Proceeds  from the stock  purchased by  employees  through the
employee stock purchase plan provided additional cash of $24,657.

Our  bank  facility  with JP  Morgan  Chase  expired  in April  2002.  It is the
intention of the Company to procure a new credit facility on terms acceptable to
the  Company,  however,  there  can  be no  assurance  that  we  will  secure  a
replacement line of credit at competitive terms.

On November 8, 1996, we approved a stock  repurchase  program.  The program,  as
amended,  authorizes  the Company to repurchase up to 850,000  shares of our own
stock.  We intend to use the  repurchased  shares for certain  employee  benefit
programs.  On December 17, 1997, the stock repurchase  program was extended by a
resolution  of our Board of  Directors.  As of June 30,  2003,  we held  542,067
treasury  shares  purchased  for  $1,497,216  at an  average  purchase  price of
approximately $2.76 per share.

We  believe  that  our cash and  cash  equivalents  as of June 30,  2003 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.

                                       23

<PAGE>

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

The following table shows the Company's contractual obligations related to lease
obligations as of June 30, 2003:

                                                        Payments due by period
Contractual obligations                 Total           1 year       1-3 years
-----------------------                 -----           ---------    ---------

Operating lease obligations             $ 1,755,674     $ 662,838    $ 1,092,836
                                        ===========     =========    ===========

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

Financial  Reporting  Release  No.  60,  requires  all  companies  to  include a
discussion of critical accounting policies or methods used in the preparation of
financial statements.

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

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

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

Our revenues are primarily derived from the sale of computer boards which enable
you to view  television  programs on your personal  computer.  Sales of computer
boards are commonly classified as computer hardware.  Our sales are primarily to
retailers,  distributors  and  original  equipment  manufacturers.  Sales to our
customers are documented by a purchase  order which  describes the conditions of
sale. Sales are recorded when products are shipped to our customers. The product
price is fixed and  determinable,  collection  of the  resulting  receivable  is
probable  and product  returns are  reasonably  estimable.  Revenue from freight
charged to customers is  recognized  when products are shipped.  Provisions  for
customer  returns  and other  adjustments  are  provided  for in the  period the
related sales are recorded based upon historical data.

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

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

Since October 1, 1999, our European  subsidiary has  historically  accounted for
approximately  68% to 77 % of our  net  sales.  All of our  European  sales  are
denominated in local currencies, primarily the Euro. As a result of this, we are
a net receiver of currencies other than the U.S Dollar.  Changes in the exchange
rate subject us to market risks  resulting  from the  fluctuation of the Euro to
the U.S.  Dollar.  In an attempt to minimize these risks,  we enter into forward
exchange contracts with financial institutions.


                                       24

<PAGE>

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

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

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

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

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

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

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.

Euro
----

On January 1, 1999,  the Euro was adopted in Europe as the common legal currency
among 11 of the 15 member countries of the European Community. On that date, the
participating  countries  established  fixed Euro  conversion  rates  (i.e.  the
conversion  exchange rate between their existing  currencies and the Euro).  The
Euro  now  trades  on  currency   exchanges   and  is  available   for  non-cash
transactions.  A new European  Central Bank was  established to direct  monetary
policy for the participating countries.

                                       25

<PAGE>

Euro-continued
--------------

Prior to the adoption of the Euro,  we billed our  European  customers in German
Marks or British Pounds, depending upon which currency the customer preferred to
be billed in.  Effective  January 1, 1999, we began  invoicing our customers who
are  located  in the eleven  member  countries  in Euros.  We  continue  to bill
customers  located in the United  Kingdom in British  Pounds.  The  benefits  to
billing customers in Euros were twofold:

        o Our foreign  currency  hedging program was streamlined to the Euro and
          the British Pound
        o The pricing from country to country was harmonized,  eliminating price
          differences between countries due to the fluctuating local currencies

We handled the  conversion to the Euro without any material  disruptions  to our
operations.

Recent Accounting Pronouncements
--------------------------------

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity" (" SFAS 150").
SFAS 150 establishes  standards for how an issuer  classifies and measures three
classes of  freestanding  financial  instruments  with  characteristics  of both
liabilities  and  equity.  It  requires  that an  issuer  classify  a  financial
instrument  that is within its scope as a liability.  SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period  beginning  after June
15, 2003. The Company has not entered into any financial  instruments within the
scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant
financial instruments within its scope.

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

Derivatives and Hedging Activities
----------------------------------

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

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

The strength or weakness of the U.S.  Dollar  against the Euro and British Pound
Sterling impacts our financial results. Changes in exchange rates may positively
or negatively affect our revenues, gross margins,  operating income and retained
earnings (which are all expressed in U.S. Dollars). We use derivatives to reduce
our exposure to fluctuations in foreign  currencies.  Foreign  currency  forward
contracts,  are used to hedge the foreign currency market  exposures  underlying
forecasted  sales  transactions  with  customers.  As of June 30,  2003,  we had
foreign currency contracts  outstanding of approximately  $1,590,000 against the
delivery of the Euro. The

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<PAGE>

Derivatives and Hedging Activities-continued
--------------------------------------------

contracts  expire  through  August  2003.  Our  accounting  policies  for  these
instruments  are  based on its  designation  of such  instruments  as cash  flow
hedging  transactions.  We do not enter  into  such  contracts  for  speculative
purposes.  We record all  derivative  gains and losses on the balance sheet as a
component  of  stockholders'   equity  under  the  caption   "Accumulated  other
comprehensive  income (loss)".  As of June 30, 2003, a deferred loss of $146,007
reflecting  the net mark to market  loss of our  derivatives  was  recorded as a
component of accumulated other comprehensive income on our balance sheet.

For the three months and nine months ended June 30, 2003, we recorded a decrease
in sales of $366,300 and $1,525,100  related to our contracts that closed during
these periods and the changes in the fair value of our derivative contracts. For
the three months and nine months ended June 30, 2002, we recorded an decrease in
sales of $750,000 and $653,000 related to our contracts that closed during these
periods and the changes in the fair value of our derivative contracts.

Item 4. Controls and Procedures
-------------------------------

Our Chief Executive  Officer and Chief Financial Officer conducted an evaluation
of the  effectiveness of our disclosure  controls and procedures.  Based on this
evaluaution,  our Chief Executive  Officer and Chief Financial Officer concluded
that our disclosure  controls and procedures  were effective as of June 30, 2003
in  alerting  them in a timely  manner to  materail  information  required to be
included in our SEC reports. In addition, no change in our internal control over
financial  reporting occurred during the fiscal quarter ended June 30, 2003 that
has  materially  affected,  or is reasonably  likely to materially  affect,  our
internal control over financial reporting.

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

This  Quarterly  Report  contains  forward-looking  statements  as that  term is
defined in the federal  securities laws. The events described in forward-looking
statements  contained in this Quarterly  Report may not occur.  Generally  these
statements  relate to business  plans or  strategies,  projected or  anticipated
benefits  or  other  consequences  of our  plans  or  strategies,  projected  or
anticipated  benefits  from  acquisitions  to be  made  by  us,  or  projections
involving  anticipated  revenues,  earnings  or other  aspects of our  operating
results. The words "may," "will," "expect," "believe,"  "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 (including, but
not limited to,  those set forth in our Annual  Report on Form 10-K for the year
ended  September  30,  2002),  many of which are  beyond our  control,  that may
influence  the accuracy of the  statements  and the  projections  upon which the
statements are based.  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.


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<PAGE>

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

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

We were  informed  by counsel  for the estate of the late Mr.  Kenneth  Aupperle
("Estate")  that they have  filed a Demand  for  Arbitration  with the  American
Arbitration  Association  claiming  property rights and interest in the Company,
certain  amounts  due  and  owing  to the  Estate  based  on  various  corporate
agreements with Mr. Aupperle and certain insurance  policies,  such amount to be
no less than $2,500,000. We are proceeding to arbitrate the claims. Based on the
preliminary  information presented to us, management believes that the claim and
the basis for proceeding with  arbitrating  such claim is without merit and will
vigorously defend it.

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

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

31.1 Certification of the Chief Executive  Officer pursuant to Rule 13a-14(a) or
     Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act
     of 2002.

31.2 Certification of the Chief Financial  Officer pursuant to Rule 13a-14(a) or
     Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act
     of 2002.

32   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.

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

One Current Report on Form 8-K was filed by us during the quarter ended June 30,
2002 as follows:

    (i) Date of Report:  May 15, 2003
        Item Reported:   7, 9


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<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 13 , 2003                By   /s/ Kenneth Plotkin
                                            ------------------------------------
                                            KENNETH PLOTKIN
                                            Chief Executive Officer and Director


Date:  August  13, 2003                By   /s/ Gerald Tucciarone
                                            ------------------------------------
                                            GERALD TUCCIARONE
                                            Treasurer and Chief
                                            Financial Officer


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