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,  2004

                                       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, including zip code)

                                 (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,  9 2004,  9,126,831  shares of .01 par value  Common  Stock of the
registrant were outstanding, not including treasury shares.

                                       1

<PAGE>

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

                                      INDEX
                                      -----


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

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

Condensed Consolidated Balance Sheets-
     June 30, 2004 (unaudited) and September 30, 2003 (audited)                3

Condensed Consolidated Statements of Income-
     Nine months ended June 30, 2004 (unaudited) and 2003 (unaudited)          4

Condensed Consolidated Statements of Income -
     Three months ended June 30, 2004 (unaudited) and 2003 (unaudited)         5

Condensed Consolidated Statements of Other Comprehensive Income -
     Three months and nine months ended June 30, 2004 (unaudited)
     and 2003 (unaudited)                                                      6

Condensed Consolidated Statements of Cash Flows-
     Nine Months ended June 30, 2004 (unaudited) and 2003 (unaudited)          7

Notes to Condensed Consolidated Financial Statements                        8-13

Item 2. Management's  Discussion and Analysis of Financial Condition and
Results of Operations                                                      14-28

Item 3. Quantitative and Qualitative Disclosures about Market Risks        28-29

Item  4. Controls and Procedures                                              29

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

Item 1. Legal Proceedings                                                     30

Item 5. Other Information                                                     30

Item 6. Exhibits and Reports on Form 8-K                                      30

SIGNATURES                                                                    31


                                       2

<PAGE>

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

Item 1. Financial Statements

                     HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                          June  30,   September 30,
                                                                                             2004          2003
                                                                                         (Unaudited)    (Audited)
                                                                                ----------------------------------------
Assets:

 Current Assets:
<S>                                                                                     <C>            <C>
     Cash and cash equivalents                                                        $   9,427,652    $ 5,838,160
     Receivables, net of  various allowances                                              7,047,567      9,182,758
     Inventories                                                                          7,519,023      5,474,374
     Prepaid expenses and other current assets                                              792,829        546,328
                                                                                ----------------------------------------
                Total current assets                                                     24,787,071     21,041,620

     Property, plant and equipment, net                                                     428,240        532,516
     Security deposits and other non current assets                                          77,342         76,216
                                                                                ----------------------------------------
                                                                                       $ 25,292,653    $21,650,352
                                                                                ========================================
 Liabilities and Stockholders' Equity:

 Current Liabilities:
    Accounts payable                                                                   $  6,971,191    $ 7,452,867
    Accrued expenses                                                                      3,793,391      2,539,678
    Income taxes payable                                                                    202,222        189,122
                                                                                ----------------------------------------
              Total current liabilities                                                  10,966,804     10,181,667

 Stockholders' Equity
    Common Stock, $0.01 par value; 25,000,000 shares authorized,
          9,668,898 and 9,420,315  issued, respectively                                      96,689         94,203
    Additional paid-in capital                                                           12,770,663     12,302,119
    Retained earnings                                                                     1,805,874         99,987
    Accumulated other comprehensive income                                                1,149,839        469,592
    Treasury Stock, at cost, 542,067 shares                                              (1,497,216)    (1,497,216)
                                                                                ----------------------------------------
             Total stockholders' equity                                                  14,325,849     11,468,685
                                                                                ----------------------------------------
                                                                                       $ 25,292,653    $21,650,352
                                                                                ========================================
</TABLE>


See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                       Nine months ended June  30,
                                                                                    ---------------------------------
                                                                                             2004            2003
                                                                                    ---------------------------------

<S>                                                                                     <C>              <C>
Net Sales                                                                               $48,828,873      $39,450,126
Cost  of Sales                                                                           35,758,126       29,905,216
                                                                                    ---------------------------------
    Gross Profit                                                                         13,070,747        9,544,910

Selling, General and  Administrative Expenses                                             9,272,449        8,068,951
Research & Development Expenses                                                           1,367,270        1,429,171
Arbitration proceeding                                                                      206,250                -
Litigation proceeding                                                                       427,000                -
                                                                                    ---------------------------------
    Income from operations                                                                1,797,778           46,788

Other Income:
  Interest income                                                                             4,373           13,148
  Foreign currency                                                                           21,959           40,586
                                                                                    ---------------------------------
Other income                                                                                 26,332           53,734
                                                                                    ---------------------------------
      Income before taxes on income                                                       1,824,110          100,522
Tax provision                                                                               118,223           39,000
                                                                                    ---------------------------------
      Net income                                                                         $1,705,887          $61,522
                                                                                    =================================
Net income per share:
    Basic                                                                                     $0.19            $0.01
    Diluted                                                                                   $0.18            $0.01
                                                                                    =================================
</TABLE>



See accompanying notes to condensed consolidated financial statements


                                       4

<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                        Three months ended June 30,
                                                                                    ----------------------------------
                                                                                              2004            2003
                                                                                    ----------------------------------

<S>                                                                                      <C>             <C>
Net Sales                                                                                $13,794,292     $10,010,782
Cost of Sales                                                                             10,236,138       7,756,306
                                                                                    ---------------------------------
    Gross Profit                                                                           3,558,154       2,254,476

Selling, General and Administrative Expenses                                               2,928,064       2,638,177
Research & Development Expenses                                                              512,606         487,847
Litigation proceeding                                                                       (73,000)               -
                                                                                    ---------------------------------
    Income (loss) from operations                                                            190,484        (871,548)

Other Income:
  Interest income                                                                              1,237           3,143
  Foreign currency                                                                                60          12,940
                                                                                    ---------------------------------
Other income                                                                                   1,297          16,083
                                                                                    ---------------------------------
      Income (loss) before taxes on income                                                   191,781        (855,465)
Tax provision                                                                                 23,144               -
                                                                                    ---------------------------------
      Net income (loss)                                                                   $  168,637     $  (855,465)
                                                                                    =================================

Net income (loss) per share:
    Basic and Diluted                                                                          $0.02         ($0.10)
                                                                                    =================================
</TABLE>


See accompanying notes to condensed consolidated financial statements

                                       5


<PAGE>

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



                                                   Three months ended June 30,
                                                   ---------------------------
                                                       2004           2003
                                                       ----           ----

Net income (loss)                                   $ 168,637     $ (855,465)
Forward exchange contracts marked to market            26,138         18,169
Foreign currency translation (loss) gain             (241,751)       197,917
                                                   ---------------------------
Other  comprehensive (loss)                         $ (46,976)    $ (639,379)
                                                   ===========================



                                                    Nine months ended June 30,
                                                    --------------------------
                                                         2004           2003
                                                         ----           ----

Net income                                         $  1,705,887     $  61,522
Forward exchange contracts marked to market             214,116      (336,926)
Foreign currency translation gain                       466,131       361,963
                                                   ---------------------------
Other  comprehensive income                        $  2,386,134     $  86,559
                                                   ===========================

See accompanying notes to condensed consolidated financial statements


                                       6


<PAGE>
                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        Nine months ended June  30,
                                                                       2004                 2003

                                                                 -------------------------------------
<S>                                                                 <C>                 <C>
Net income                                                          $1,705,887          $   61,522
                                                                 -------------------------------------
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization                                     181,441             205,945
     Other non cash items                                               11,541              30,903
Changes in current assets and liabilities:
      Accounts receivable                                            2,815,438           1,448,442
      Inventories                                                   (2,044,649)           (221,337)
      Prepaid expenses and other current assets                       (246,501)           (171,677)
     Accounts payable and other current liabilities                    785,137            (792,715)
                                                                 -------------------------------------
          Total adjustments                                          1,502,407             499,561
                                                                 -------------------------------------
Net cash provided by operating activities                            3,208,294             561,083
                                                                 -------------------------------------

Cash Flows From Investing Activities:
    Purchases of property, plant and equipment                         (77,165)           (167,365)
                                                                 -------------------------------------
       Net cash used in investing activities                           (77,165)           (167,365)
                                                                 -------------------------------------


Cash Flows From Financing Activities:
Proceeds from employee stock and stock option  purchases               458,363              24,657
Purchase of treasury stock                                                   -             (35,642)
                                                                 -------------------------------------
       Net cash provided by (used in) financing activities             458,363             (10,985)
                                                                 -------------------------------------
       Net increase in cash and cash equivalents                     3,589,492             382,733
Cash and cash equivalents, beginning of period                       5,838,160           4,964,522
                                                                 -------------------------------------
Cash and cash equivalents, end of period                            $9,427,652         $ 5,347,255
                                                                 =====================================
Supplemental disclosures:
   Income taxes paid                                                $   85,213         $    40,262
                                                                 =====================================
</TABLE>



See accompanying notes to condensed 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 month and
nine month period ended June 30, 2004 have been  included.  It is suggested that
these interim  statements be read in conjunction  with the financial  statements
and related notes included in Hauppauge Digital Inc.'s ("the Company") September
30, 2003 Form 10-K.

The  operating  results for the three month and nine month period ended June 30,
2004 are not  necessarily  indicative  of the  results  to be  expected  for the
September 30, 2004 year end.

Note 2. Receivables

Accounts and other receivables consisted of the following as of June 30, 2004:

                                                   June 30,       September 30,
                                                     2004             2003
                                                 -----------      -------------
Trade receivables                                $ 6,404,036      $ 7,435,539
Receivable from contract manufacturers             3,598,295        4,134,456
GST and VAT taxes receivables                        236,822          289,700
Allowances and reserves                           (3,307,184)      (2,887,184)
Income tax receivable                                  7,582          175,000
Other                                                108,016           35,247
                                                 -----------      -----------
                                                 $ 7,047,567      $ 9,182,758
                                                 ===========      ===========

Note 3. Derivative Financial Instruments

Sales to our European customers are invoiced in local currencies, and subsequent
payments received from our customers are in local currencies (primarily the Euro
and Great British Pound).  On the supply side, since we predominantly  deal with
North  American  and  Asian  suppliers,   approximately  75%  of  our  inventory
supporting our Euro and Great British Pound sales are purchased and paid in U.S.
Dollars.  Consequently,  changes in exchange  rates expose our U.S.  denominated
inventory on the books of our European subsidiary 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. The purpose of these forward contracts is
to hedge the foreign  currency market  exposures  underlying the forecasted U.S.
Dollar denominated inventory purchases required to support our European sales.

As  of  June  30,  2004,  we  had  foreign  currency  contracts  outstanding  of
approximately  $3,926,000 against the delivery of the Euro. The contracts expire
through December 2004. 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 $214,116 for the nine months ended June 30, 2004. As of June 30, 2004, a
deferred loss of $20,475  reflecting the  cumulative  mark to market loss of our
derivatives,  was recorded as a component  of  accumulated  other  comprehensive
income on the balance sheet.

The Company uses the average monthly forward contract exchange rate to translate
Euro sales into our U.S. dollars reporting currency.  For the three months ended
June 30, 2004,  using the average  contract rate resulted in an increase in Euro
to U.S.  dollar  translated  sales of $45,403.  For the nine month period ending
June 30, 2004, if

                                       8


<PAGE>


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


the Company had used the average spot rate,  we would have  recorded an increase
in Euro to U.S dollar translated sales of $863,965 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,  2003,  if the
Company had used the average  spot rate,  we would have  recorded an increase in
Euro to U.S dollar  translated  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.

Note 4.  Inventories

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

                                                June 30,         September 30,
                                                 2004                2003
                                                 ----                ----

     Component Parts                         $ 3,059,888         $ 1,446,670
     Finished Goods                            4,459,135           4,027,704
                                             -----------         -----------
                                             $ 7,519,023         $ 5,474,374
                                             ===========         ===========

Note 5. 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 shares of common stock  outstanding for
the period.  Diluted net income per share reflects, in the periods in which they
have a dilutive  effect,  the  dilution  which would occur upon the  exercise of
stock options.  A  reconciliation  of the shares used in  calculating  basic and
diluted net income per share is as follows:

<TABLE>
<CAPTION>
                                                                            Three Months Ended            Nine Months Ended
                                                                                  June 30,                    June  30
                                                                            2004        2003            2004            2003
                                                                       ------------------------      -------------------------
<S>                                                                     <C>           <C>            <C>             <C>
Weighted average shares outstanding-basic                               9,047,561     8,869,832      8,943,087       8,863,663
Number of shares issued on the assumed exercise of stock options          972,176             -        749,388         143,625
                                                                       ----------     ---------      ---------       ---------
Weighted average shares outstanding-diluted                            10,019,697     8,869,832      9,692,475       9,007,288
                                                                       ==========     =========      =========       =========
</TABLE>

Options  to  purchase  38,906  and  1,782,601  shares of common  stock at prices
ranging $8.75 to $10.06 and $1.05 and $10.06, respectively, were outstanding for
the three month period ending June 30, 2004 and 2003, respectively, but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive.

Options to  purchase  111,304  and  1,028,522  shares of common  stock at prices
ranging $5.25 to $10.06 and $1.88 and $10.06, respectively, were outstanding for
the nine month period ending June 30, 2004 and 2003, respectively,  but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive

Note 6. 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 or losses are recorded on
the balance sheet under accumulated other comprehensive income.

                                       9


<PAGE>

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

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 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, 2004,  appearing in the equity section under " Accumulated  other
comprehensive  income" was a deferred gain of $1,149,839,  which  consisted of a
deferred  translation  gain of $1,170,314  and a deferred loss of $20,475 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 spot rate.

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

Note 7. Revenue Recognition

We sell our  products  through a sales  channel  which  consists  of  retailers,
distributors  and original  equipment  manufacturers  ("OEM's").  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 products  and the cost of any  pilferage  while in the  customer's
possession  is the  responsibility  of the  customer.  Our retail  products  are
typically  stocked on the  shelves of  retailers,  and are subject to the normal
consumer traffic that retail stores attract.  Aside from normal store promotions
such as 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 Statement of Accounting Standards 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
the  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  8.  Product Segment and Geographic Information

We engineer, develop, subcontract for manufacture,  market and sell products for
the personal computer ("PC") market and the Apple(R) Macintosh(R) market.

We also offer products for the home  entertainment  market.  We have two primary
product  categories:  analog TV products and digital TV  products.  Our WinTV(R)
analog TV receivers  allow PC users to watch  television on their PC screen in a
resizable  window,  and also enable  recording  of TV shows to a hard disk.  Our
WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders,
which improve the performance of TV recording and add instant replay and program
pause functions,  plus also enable the `burning' of TV recordings onto DVD or CD
media.  Our  Eskape(TM)  Labs  products  allow  users  of   Apple(R)Macintosh(R)
computers to watch television on their computer screen.

                                       10


<PAGE>

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

We offer three types of digital TV receivers. Our WinTV(R) digital receivers can
receive  digital  TV  transmissions  and  display  the  digital  TV  show  in  a
re-sizeable  window on a user's PC  screen.  Our  Digital  Entertainment  Center
("DEC")  products  allow users to receive  digital TV broadcasts and display the
digital  TV on either a TV set or a PC  screen.  Our  MediaMVP(TM)  product  was
designed to allow PC users to play digital media such as digital music,  digital
pictures and digital videos on a TV set via a home network.

Note  8.  Product Segment and Geographic Information-continued

We sell our  products  through a sales  channel  which  consists  of  retailers,
distributors and OEM's. Sales by functional category are as follows:

<TABLE>
<CAPTION>
                              Three months ended June 30,          Nine months ended June 30,
                                  2004           2003                 2004            2003
                                  ----           ----                 ----            ----
Product line sales
------------------
<S>                           <C>             <C>                  <C>             <C>
Analog sales                  $10,946,522     $ 6,948,851          $39,099,757     $28,371,468
Digital sales                   2,847,770       3,061,931            9,729,116      11,078,658
                              -----------     -----------          -----------     -----------
                              $13,794,292     $10,010,782          $48,828,873     $39,450,126
                              ===========     ===========          ===========     ===========
</TABLE>

European sales  accounted for 66% and 67% and 69% and 69% of sales for the three
and nine months  ended June 30, 2004 and 2003,  respectively.  Sales  percent by
geographic region are as follows:

<TABLE>
<CAPTION>
                                     Three months ended June 30,     Nine months ended June 30,
                                     ---------------------------     --------------------------
                                         2004           2003            2004            2003
                                         ----           ----            ----            ----
Sales percent by geographic region
---------------------------
<S>                                       <C>            <C>            <C>             <C>
United States                             32%            31%            29%             30%
Europe                                    66%            67%            69%             69%
Asia                                       2%             2%             2%              1%
                                         ---            ---            ---             ---
    Total                                100%           100%           100%            100%
                                         ===            ===            ===             ===
</TABLE>

Note 9. 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 and nine months  ended June 30, 2004
and June 30 2003 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, 2004 and June 30, 2003: 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:

                                       11

<PAGE>




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

<TABLE>
<CAPTION>
                                                                    Three months ended              Nine months ended
                                                                    ----------------------------------------------------
                                                                     June 30,    June  30,       June 30,      June  30,
                                                                       2004        2003             2004           2003
                                                                       ----        ----             ----           ----

<S>                                                                 <C>          <C>             <C>             <C>
Net income (loss) as reported                                       $168,367     $(855,465)      $1,705,887      $61,522
-----------------------------
   Deduct:  Total stock-based employee compensation expense
     Determined under fair value method, net of related taxes        (24,788)      (11,626)         (74,364)     (34,877)
                                                                    --------     ---------       ----------      -------
Pro forma net income (loss)                                         $143,579     $(867,091)      $1,631,523      $26,645
---------------------------                                         ========     =========       ==========      =======

Net income (loss) per share - as reported:

Basic                                                               $   0.02     $   (0.10)      $     0.19      $  0.01
                                                                    ========     ==========      ==========      =======
Diluted                                                             $   0.02     $   (0.10)      $     0.18      $  0.01
                                                                    ========     ==========      ==========      =======
Net income (loss) per share - pro forma:

Basic                                                               $   0.02     $   (0.10)      $     0.18      $  0.00
                                                                    ========     ==========      ==========      =======
Diluted                                                             $   0.01     $   (0.10)      $     0.17      $  0.00
                                                                    ========     ==========      ==========      =======
</TABLE>

Note 10.  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
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.
Since January 1, 2003, the Company has not entered into any new guarantees.

We occupy a facility  located  in  Hauppauge  New York and use it for  executive
offices and for the testing,  storage and shipping of our products.  In February
1990,  Hauppauge Computer Works, Inc., a wholly-owned  subsidiary of the Company
("HCW"),  entered into a lease,  as amended,  with Ladokk Realty Co.  (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive   Officer,   and  Vice  President  of  Marketing  and  the  holder  of
approximately  6% of the  Company's  outstanding  Common  Stock as of August 16,
2004, Dorothy Plotkin, the wife of Kenneth Plotkin, a holder of approximately 6%
of the Company's Common Stock as of August 16, 2004 and Laura Auppele,  believed
by the Company to be the holder of  approximately  12% of the  Company's  Common
Stock as of August 16, 2004.  Until February 17, 2004,  the premises  subject to
such lease were subject to two mortgages  guaranteed by the Company. On February
17,  2004,  HCW and Ladokk  terminated  the old lease and HCW entered into a new
lease  agreement  with Ladokk  Realty Co., LLC. The lease term is for five years
and  terminates  on February  16,  2009.  Concurrently  with the new lease,  our
landlord  completed a refinancing of its  mortgages,  and the new lender did not
require  us to sign a  guarantee.  In  recognition  of  this,  we are no  longer
obligated to guarantee the landlord's mortgages.

The Company's  Audit  Committee is in the process of evaluating the February 17,
2004 lease.

                                       12

<PAGE>

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

Note 11. Arbitration and Litigation Proceedings

Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owed to the Estate based on various  corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second  quarter of fiscal year 2004 to cover
the award. The $206,250 award was paid in May 2004.

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt  with the sales  representative  for  several  years  with  respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.

The Company  accrued a charge of $500,000  during the second  fiscal  quarter of
2004 to cover the award.  Subsequent  negotiation reduced the award to $427,000,
and the Company  paid the award in June 2004.  The  reduction in the final award
has been reflected in our third quarter results.

                                       13

<PAGE>

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

Nine Month Period ended June 30, 2004 Compared to June 30, 2003
---------------------------------------------------------------

Results of  operations  for the nine months ended June 30, 2004 compared to June
30, 2003 are as follows:

<TABLE>
<CAPTION>
                                                         Nine          Nine
                                                         Months        Months
                                                         Ended         Ended         Variance         Percentage of sales
                                                         6/30/04       6/30/03          $           2004   2003     Variance
                                                         -------       -------          -           ----   ----     --------


<S>                                                   <C>            <C>             <C>           <C>     <C>             <C>
Net Sales                                             $ 48,828,873   $ 39,450,126  $ 9,378,747     100.0%  100.0%         0
Cost of sales                                           35,758,126     29,905,216    5,852,910     73.23%  75.81%     -2.58%
                                                        ----------     ----------    ---------     -----   -----       ----
Gross Profit                                            13,070,747      9,544,910    3,525,837     26.77%  24.19%      2.58%
Gross Profit %                                               26.77%         24.19%        2.58%

Costs:
Sales & Marketing                                        6,075,015      5,356,753      718,262     12.44%  13.58%     -1.14%
Technical Support                                          332,707        314,318       18,389      0.68%   0.80%     -0.12%
General & Administrative                                 2,864,727      2,397,880      466,847      5.87%   6.08%     -0.21%
                                                         ---------      ---------      -------      ----    ----       ----
Total Selling, General and Administrative costs          9,272,449      8,068,951    1,203,498     18.99%  20.46%     -1.47%
Research & Development                                   1,367,270      1,429,171      (61,901)     2.80%   3.62%     -0.82%
                                                         ---------      ---------      -------      ----    ----       ----
Total Costs                                             10,639,719      9,498,122    1,141,597     21.79%  24.08%     -2.29%
                                                        ----------      ---------    ---------     -----   -----       ----
Net operating income before arbitration & litigation     2,431,028         46,788    2,384,240      4.98%   0.11%      4.87%

Arbitration & litigation items:

Arbitration proceeding                                     206,250              -      206,250      0.43%   0.00%      0.43%
Litigation proceeding                                      427,000              -      427,000      0.87%   0.00%      0.87%
                                                           -------                     -------      ----    ----       ----
Net operating income                                     1,797,778         46,788    1,750,990      3.68%   0.11%      3.57%

Other income
------------
Interest income                                              4,373         13,148       (8,775)     0.01%   0.04%      0.43%
Foreign currency                                            21,959         40,586      (18,627)     0.04%   0.11%      0.87%
                                                            ------         ------      -------      ----    ----       ----
  Total other income                                        26,332         53,734      (27,402)     0.05%   0.15%     -0.10%
                                                            ------         ------      -------      ----    ----       ----
Income before taxes on income                            1,824,110        100,522    1,723,588      3.73%   0.26%      3.47%
Taxes on income                                            118,223         39,000       79,223      0.24%   0.10%      0.14%
                                                      ------------      ---------    ---------      ----    ----       ----
Net income                                            $  1,705,887      $  61,522   $1,644,365      3.49%   0.16%      3.33%
                                                      ============      =========    =========      ====    ====       ====
</TABLE>

Net sales for the nine months ended June 30, 2004 increased  $9,378,747 compared
to the nine months ended June 30, 2003 as shown on the table below.

<TABLE>
<CAPTION>
                                                                        Increase
                                                                        (decrease)   Increase     Percentage of sales by
                               Nine Months        Nine Months           Dollar      (decrease)      Geographic region
Location                       ended 6/30/04      ended 6/30/03         Variance     Variance %     2004          2003
--------                       -------------      -------------         --------     ----------     ----          ----

<S>                            <C>                <C>                   <C>              <C>         <C>           <C>
Domestic                       $14,366,529        $11,779,917           $2,586,612       22%         29%           30%
Europe                          33,756,324         27,127,121            6,629,203       24%         69%           69%
Asia                               706,020            543,088              162,932       30%          2%            1%
                               -----------        -----------           ----------       --         ---           ---
  Total                        $48,828,873        $39,450,126           $9,378,747       24%        100%          100%
                               ===========        ===========           ==========       ==         ===           ===
</TABLE>

The primary factors contributing the sales increase were:

o    Stronger demand for retail WinTV-PVR-250 products due to exposure generated
     from WindowsXP Media Center awareness
o    Increased  WinTV-PVR-USB2  sales due to  introduction  of lower  cost model
     during fiscal 2003
o    Introduction in early fiscal 2004 of MediaMVP product
o    Increased sales of OEM `Amity1' board for WindowsXP Media Center
o    Higher sales of WinTV-USB analog product
o    Increased DVB sales in Europe
o    Increase in our average Euro to USD contract  rate of  approximately  19.0%
     (1.1828  versus  0.9927) for the nine  months  ended June 30, 2004 over the
     same period of last year, which yielded higher converted Euro to USD sales

                                       14


<PAGE>

Results of operations-nine month period ended June 30, 2004 compared to June 30,
2003-continued
--------------

The increases were offset somewhat by:

o    Decrease in Digital Entertainment Center (DEC) sales
o    Decrease in low end WinTV family sales
o    $90,000  reduction in sales for price  protection due to anticipated  price
     reductions on older products
o    Increase in sales return reserve of $320,000 to reflect increased prior six
     month sales level and residual product returns on in-warranty products


Net sales to domestic  customers were 29% of net sales for the nine months ended
June 30, 2004 compared to 30% for the nine months ended June 30, 2003. Net sales
to European customers were 69% of net sales for the periods ending June 30, 2004
and 2003.  Net sales to Asian  customers  were 2% for the period ending June 30,
2004 compared to 1% for the period ending June 30, 2003.

Gross  profit  increased  $3,525,837  for the nine  months  ended June 30,  2004
compared to the nine months ended June 30, 2003.

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

                                                                   Increase
                                                                  (decrease)
                                                                  -----------
Due to increased sales                                            $3,061,262
Increase in gross margin on non OEM products                       1,999,051
Effect on gross margin due to lower margin OEM sales                (494,222)
Price protection                                                     (90,000)
Due to increases in labor related and other costs                   (950,254)
                                                                    --------
      Total  increase in gross profit                             $3,525,837
                                                                  ==========

Gross  profit  percentage  for the nine  months  ended June 30,  2004 was 26.77%
compared  to 24.19% for the nine  months  ended June 30,  2003,  an  increase of
2.58%.

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

                                                                   Increase
                                                                   (decrease)
                                                                   ----------

Increase in gross margin on non OEM products                           4.23%
Effect on gross margin due to lower margin OEM sales                  (1.01%)
Price protection                                                      (0.13%)
Due to increases in labor related and other costs                     (0.51%)
                                                                      -----
      Net increase in gross profit                                     2.58%
                                                                      =====


The  increase  in the gross  profit  margin  on  non-OEM  products  of 4.23% was
primarily due to:

o    Cost  reductions  attained  during fiscal 2003 and the first half of fiscal
     2004
o    Cost reduced versions of the  WinTV-PVR-250 and  WinTV-PVR-USB2  introduced
     during fiscal 2003
o    Increase in our average  Euro to USD contract  rates,  used to convert Euro
     sales to U.S.  dollar  sales,  of 19% (1.1828  versus  0.9927) for the nine
     months  ended June 30, 2004 over the same period of last year.  Since about
     75% of our European  inventory is purchased in U.S. dollars,  while most of
     the  European  sales are  invoiced in Euros or Great  British  Pounds,  the
     Company benefits from the higher converted Euro to U.S. dollar sales, which
     are sold against either stable or declining U.S. dollar unit inventory cost
o    Sales of lower margin DEC products  declined as a percentage  of sales from
     last year

The decrease in the gross profit percentage of 1.01%  attributable to the mix of
OEM sales for the nine months ended June 30, 2004 was due to the increase in OEM
sales.  The higher mix of lower margin OEM sales during the first nine months of
fiscal 2004 compared to fiscal 2003 caused a decrease in gross profit percent of
1.01% over the prior year.

                                       15


<PAGE>

Results of operations-nine month period ended June 30, 2004 compared to June 30,
2003-continued
--------------

The decrease in the gross margin percent of 0.51%  attributable to labor related
and  other  costs  for the  nine  months  ended  June  30 , 2004  was due to the
percentage  increase in labor  related and other costs for the nine months ended
June 30, 2004 over the nine months ended June 30, 2003 of 32.18%  exceeding  the
percentage increase in sales of 23.77%.

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

<TABLE>
<CAPTION>
                                                Nine months ended June  30,
                                                ---------------------------
                                                       Dollar Costs                                Percentage of Sales
                                     ------------------------------------------------------------------------------------------
                                                                             Increase                                Increase
                                           2004             2003             (Decrease)         2004         2003    (Decrease)
                                     ---------------- ------------------ ------------------ ------------ ---------- ------------
<S>                                    <C>                <C>                <C>               <C>          <C>         <C>
Sales and Marketing                    $6,075,015         $5,356,753         $ 718,262         12.44%       13.58%     -1.14%
Technical  Support                        332,707            314,318            18,389          0.68%        0.80%     -0.12%
General and Administrative              2,864,727          2,397,880           466,847          5.87%        6.08%     -0.21%
                                        ---------          ---------           -------          ----         ----       ----
    Total                              $9,272,449         $8,068,951        $1,203,498         18.99%       20.46%     -1.47%
                                       ==========         ==========        ==========         =====        =====       ====
</TABLE>

Selling, General and Administrative expenses increased $1,203,498 from the prior
year. As a percentage of sales,  Selling,  General and  Administrative  expenses
decreased by 1.47% when compared to the nine months ended June 30, 2003.

The increase in Sales and  Marketing  expense of $718,262,  which  accounted for
approximately 60% of the total increase in Selling,  General and  Administrative
expenses, was mainly due to:

o    Higher advertising costs of $303,199 due to higher sales based co-operative
     advertising and increased special promotions
o    Higher  advertising  costs of $181,030 due to higher translated Euro to U.S
     dollar amounts due to the strengthening of the Euro against the USD
o    Increased commission expense of $73,889 due to higher sales
o    Increased  commission  expense of $47,306 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 $193,684 due to higher translated
     Euro to U.S dollar amounts due to the strengthening of the Euro against the
     USD
o    Increased European merchandising programs of $76,684
o    Increased public relation costs for product launches of $41,076
o    Higher  European  rep costs of $ 80,395 due to  addition of rep and support
     costs
o    Lower merchandise material promotions of $99,158
o    Lower sales office expenses of $187,220 due to personnel shift and stricter
     budget controls

The increase in General and  Administrative  expenses of $466,847 was  primarily
due to:

o    Higher  legal and legal  related  costs of $311,922 due to  litigation  and
     arbitration cases
o    Directors fees of $70,924
o    European accounting service fees $40,756
o    Increment  to account  receivables  reserves  of $25,000 in  reflection  of
     higher sales

Research and Development expenses decreased $61,901. The decrease was mainly due
to lower  compensation  costs attributable to open positions not filled and less
use of third party software development in fiscal 2004 compared to fiscal 2003.

                                       16


<PAGE>

Results of  operations-nine  month period  ended June 30, 2004  compared to June
30,2003 continued
-----------------

Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owed to the Estate based on various  corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second  quarter of fiscal year 2004 to cover
the award. The $206,250 award was paid in May 2004.

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt with the said sales  representative  for several years with respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.

The Company  accrued a charge of $500,000  during the second  fiscal  quarter of
2004 to cover the award.  Subsequent  negotiation reduced the award to $427,000,
and the Company  paid the award in June 2004.  The  reduction in the final award
has been reflected in our third quarter results.

Other income

Net other income for the nine months ended June 30, 2004 was $26,332 compared to
net other  income of $53,734 for the nine months ended June 30, 2003 as detailed
below:

                                                   Nine months ended June 30,
                                                     2004                2003
                                                     ----                ----

  Interest income                                  $  4,373            $13,148
  Foreign currency transaction gains (losses)        21,959             40,586
                                                     ------             ------
  Total other income  (expense)                    $ 26,332            $53,734
                                                   ========            =======

Re-measurement  of accounts denominated in currencies other than the Euro

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,  excluding  inter-company  accounts which are long
term in nature,  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.

                                       17


<PAGE>

Results of  operations-nine  month period  ended June 30, 2004  compared to June
30, 2003 continued
------------------

Re-measurement   of  accounts   denominated   in   currencies   other  than  the
Euro-continued

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  foreign currency  transaction gains
(losses).

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 denominated  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 gain
of $704,183 recorded on the balance sheet as of September 30, 2003. For the nine
months ended June 30 2004,  the Company  recorded on the balance sheet  deferred
translation  gains  $466,131  resulting  in a  translation  gain  of  $1,170,314
recorded as a component of accumulated other comprehensive income as of June 30,
2004.

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 SFAS 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. The
Company had mark to market  losses of $234,591  recorded on the balance sheet as
of  September  30, 2003.  For the nine months  ended June 30, 2004,  the Company
recorded, as a component of other comprehensive income, a mark to market gain of
$214,116, resulting in a mark to market loss of $20,475 for contracts open as of
June 30, 2004.

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):
<TABLE>
<CAPTION>
                                          Balance      Oct 03 to    Balance       Jan  04 to    Balance      April 04 to   Balance
                                           As of        Dec 03       As of         Mar  04       As of         June 04      As of
                                          Sept 30,       Gains      Dec 31,         Gains       Mar 31,         Gains      June 30,
Accumulated other comprehensive income      2003       (losses)      2003          (losses)      2004         (losses)      2004
--------------------------------------      ----       --------      ----          --------      ----         --------      ----
<S>                                     <C>           <C>         <C>             <C>         <C>            <C>         <C>
Translation  gains                      $ 704,183     $  849,969  $1,554,152      $(142,087)  $1,412,065     $(241,751)  $1,170,314
FAS 133 mark to market adjustments       (234,591)       204,461     (30,130)       (16,483)     (46,613)       26,138      (20,475)
                                         --------        -------     -------        -------      -------        ------      -------
                                        $ 469,592     $1,054,430  $1,524,022      $(158,570)  $1,365,452     $(215,613)  $1,149,839
                                        =========     ==========  ==========      =========   ==========     =========   ==========
</TABLE>

                                       18


<PAGE>

Results of  operations-nine  month period  ended June 30, 2004  compared to June
30,2003- continued
------------------

Tax provision

Our net tax  provision  for the nine  months  ended June 30, 2004 and 2003 is as
follows:

                                                    Nine months ended June  30,
                                                    ---------------------------
                                                       2004              2003
                                                       ----              ----
Tax (benefit) attributable to U.S operations        $(485,000)        $(603,500)
Tax  expense  European operations                     103,223            39,000
State taxes                                            15,000            14,000
Deferred tax asset valuation allowance                485,000           589,500
                                                      -------           -------
Net tax provision                                   $ 118,223         $  39,000
                                                    =========         =========

For the last four fiscal years, our domestic  operation has incurred losses.  We
analyzed the future  realization  of our deferred tax assets as of June 30, 2004
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 loss  incurred  in the first and second  quarters of
fiscal 2004 from domestic operations.

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 earned net
income of $1,705,887 for the nine months ended June 30, 2004,  which resulted in
basic net income per share of $0.19 and diluted net income per share of $0.18 on
weighted   average  basic  and  diluted   shares  of  8,943,087  and  9,692,475,
respectively, compared to a 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.

Options to  purchase  111,304  and  1,028,522  shares of common  stock at prices
ranging $5.25 to $10.06 and $1.88 and $10.06, respectively, were outstanding for
the nine month period ending June 30, 2004 and 2003, respectively,  but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive.

                                       19

<PAGE>

Three Month Period ended June 30, 2004 Compared to June 30, 2003
----------------------------------------------------------------

Results of operations for the three months ended June 30, 2004 compared to June
30, 2003 are as follows:

<TABLE>
<CAPTION>
                                                             Three       Three
                                                            Months      Months
                                                             Ended        Ended       Variance          Percentage of sales
                                                           6/30/04      6/30/03          $         2004    2003       Variance
                                                           -------      -------          -         ----    ----       --------
<S>                                                   <C>            <C>             <C>          <C>      <C>          <C>
Net Sales                                             $ 13,794,292   $ 10,010,782    $3,783,510   100.00%  100.00%      0.00%
Cost of sales                                           10,236,138      7,756,306     2,479,832    74.21%   77.48%     -3.27%
                                                        ----------      ---------     ---------    -----    -----       ----
Gross Profit                                             3,558,154      2,254,476     1,303,678    25.79%   22.52%      3.27%
Gross Profit %                                               25.79%         22.52%         3.27%

Costs:
Sales & Marketing                                        1,907,692      1,655,344       252,348    13.83%   16.54%     -2.71%
Technical Support                                          116,763        114,543         2,220     0.85%    1.14%     -0.29%
General & Administrative                                   903,609        868,290        35,319     6.55%    8.67%     -2.12%
                                                           -------        -------        ------     ----     ----       ----
Total Selling, General and Administrative costs          2,928,064      2,638,177       289,887    21.23%   26.35%     -5.12%
Research & Development                                     512,606        487,847        24,759     3.71%    4.88%     -1.17%
                                                           -------        -------        ------     ----     ----       ----
Total Costs                                              3,440,670      3,126,024       314,646    24.94%   31.23%     -6.29%
                                                         ---------      ---------       -------    -----    -----       ----

Net operating income (loss) before arbitration &
   litigation                                              117,484       (871,548)      989,032     0.85%   -8.71%      9.56%
Arbitration & litigation items:
Litigation proceeding                                      (73,000)             -       (73,000)   -0.53%    0.00%     -0.53%
                                                           -------      ---------       -------     ----     ----       ----
Net operating income (loss)                                190,484       (871,548)    1,062,032     1.38%   -8.71%     10.09%

Other income
------------
Interest income                                              1,237          3,143        (1,906)    0.01%   0.03%     -0.02%
Foreign currency                                                60         12,940       (12,880)    0.00%   0.13%     -0.13%
                                                                --         ------       -------     ----    ----       ----
  Total other income                                         1,297         16,083       (14,786)    0.01%   0.16%     -0.15%
                                                             -----         ------       -------     ----    ----       ----
Income  before taxes on income                             191,781       (855,465)    1,047,246     1.39%  -8.55%      9.94%
Taxes on income                                             23,144              -        23,144     0.17%   0.00%      0.17%
                                                            ------                        ------     ----    ----       ----
Net income  (loss)                                      $  168,637    $  (855,465)   $1,024,102     1.22%  -8.55%      9.77%
                                                        ==========    ===========    ==========     ====    ====       ====
</TABLE>


Net sales for the three months ended June 30, 2004 increased $3,783,510 over the
three months ended June 30, 2003 as shown in the table below.

<TABLE>
<CAPTION>
                                                         Increase
                                                        (decrease)      Increase      Percentage of sales by
                Three  Months      Three  Months          Dollar       (decrease)    Geographic region
Location        ended 6/30//04     ended 6/30/03         Variance       Variance %     2004           2003
--------        --------------     -------------         --------       ----------     ----           ----
<S>             <C>                <C>                <C>                  <C>           <C>          <C>
Domestic        $   4,410,222      $  3,104,548       $  1,305,674         42%           32%          30%
Europe              9,146,161         6,746,029          2,400,132         36%           66%          69%
Asia                  237,909           160,205             77,704         49%            2%           1%
                      -------           -------             ------         --             -            -
  Total         $  13,794,292      $ 10,010,782       $  3,783,510         38%          100%         100%
                =============      ============       ============         ==           ===          ===
</TABLE>

The primary factors contributing the sales increase were:

o    Stronger demand for retail WinTV-PVR-250 products due to exposure generated
     from WindowsXP Media Center awareness
o    Increased  WinTV-PVR-USB2  sales due to  introduction  of lower  cost model
     during fiscal 2003
o    Higher sales of WinTV-USB analog product
o    Increased  sales  of  analog  product  due to  sales  to  direct  corporate
     customers
o    Introduction in early fiscal 2004 of Media MVP product
o    Increase in our average  Euro to USD  contract  rate of  approximately  16%
     (1.2122  versus  1.0480) for the three  months ended June 30, 2004 over the
     three months ended June 30, 2003,  which yielded  higher  converted Euro to
     USD sales

                                       20


<PAGE>

Results of  operations-three  month period ended June 30, 2004  compared to June
30,2003-continued
-----------------

The sales increases were offset by the following negative trends:

o    Decrease in WinTV-PVR-250 OEM sales
o    Decrease in Digital Entertainment Center (DEC) sales
o    $90,000  reduction in sales for price  protection due to anticipated  price
     reductions on older products

Net sales to domestic customers were 32% of net sales for the three months ended
June 30, 2004  compared to 31% for the three  months  ended June 30,  2003.  Net
sales to European  customers  were 66% of net sales compared to 67% for the same
quarter of last year. Net sales to Asian customers were 2% for both periods.

Gross  profit  increased  $1,303,678  for the three  months  ended June 30, 2004
compared to the prior year's third quarter.

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

                                                                Increase
                                                               (decrease)
                                                               ----------
Due to increased sales                                         $1,289,600
Increase in gross margin on non OEM products                      327,132
Effect on gross margin due to lower margin OEM sales              139,742
Price protection                                                  (90,000)
Due to increases in labor related and other costs                (362,796)
                                                                ---------
       Total increase in gross profit                          $1,303,678
                                                                ---------

Gross  profit  percentage  for the three  months  ended June 30, 2004 was 25.79%
compared  to 22.52% for the three  months  ended June 30,  2003,  an increase of
3.27%.

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

                                                             Increase
                                                            (decrease)
                                                            ----------
Increase in gross margin on non OEM products                   2.78%
Effect on gross margin due to lower margin OEM sales           1.01%
Price protection                                              (0.41)
Due to increases in labor related and other costs             (0.11)%
                                                              -----
        Net increase in gross profit                           3.27%
                                                              =====

The increase in the gross profit  margin  percent of 2.78% for non-OEM  products
was primarily due to:

o    Cost  reductions  attained  during fiscal 2003 and the first half of fiscal
     2004
o    Cost reduced versions of the  WinTV-PVR-250 and  WinTV-PVR-USB2  introduced
     during fiscal 2003
o    Increase in our average  Euro to USD contract  rates,  used to convert Euro
     sales to U.S.  dollar  sales,  of about 16% for the three months ended June
     30, 2004 (1.2122  versus  1.0480) over the same period of last year.  Since
     about 75% of our European  inventory is  purchased in U.S.  dollars,  while
     most of the European  sales are invoiced in Euros or Great British  Pounds,
     the Company  benefits from the higher  converted Euro to U.S. dollar sales,
     which  are sold  against  either  stable  or  declining  U.S.  dollar  unit
     inventory cost
o    Sales of lower  margin DEC boards  declined as a  percentage  of sales from
     last year

The increase in the gross profit percentage of 1.01%  attributable to the mix of
OEM sales for the three months ended June 30, 2004 was due to the following:

o    Decreased sales of our OEM WinTV-PVR-250  boards for the three months ended
     June 30, 2004.
o    Higher gross profit percentage. The decrease in OEM sales in actual dollars
     and as a percent of sales coupled with higher a gross profit resulted in an
     increase in the gross profit percent attributable to OEM sales of 1.02%.

                                       21


<PAGE>

Results of  operations-three  month period ended June 30, 2004  compared to June
30,2003-continued
-----------------

The decrease in the gross margin percent of 0.11%  attributable to labor related
and  other  costs  for the  three  months  ended  June  30,  2004 was due to the
percentage  increase in labor related and other costs for the three months ended
June 30, 2004 over the nine months ended June 30, 2003 of 39.95%  exceeding  the
percentage increase in sales of 37.79%.

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

<TABLE>
<CAPTION>
                                         Three months ended June  30,
                                         ----------------------------
                                                  Dollar Costs                                Percentage of Sales
                                      ------------------------------------------------------------------------------------------
                                                                         Increase                                    Increase
                                           2004            2003          (Decrease)            2004       2003      (Decrease)
                                           ----            ----          ----------            ----       ----      ----------
<S>                                    <C>              <C>              <C>                  <C>        <C>           <C>
Sales and Marketing                    $1,907,692       $1,655,344       $  252,348           13.83%     16.54%       -2.71%
Technical  Support                        116,763          114,543            2,220            0.85%      1.14%       -0.29%
General and Administrative                903,609          868,290           35,319            6.55%      8.67%       -2.12%
                                          -------          -------           ------            ----       ----         ----
     Total                             $2,928,064       $2,638,177       $  289,887           21.23%     26.35%       -5.12%
     -----                             ==========       ==========       ==========           =====      =====         ====
</TABLE>

Selling,  General and Administrative  expenses increased $289,887 from the prior
year's  third  quarter.  As  a  percentage  of  sales,   Selling,   General  and
Administrative  expenses  decreased  by 5.12% when  compared to the three months
ended June 30, 2003.

The increase in Sales and  Marketing  expense of $252,348,  which  accounted for
approximately 87% of the total increase in Selling,  General and  Administrative
expenses, was mainly due to:

o    Higher advertising costs of $108,198 due to higher sales based co-operative
     advertising and increased special promotions
o    Higher  advertising  costs of $24,208 due to higher  translated Euro to U.S
     dollar amounts due to the strengthening of the Euro against the USD
o    Increased  commission  expense of $55,335 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 $31,628 due to higher  translated
     Euro to U.S dollar amounts due to the strengthening of the Euro against the
     USD
o    Increased public relation costs of $9,354
o    Higher  European  sales rep costs of  $43,970  due to  addition  of rep and
     support costs
o    Higher domestic  compensation  cost of $26,965 due to addition of OEM sales
     person
o    Lower sales office  expenses of $29,374 due to personnel shift and stricter
     budget controls
o    Lower catalogue placement costs of $14,783

The increase in General and Administrative expenses of $35,319 was primarily due
to:

o    Directors fees of $22,299
o    European accounting service fees $14,677

Research and Development expenses increased $24,749. The increase was mainly due
to higher  compensation costs attributable to additions to staff in the U.S. and
the creation of an R&D department in Taiwan.

Arbitration Proceeding

In November 2002, the estate of Kenneth  Aupperle  ("Estate") filed a demand for
arbitration against the Company with the American Arbitration  Association.  The
Estate claimed certain property rights and interest in the Company,  amounts due
and owing to the Estate based on various corporate  agreements with the late Mr.
Aupperle  and certain  insurance  policies.  The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.

                                       22


<PAGE>



Results of  operations-three  month period ended June 30, 2004  compared to June
30, 2003-continued
------------------

The  arbitration  proceeding was heard before a New York  arbitration  panel. On
April 19, 2004, the arbitration  panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded.

The Company  accrued a charge of  $206,250 in the second  quarter of fiscal year
2004 to cover the award. The $206,250 award was paid in May 2004.

Litigation Proceeding

In March 2002, Polywell International,  Inc. ("Polywell"),  a supplier of cables
to the Company,  commenced an action seeking  $339,520 in damages plus exemplary
damages,  attorney's  fees,  costs and interest with relation to certain  unpaid
invoices.  The  Company  paid these  invoices to the sales  representative,  who
subsequently  failed to forward the payments to Polywell.  The Company had dealt
with this  sales  representative  over a number of years,  who also  represented
himself as Polywell's payment and collection agent.

The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division.  Since the Company had
dealt with the said sales  representative  for several years with respect to all
purchasing and payment issues,  the Company believed that paying the invoices to
this sales  representative  was tantamount to paying Polywell.  The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest.

The Company  accrued a charge of $500,000  during the second  fiscal  quarter of
2004 to cover the award.  Subsequent  negotiation reduced the award to $427,000,
and the Company  paid the award in June 2004.  The  reduction in the final award
has been reflected in our third quarter results.

Other income

Net other income for the three months ended June 30, 2004 was $1,297 compared to
net other income of $16,083 for the three months ended June 30, 2003 as detailed
below:

                                                Three months ended June  30,
                                                    2004             2003
                                                    ----             ----
  Interest income                                $  1,237         $  3,143
  Foreign currency transaction gains                   60           12,940
                                                       --           ------
  Total other income                             $  1,297         $ 16,083
                                                 ========         ========

Re-measurement  of accounts denominated in currencies other than the Euro

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,  excluding  inter-company  accounts which are long
term in nature,  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  foreign currency  transaction gains
(losses).

                                       23


<PAGE>


Results of  operations-three  month period ended June 30, 2004  compared to June
30, 2003-continued
------------------

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 denominated 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  gain of $704,183
recorded on the balance  sheet as of September  30,  2003.  For the three months
ended June 30,  2004,  the Company  recorded on the  balance  sheet  translation
losses of $241,751. For the nine months ended June 30 2004, the Company recorded
on  the  balance  sheet  deferred  translation  gains  $466,131  resulting  in a
translation  gain of  $1,170,314  recorded as a component of  accumulated  other
comprehensive income as of June 30, 2004.

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 SFAS 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. The
Company had mark to market  losses of $234,591  recorded on the balance sheet as
of  September  30, 2003.  For the three months ended June 30, 2004,  the Company
recorded as a component of other  comprehensive  income a mark to market loss of
$26,138.  For the nine months  ended June 30,  2004,  the Company  recorded,  as
component  of other  comprehensive  income,  a mark to market gain of  $214,116,
resulting in a mark to market loss of $20,475 for contracts  open as of June 30,
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):

<TABLE>
<CAPTION>
                                          Balance      Oct 03 to    Balance       Jan 04 to     Balance      April 04 to   Balance
                                           As of        Dec 03       As of         Mar  04       As of         June 04      As of
                                          Sept 30,       Gains      Dec 31,         Gains       Mar 31,         Gains      June 30,
Accumulated other comprehensive income      2003       (losses)      2003          (losses)      2004         (losses)      2004
--------------------------------------      ----       --------      ----          --------      ----         --------      ----
<S>                                     <C>           <C>         <C>             <C>         <C>            <C>         <C>
Translation  gains                      $ 704,183     $  849,969  $1,554,152      $(142,087)  $1,412,065     $(241,751)  $1,170,314
FAS 133 mark to market adjustments       (234,591)       204,461     (30,130)       (16,483)     (46,613)       26,138      (20,475)
                                         --------        -------     -------        -------      -------        ------      -------
                                        $ 469,592     $1,054,430  $1,524,022      $(158,570)  $1,365,452     $(215,613)  $1,149,839
                                        =========     ==========  ==========      =========   ==========     =========   ==========
</TABLE>

Tax provision

Our net tax  provision  for the three  months ended June 30, 2004 and 2003 is as
follows:

                                                   Three months ended June 30,
                                                   ---------------------------
                                                     2004               2003
                                                     ----               ----

Tax (benefit) attributable to U.S operations     $ (50,900)          $(377,500)
Tax  expense  European operations                   23,144                   -
Deferred tax asset valuation allowance              50,900             377,500
                                                    ------             -------
Net tax provision                                $  23,144           $       -
                                                 =========           =========


                                       24


<PAGE>

Results of  operations-three  month period ended June 30, 2004  compared to June
30,2003-continued

For the last four fiscal years, our domestic  operation has incurred losses.  We
analyzed the future  realization  of our deferred tax assets as of June 30, 2004
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 loss  incurred in the second  quarter of fiscal 2004
from domestic operations.

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 earned net
income of $168,637,  for the three months ended June 30, 2004, which resulted in
basic and diluted net income per share of $0.02 on  weighted  average  basic and
diluted shares of 9,047,561 and 10,019,697, respectively, compared to a 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.

Options  to  purchase  38,906  and  1,782,601  shares of common  stock at prices
ranging $8.75 to $10.06 and $1.05 and $10.06, respectively, were outstanding for
the three month period ending June,  2004 and 2003,  respectively,  but were not
included in the  computation  of diluted  earnings  per share  because they were
anti-dilutive.

Seasonality

As our sales are primarily to the consumer market,  we have experienced  certain
seasonal revenue trends. Our peak sales quarter,  due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December),  followed
by our fourth fiscal quarter (July to September). In addition, our international
sales,  mostly in the European,  market,  were 68%, 73% and 77% of sales for the
years ended September 30, 2003, 2002 and 2003,  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,
                                    2004              2003
                                    ----              ----

Cash                           $   9,427,652    $   5,838,160
Working Capital                   13,820,267       10,859,953
Stockholders' Equity              14,325,849       11,468,685


We had cash and cash equivalents as of June 30, 2004 of $9,427,652,  an increase
of $3,589,492 from September 30, 2003.

The increase was due to:

Net income adjusted for non cash items                           $ 1,898,869
Decrease in accounts receivable                                    2,815,438
Increase in accounts payable other current liabilities               785,137
Proceeds from employee stock purchases                               458,363
Less cash used for:
Increase in inventories                                           (2,044,649)
Increase in prepaid expenses and other current assets               (246,501)
Capital equipment purchases                                          (77,165)
                                                                   ---------
 Net cash  increase                                               $3,589,492
                                                                  ==========

Net cash of  $3,208,294  provided by operating  activities  was primarily due to
increases in accounts  payables and accrued expenses of $785,137,  a decrease in
accounts  receivable of $2,815,438 and net income adjusted for non cash items of
$1,898,869  offset somewhat by increases in inventories and prepaid expenses and
other current assets of $2,044,649 and $246,501 respectively.

                                       25

<PAGE>

Liquidity and Capital Resources-continued

Cash of $77,165  was used to  purchase  fixed  assets.  Proceeds  from the stock
purchased  by  employees  through the  employee  stock  purchase  plan  provided
additional cash of $458,363.

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,  2004,  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,  2004 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.

Future Contractual Obligations

The following table shows the Company's contractual obligations related to lease
obligations as of June 30, 2004:

<TABLE>
<CAPTION>
                                                                Payments due by period
Contractual obligations                      Total             1 year         1-3 years           Over 3 years
-----------------------                      -----             ------         ---------           ------------

<S>                                       <C>               <C>             <C>                    <C>
Operating lease obligations               $ 2,022,605       $ 568,015       $ 1,049,590            $ 405,000
                                          ===========       =========       ===========            =========
</TABLE>

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 European subsidiary inventory purchases  denominated in
     U.S. dollars
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

                                       26


<PAGE>

Management's Estimates-continued

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  approximating  the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results may differ from these estimates.

Our European subsidiary accounted for approximately 67% and 71% of our net sales
for fiscal 2003 and fiscal 2002,  respectively.  All of our  European  sales are
denominated in local currencies,  primarily the Euro and Great British Pound. On
the supply  side,  since we  predominantly  deal with North  American  and Asian
suppliers,  approximately  75% of our  inventory  supporting  our Euro and Great
British  Pound  sales  are  purchased  and paid in U.S.  Dollars.  Consequently,
changes in exchange rates expose our U.S. denominated  inventory on the books of
our European  subsidiary to market risks resulting from the  fluctuations in the
foreign currency  exchange rates to the U.S.  Dollar.  In an attempt to minimize
these  risks,   we  enter  into  forward   exchange   contracts  with  financial
institutions.

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 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:

o    Actual inventory  purchases may fluctuate from our estimates,  resulting in
     excess contracts
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 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,  with the exception of gains and
losses that are  attributable to  inter-company  accounts which are long term in
nature,  we are  obligated to include these gains and losses on our statement of
operations,  which we report in other  income or expense  under the  description
foreign currency transaction gains (losses).

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.


                                       27

<PAGE>
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.

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.

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

Derivatives and Hedging Activities

Product is invoiced to our European  customers in local  currencies and payments
from our  customers  are received in local  currencies  (primarily  the Euro and
Great British Pound). On the supply side, since we predominantly deal with North
American and Asian suppliers,  approximately 75% of our inventory supporting our
Euro and Great  British  Pound  sales are  purchased  and paid in U.S.  Dollars.
Consequently, changes in exchange rates expose our U.S. denominated inventory on
the  books  of our  European  subsidiary  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. The purpose of these forward contracts is
to hedge the foreign  currency market  exposures  underlying the forecasted U.S.
Dollar denominated inventory purchases required to support our European 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 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.

As  of  June  30  2004,  we  had  foreign  currency  contracts   outstanding  of
approximately  $3,926,000 against the delivery of the Euro. The contracts expire
through December 2004. 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,

                                       28

<PAGE>

Derivatives and Hedging Activities-continued

2004, a deferred loss of $20,475 reflecting the net mark to market loss of our
derivatives was recorded as a component of accumulated other comprehensive
income on our balance sheet.

The Company uses the average monthly forward contract exchange rate to translate
Euro sales into our U.S. dollars reporting currency.  For the three months ended
June 30, 2004,  using the average  contract rate resulted in an increase in Euro
to U.S.  dollar  translated  sales of $45,403.  For the nine month period ending
June 30,  2004,  if the Company had used the  average  spot rate,  we would have
recorded an increase in Euro to U.S dollar  translated sales of $863,965 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,  2003,  if the Company had used the  average  spot rate,  we would have
recorded  an  increase in Euro to U.S dollar  translated  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.


<PAGE>

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
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that our disclosure  controls and procedures  were effective as of June 30, 2004
in  alerting  them in a timely  manner to  material  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, 2004 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,  2003),  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.

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

Item 1.  Legal Proceedings

We were  involved in  arbitration  proceedings  before the American  Arbitration
Association,  which had been  brought  against  the Company by the estate of the
late Mr. Kenneth Aupperle  ("Estate").  The Estate was 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.

On April 19, 2004, the arbitration panel awarded the estate of Kenneth Aupperle,
one of the  Company's  founders and former  President,  a total of $206,250.  No
other fees or expenses were awarded.

The Company  accrued a charge of  $206,250 in the second  quarter of fiscal year
2004 to cover the award. The award was paid in May 2004.

                                       29

<PAGE>



Item 1. Legal Proceedings-continued

See Note 11 in the "NOTES TO CONDENSED  CONSOLIDATED  FINANCIAL  STATEMENTS" and
"Managements  discussion  and  analysis of  financial  results"  with respect to
certain litigation with Polywell International, Inc.

Item 5. Other information

This  information  shall not be deemed "filed" for purposes of Section 18 of the
Securities   Exchange  Act  of  1934,  as  amended  (the  "Exchange   Act"),  or
incorporated  by reference in any filing under the  Securities  Act of 1933,  as
amended or the Exchange  Act except as shall be expressly  set forth by specific
reference in such a filing.

We occupy a facility  located  in  Hauppauge  New York and use it for  executive
offices and for the testing,  storage and shipping of our products.  In February
1990,  Hauppauge Computer Works, Inc., a wholly-owned  subsidiary of the Company
("HCW"),  entered into a lease,  as amended,  with Ladokk Realty Co.  (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive   Officer,   and  Vice  President  of  Marketing  and  the  holder  of
approximately 6% of the Company's  outstanding  Common Stock as of May 14, 2004,
Dorothy Plotkin,  the wife of Kenneth  Plotkin,  a holder of approximately 6% of
the Company's Common Stock as of May 14, 2004 and Laura Auppele, believed by the
Company to be the holder of  approximately  12% of the Company's Common Stock as
of May 14, 2004.  Until  February 17, 2004,  the premises  subject to such lease
were subject to two mortgages  guaranteed  by the Company.  On February 17, 2004
HCW and  Ladokk  terminated  the old  lease  and HCW  entered  into a new  lease
agreement  with  Ladokk  Realty Co.,  LLC.  The lease term is for five years and
terminates on February 16, 2009.  Concurrently  with the new lease, our landlord
completed a refinancing of its mortgages,  and the new lender did not require us
to sign a  guarantee.  In  recognition  of this,  we are no longer  obligated to
guarantee the landlord's mortgages.

The Company's  Audit  Committee is in the process of evaluating the February 17,
2004 lease.

On August 12 2004, HAUPPAUGE DIGITAL, INC. issued a press release announcing its
financial  results for the fiscal  quarter  ended June 30,  2004. A copy of this
press release is furnished as Exhibit 99.1 to this Report.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1 Certification of 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

99.1 Press Release, dated August 12, 2004 issued by HAUPPAUGE DIGITAL, INC.

(b) Reports on Form 8-K

None


                                       30

<PAGE>
                                   SIGNATURES

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


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


Date: August 16, 2004                      By:  /s/ Kenneth Plotkin
                                              ---------------------------------
                                              KENNETH  PLOTKIN
                                              Chief Executive Officer, Director,
                                              Vice President of Marketing
                                             (Principal Executive Officer)
                                              and Director



Date: August 16, 2004                      By: /s/ Gerald Tucciarone
                                               --------------------------------
                                               GERALD TUCCIARONE
                                               Treasurer and Chief
                                               Financial Officer


                                       31