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

                                   FORM 10-QSB

(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, 1998

                                       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 SMALL BUSINESS ISSUER 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)

                                 (516) 434-1600
                           (Issuer's telephone number)

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

As of August 4,  1998,  4,416,202  shares of .01 par value  Common  Stock of the
registrant were outstanding, not including treasury shares

Index schedule found on Page No.  16

Page 1 of 17 pages.

                                       -1-
<PAGE>


                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES


                                      INDEX


PART I. FINANCIAL INFORMATION
-----------------------------
                                                                        Page No.
                                                                        --------
Item 1.Financial Statements

Condensed Consolidated Balance Sheets-
   June 30, 1998 and September 30, 1997                                        3

Condensed Consolidated Statements of Income-
   Nine  Months ended June 30, 1998 and 1997                                   4

Condensed Consolidated Statements of Income-
  Three Months ended June 30, 1998 and 1997                                    5

Condensed Consolidated Statements of Cash Flows-
  Nine Months ended June 30, 1998 and 1997                                     6

Notes to Condensed Consolidated Financial Statements                         7-9

Item 2. Management's Discussion and Analysis of  Financial Condition       10-15
           and Results of Operations


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

Item 5.  Other Information                                                    16

Item 6.  Exhibits and Reports on form 8-K                                     16


SIGNATURES                                                                    17
----------                                                                    




                                       -2-

<PAGE>


PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements

<TABLE>
<CAPTION>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS



ASSETS
                                                                                          June 30,
                                                                                            1998           September 30,
                                                                                        (Unaudited)             1997
                                                                                      ----------------    ----------------
 CURRENT ASSETS:
<S>                                                                                         <C>                 <C>       
     Cash and cash  equivalents                                                             $5,379,142          $5,602,412
     Accounts receivable, net of allowance for doubtful accounts                             5,097,148           3,194,128
     Inventories (Note 2)                                                                    5,269,996           4,844,366
     Prepaid expenses and other current assets                                                 507,359             553,540
                                                                                      ----------------    ----------------       
                Total current assets                                                        16,253,645          14,194,446

     Property, plant and equipment-at cost                                                     745,884             494,220
     Less: Accumulated depreciation and amortization                                           324,830             276,832
                                                                                      ----------------    ----------------
                                                                                               421,054             217,388
                                                                                      ----------------    ----------------
     Security deposits and other non-current assets                                             58,154              59,470
                                                                                      ----------------    ----------------
                                                                                           $16,732,853         $14,471,304
                                                                                           ===========         ===========
                                                                                      

 LIABILITIES AND SHAREHOLDERS' EQUITY :

 CURRENT LIABILITIES:
    Accounts payable                                                                        $4,603,729          $4,403,787
    Accrued expenses                                                                         2,046,068           1,100,745
                                                                                      ----------------    ----------------
              Total current liabilities                                                      6,649,797           5,504,532
                                                                                      ----------------    ----------------


 SHAREHOLDERS' EQUITY
    Common stock $.01 par value; 10,000,000 shares authorized, 4,497,402 and
       4,465,302  issued as of June 30 , 1998  and September 30, 1997 respectively              44,974              44,653
    Additional paid-in capital                                                              10,454,987          10,344,844
    Accumulated deficit                                                                      (117,906)         (1,228,772)
    Treasury Stock, at cost, 81,200 and  59,200 shares  respectively (Note 5)                (298,999)           (193,953)
                                                                                      ----------------    ----------------
                                                                                            10,083,056           8,966,772
                                                                                      ----------------    ----------------
                                                                                           $16,732,853         $14,471,304
                                                                                      ================    ================


 See accompanying notes to consolidated financial statements

                                       -3-
<PAGE>

</TABLE>




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



<CAPTION>
                                                                                   Nine months           Nine months
                                                                                     ended                  ended
                                                                                   June 30,                June 30,
                                                                                      1998                  1997
                                                                                   (Unaudited)           (Unaudited)
                                                                                -----------------     ------------------

<S>                                                                                   <C>                    <C>        
NET SALES                                                                             $26,443,939            $18,695,544

COST OF SALES                                                                          19,820,546             14,426,315
                                                                                -----------------     ------------------
    Gross Profit                                                                        6,623,393              4,269,229

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                            4,649,857              3,071,592
RESEARCH & DEVELOPMENT EXPENSES                                                           576,670                395,577
                                                                                -----------------     ------------------
    Income from operations                                                              1,396,866                802,060

OTHER INCOME (EXPENSE):
  Interest income                                                                         178,875                185,033
  Other, net                                                                               81,940               (14,015)
                                                                                -----------------     ------------------
      Income before income tax provision                                                1,657,681                973,078

INCOME TAX PROVISION (Note 4)                                                             546,815                220,927
                                                                                -----------------     ------------------
      Net income                                                                       $1,110,866               $752,151
                                                                                       ==========               ========
                                                                                
Net income per share-basic (Note 3)                                                         $0.25                  $0.17

Net income per share-diluted (Note 3)                                                       $0.24                  $0.17
                                   =                                            =================     ==================
 

   See accompanying notes to consolidated financial statements

</TABLE>





                                       -4-


<PAGE>


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


<CAPTION>
                                                                                   Three months            Three months
                                                                                     ended                     ended
                                                                                     June 30,                June 30,
                                                                                      1998                    1997
                                                                                  (Unaudited)              (Unaudited)
                                                                               ------------------     -----------------

<S>                                                                                    <C>                   <C>       
NET SALES                                                                              $9,042,704            $5,843,431

COST OF SALES                                                                           6,628,542             4,531,054
                                                                               ------------------     -----------------
    Gross Profit                                                                        2,414,162             1,312,377

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                            1,800,393             1,057,306
RESEARCH & DEVELOPMENT EXPENSES                                                           228,389               156,178
                                                                               ------------------     -----------------
    Income from operations                                                                385,380                98,893

OTHER INCOME (EXPENSE):
  Interest income                                                                          58,480                57,260
  Other, net                                                                               21,301               (2,512)
                                                                               ------------------     -----------------
      Income before income tax provision                                                  465,161               153,641

INCOME TAX PROVISION (Note 4)                                                             154,000                35,000
                                                                               ------------------     -----------------
      Net income                                                                         $311,161              $118,641
                                                                                         ========              ========
                                                                               

Net income per share-basic (Note 3)                                                         $0.07                $0.03

Net income per share-diluted (Note 3)                                                       $0.07                $0.03
                                   =                                            =================     ================


See accompanying notes to consolidated financial statements

</TABLE>

                                       -5-

<PAGE>




<TABLE>
                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




<CAPTION>
                                                                                        Nine months            Nine months
                                                                                            ended                 ended
                                                                                          June 30,              June 30,
                                                                                            1998                  1997
                                                                                        (Unaudited)            (Unaudited)
                                                                                  ------------------    ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                       <C>                     <C>     
  Net income                                                                              $1,110,866              $752,151
                                                                                  ------------------    ------------------
   Adjustments  to  reconcile  net  income  to net cash  provided  by (used  in)
    operating activities:
     Depreciation and amortization                                                            49,311                31,896
     Provision for uncollectible accounts receivable                                          10,000                 9,367
     Provision for system board obsolescence                                                  80,000                20,000
     Compensation paid in stock                                                               29,656                     -
     Changes in current assets and liabilities:
      Accounts receivable                                                                (1,913,017)               393,032
      Inventories                                                                          (505,630)           (2,703,195)
      Prepaid expenses and other current assets                                               46,181             (158,427)
      Accounts payable                                                                       199,942               575,161
      Accrued expenses                                                                       945,323                92,082
                                                                                  ------------------    ------------------
                                                                                         (1,058,234)           (1,740,084)
                                                                                  ------------------    ------------------
        Net cash provided by (used in)  operating activities                                  52,632             (987,933)
                                                                                  ------------------    ------------------


CASH FLOWS FROM INVESTING ACTIVITIES:
     Security Deposit                                                                              -               (2,220)
    Purchases of property, plant and equipment                                             (251,664)              (80,982)
                                                                                  ------------------    ------------------
               Net cash used in investing activities                                       (251,664)              (83,202)
                                                                                  ------------------    ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock                                                                 (105,046)             (193,952)
Proceeds from the exercise of stock options                                                   80,808                     -
                                                                                  ------------------    ------------------
        Net cash used by financing activities                                               (24,238)             (193,952)
                                                                                  ------------------    ------------------
        Net  (decrease) in cash and cash equivalents                                       (223,270)           (1,265,087)
CASH AND CASH EQUIVALENTS, beginning of period                                             5,602,412             6,559,175
                                                                                  ------------------    ------------------
CASH AND CASH EQUIVALENTS, end of period                                                  $5,379,142            $5,294,088
                                                                                          ==========            ==========
SUPPLEMENTAL DISCLOSURES:

   Income taxes paid                                                                         $42,306               $11,774
                                                                                             =======               =======
                                                                                  
</TABLE>

See accompanying notes to consolidated financial statements


                                       -6-

<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-QSB. Accordingly, these statements do not include all of
the information required by generally accepted accounting  principles for annual
financial statements, and are subject to year-end adjustments. In the opinion of
management,  all known adjustments  (consisting of normal recurring accruals and
reserves)  necessary to present fairly the quarterly  financial  results for the
period have been included. It is suggested that these interim statements be read
in conjunction  with the financial  statements and related notes included in the
Company's September 30, 1997 Form 10-KSB.

     The  operating  results for the three months and nine months ended June 30,
1998 are not  necessarily  indicative  of the  results  to be  expected  for the
September 30, 1998 year end.

NOTE 2. INVENTORIES

     Inventories  have been valued at the lower of average  cost or market.  The
components of inventory at June 30, 1998 and September 30, 1997 consist of:

                                     June 30,            September 30,
                                      1998                   1997
                                      ----                   ----


     Component    Parts            $1,580,999            $1,545,790
     Work in Progress                 790,499             2,181,249
     Finished Goods                 2,898,498             1,117,327
                                    ---------             ---------
                                   $5,269,996            $4,844,366
                                   ==========            ==========


NOTE 3. NET INCOME PER SHARE 

     In 1997,  The  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards Number 128, "Earnings per Share." Statement 128
replaced the previously  reported  primary and fully diluted earnings per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share.  Net income per share  amounts for the three months and nine
months  ended June 30, 1998 and 1997 have been  presented  or, as in the case of
the prior year, restated to conform to Statement 128 requirements. Conformity to
Statement  128 did not have a material  affect on the previous  year's  reported
third quarter and year to date earnings per share.



                                       -7-
<PAGE>


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

                                   (Unaudited)

Net income (loss) per share - continued

     Weighted average shares outstanding listed below were used in the basic and
diluted per share computation:

                                                       Three Months Ended
                                                            June 30,
                                                    1998                1997
                                                    ----                ----

                                                  4,406,870         4,411,893
Weighted average shares outstanding-basic
Common stock equivalents                            343,584             4,810
                                                 -----------        ---------
Weighted average shares outstanding-diluted       4,750,454         4,416,703
                                                 ----------         ---------

                                                        Nine Months Ended 
                                                             June 30,
                                                    1998               1997
                                                   ----                ----
 
                                                  4,404,545         4,434,630
Weighted average shares outstanding-basic
Common stock equivalents                            206,625            10,186
                                                 -----------        ---------
Weighted average shares outstanding-diluted       4,611,170         4,444,816
                                                 ----------         ---------

     On November 8, 1996, the Company  approved a stock repurchase  program.  On
December 17, 1997,  the buyback plan was extended  until  December 31, 1998 (See
note 5). Shares  outstanding for the quarter and nine months ended June 30, 1998
reflect a reduction  on a weighted  average  basis for the  repurchased  shares.
Weighted average shares for the quarter and nine months ended June 30, 1997 have
been restated to reflect the provisions of SFAS Number 128

NOTE 4. INCOME TAXES

     Income taxes are based on annualized  statutory rates for federal and state
income taxes.  The provision for income taxes  reflects an annualized  effective
tax rate after  deductions  for the  utilization of restricted  carry  forwards,
adjusted for applicable  federal and state  alternative  minimum tax provisions.
The benefits of these  operating loss carry forwards had previously been subject
to a 100%  valuation  allowance.  However,  based on actual  fiscal 1997 taxable
income and  projected  fiscal 1998 taxable  income,  management  has reduced the
valuation  allowance  accordingly.  The  amount  of  future  reductions  in  the
valuation allowance will be predicated on projected results for future years.

                                       -8-
<PAGE>

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


NOTE 5. STOCK REPURCHASE PROGRAM

     On November 8, 1996, the Company  approved a stock  repurchase  program for
the  repurchase of up to 300,000  shares of its own stock.  The Company will use
the repurchased  shares for certain employee benefit  programs.  On December 17,
1997, the stock repurchase  program was extended by a resolution of the Board of
Directors  until  December  31, 1998.  Through  June 30,  1998,  the Company had
repurchased  81,200  shares  for  $298,999  at  an  average  purchase  price  of
approximately $3.68 per share.


                                       -9-



<PAGE>



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

Results of Operations

Nine Month Period ended June 30, 1998 versus June 30, 1997

     Net sales for the nine months ended June 30, 1998 were $26,443,939 compared
to $18,695,544 for the comparable period in the prior fiscal year,  resulting in
an increase of $7,748,395 or 41%. The increase in sales was primarily due to the
expansion of the Company's domestic distribution and retail channels, promotions
and  inventory  increases  at the  retail  level  leading  up to the  launch  of
Windows98,  continued  sales  growth  in  Europe,  plus  strong  sales to direct
corporate customers.

     Unit  sales  of  digital  video  and   conferencing   boards  increased  to
approximately  275,000 as compared to approximately  208,200 for the prior year.
Sales to domestic  customers for the nine month period were 32% of net sales for
the  current  fiscal  year and 35% for the prior  year.  Sales to  international
customers  were 68% of net sales for the current year and 65% for the comparable
six month period of last year.

     Gross  profit  increased  to  $6,623,393  from  $4,269,229,  an increase of
$2,354,164 or 55% over the comparable prior fiscal year period. The gross profit
percentage  was 25% for the  current  nine  month  period  ended  June 30,  1998
compared to 23% for the prior  fiscal  year  period.  For the prior  fiscal year
ended  September  30, 1997,  gross margins were 22%. The increase in margins for
the nine months  ended June 30, 1998 was  primarily  due to a program of hedging
foreign  sales,  primarily  for German  Marks and  British  Sterling,  which has
stabilized the effect of foreign currency fluctuations,  lower custom duties and
the  absorption  of  manufacturing  overhead  over a  greater  number  of units.

     Selling,  general and  administrative  expenses as a percentage  of revenue
increased to 17.6% from 16.4% for the prior year. Although sales and promotional
expenses as a percentage of revenue  increased 2.79 % over sales and promotional
expenses  as a  percentage  of revenue  for the  comparable  prior year  period,
general and administrative expenses as a percentage of revenue declined by 1.29%
when compared to general and administrative  expenses as a percentage of revenue
for the prior year's nine month  period.  The increase in sales and  promotional
expenses  was  primarily  due to the  Company  allocating  additional  funds  to
participate,  as  a  Microsoft  Windows98  launch  partner,  in  the  marketing,
promotional and media campaign  associated  with the  introduction of Windows98.
Represented in dollars,  selling general and  administrative  expenses increased
$1,578,265  over  the  prior  nine  month  period  of  fiscal  1997.  Sales  and
promotional  expenses,  which  increased  $1,354,747  over the nine month period
ending June 30, 1997, represents about 86% of the total increase. In addition to
the  funds  expended  for  the  opportunity  to  participate  in  the  Windows98
promotional  launch  campaign,  the  Company  during  fiscal  1998  embarked  on
commitment to increase its domestic  market  presence.  To accomplish this goal,
the Company has  increased  its outside  sales  staff,  paid higher  commissions
resulting from the 41% net sales increase and higher  marketing and  promotional
costs in support of increased distribution and retail locations.  As a result of
this  program,  the number of retail  stores  carrying  the  Company's  products
increased from  approximately  300 retail  locations at the start of the year to
approximately 3,000 as of the end of the third fiscal quarter.

                                      -10-

<PAGE>

Item 2. Management's Discussion and Analysis -Continued


     Technical support,  shipping and general and administrative expenses, which
represents  about 14% of the increase  over the prior year,  increased  $45,861,
$38,130 and $139,527  respectively.  Additional  staff required to  consistently
maintain a high level of customer  support in light of the  Company's  expanding
customer base caused the technical support costs to increase. Increased shipping
costs was a function of greater  shipment  volume.  The  increase in general and
administrative  costs were mainyl for contractual  wage increases,  higher rent,
utilities and building costs for the Company's sales office in California, which
opened in June 1997 and higher  communication  costs due to increased  voice and
data traffic.

     Research and development  expenses increased $181,093 or approximately 46%.
The increase  was due to the  strategic  addition of personnel  which is in line
with the Company's commitment to expand its engineering research and development
resources to continually  enhance  current  products and further  develop future
product lines.

     The Company had net other  income of $260,815  compared to net other income
of $171,018 for the corresponding  nine months of the preceding fiscal year. The
increase in net other income was primarily  foreign currency exchange rate gains
as a result of favorable foreign rates.  Provision for income taxes increased to
$546,815 or an effective  tax rate of 33% in fiscal 1998 compared to $220,927 or
an effective  tax rate of 22.5% for fiscal 1997.  The increase in the  effective
tax rate is due to the  utilization of all the  unrestricted  net operating loss
carry forwards in fiscal 1997,  leaving only restricted net operating loss carry
forwards which can be utilized to offset current year taxable income. .

     As a result of all of the above,  the Company  recorded a net profit  after
taxes for the nine months ended June 30, 1998 of  $1,110,866,  which resulted in
basic and diluted earnings per share of $0.25 and $0.24 respectively, on weighed
average basic and diluted  shares  outstanding of 4,404,545,  and 4,611,170,  as
opposed to a net income  after taxes of  $752,151,  which  resulted in basic and
diluted earnings per share of $0.17 on weighted average basic and diluted shares
of 4,434,630 and 4,444,816 for the  corresponding  nine month period ending June
30, 1997.


                                      -11-




<PAGE>




Three Month Period ended June 30, 1998 versus June 30, 1997

     Net sales for the three months ended June 30, 1998 were $9,042,704 compared
to $5,843,431 for the comparable quarter of the prior fiscal year,  resulting in
an increase of $3,199,273 or 55%. The increase in sales was primarily due to the
expansion of the Company's domestic distribution and retail channels, promotions
and  inventory  increases  at the  retail  level  leading  up to the  launch  of
Windows98,  continued  sales  growth  in  Europe,  plus  strong  sales to direct
corporate customers.

     Unit  sales  of  digital  video  and   conferencing   boards  increased  to
approximately  106,000 as compared to  approximately  54,500 for the prior year.
Sales to domestic customers for the three month period were 43% of net sales for
the current quarter and 32% for the prior year's quarter. Sales to international
customers  were  57% of net  sales  for  the  current  quarter  and  68% for the
comparable quarter of last year.

     Gross  profit  increased  to  $2,414,182  from  $1,312,377,  an increase of
$1,101,785  or 84% over the prior  comparable  three month period ended June 30,
1997. The gross profit  percentage  was 26% for the current  quarter and 22% the
quarter ended June 30, 1997.  The increase in margins  during the current fiscal
year was  primarily  due to a program of hedging  foreign  sales,  primarily for
German Marks and British  Sterling  which has  stabilized  the effect of foreign
currency  fluctuations,  lower custom duties and the absorption of manufacturing
overhead over a greater number of units.

     Selling,  general and  administrative  expenses as a percentage  of revenue
increased to 19.9% from 18.1% for the  corresponding  quarter of the prior year.
Although  sales and  promotional  expenses as a percentage of revenue  increased
4.34 % when  compared  to sales and  promotional  expenses  as a  percentage  of
revenue the third fiscal quarter of the prior year,  general and  administrative
expenses as a percentage  of revenue  declined by 2.51% when compared to general
and  administrative  expenses as a  percentage  of revenue for the three  months
ended  June 30,  1997.  The  increase  in sales  and  promotional  expenses  was
primarily due to the Company  allocating  additional funds to participate,  as a
Microsoft  Windows98  launch  partner,  in the marketing,  promotional and media
campaign associated with the introduction of Windows98.  Represented in dollars,
selling  general  and  administrative   expenses  increased  $743,087  over  the
corresponding three month perio of fiscal 1997. Sales and promotional  expenses,
which increased $667,701 over the prior year's third fiscal quarter,  represents
about 90% of the total  increase.  In  addition  to the funds  expended  for the
opportunity to participate in the Windows98  promotional  launch  campaign,  the
Company  during  fiscal 1998  embarked on a commitment  to increase its domestic
market presence.  To accomplish this goal, the Company has increased its outside
sales staff,  paid higher  commissions  resulting from the 55% ne sales increase
and higher marketing and promotional costs in support of increased  distribution
and retail locations.  As a result of this program,  the number of retail stores
carrying the Company's  product has increased  from  approximately  1,000 retail
locations at the start of the fiscal third quarter to approximately  3,000 as of
the end of the third fiscal quarter.

                                      -12-
<PAGE>

Item 2. Management's Discussion and Analysis -Continued

     Technical support,  shipping and general and administrative expenses, which
represents  about 10% of the total  increase over the prior year's quarter ended
June 30, 1997, increased $19,925,  $46,695 and $8,766  respectively.  Additional
staff  required to  consistently  maintain a high level of  customer  support in
light of the Company's  expanding  customer  base caused the  technical  support
costs to increase.  Increased  shipping costs was a function of greater shipment
volume.  The  increase  in  general  an  administrative  costs  were  mainly for
contractual  wage increases,  higher rent,  utilities and building costs for the
Company's  sales  office in  California,  which  opened in June 1997 and  higher
communication costs due to increased voice and data traffic.

     Research and development  expenses  increased $72,211 or approximately 46%.
The increase  was due to the  strategic  addition of personnel  which is in line
with the Company's commitment to expand its engineering research and development
resources to continually  enhance  current  products and further  develop future
product lines.

     The  Company  had net other  income of $79,781  for the June 30, 1998 three
month  period  compared  to net other  income of $54,748  for the  corresponding
quarter of the  preceding  fiscal  year.  The  increase in net other  income was
primarily  foreign currency exchange rate gains as a result of favorable foreign
rates. Provision for income taxes increased to $154,000 or an effective tax rate
of 33% in fiscal 1998  compared to $35,000 or an effective tax rate of 22.5% for
fiscal 1997. The increase in the effective tax rate is due to the utilization of
all the unrestricted  net operating loss carry forwards in fiscal 1997,  leaving
only  restricted  net  operating  loss carry  forwards  which can be utilized to
offset current year taxable income. .

     As a result of all of the above,  the Company  recorded a net profit  after
taxes for the three months ended June 30, 1998 of  $311,161,  which  resulted in
basic and  diluted  earnings  per share of $0.07 on  weighed  average  basic and
diluted shares outstanding of 4,406,870 and 4,750,454 as opposed to a net income
after taxes of $118,641,  which resulted in basic and diluted earnings per share
of $0.03 on weighted average basic and diluted shares of 4,111,893 and 4,416,703
for the corresponding three month period ending June 30, 1997.

         Over the prior two fiscal years,  the company has  experienced  certain
revenue  trends.  Since  the  Company's  products  are  primarily  sold  through
distributors and retailers, the Company has historically recorded stronger sales
results during the Company's first quarter  (October to December),  which due to
the  holiday  season  is a strong  quarter  for  computer  equipment  sales.  In
addition,  the Company's  international  sales, mostly into the European market,
have been 66% and 54% of sales for fiscal 1997 an 1996 and are 68% for the first
nine months of fiscal  1998.  Due to this,  the  Company's  sales for its fourth
fiscal quarter (July to September) can  potentially be impacted by the reduction
of activity in Europe during the July and August summer holiday period.


                                      -13-

<PAGE>

Item 2. Management's Discussion and Analysis -Continued

     To offset  the above  cycles,  the  Company  is  targeting  a wide range of
customer  types  in order to  moderate  the  seasonality  of the  retail  sales.
However,  there can be no  assurances  that the Company  will be  successful  in
minimizing the effects that seasonality has on the business.

Liquidity and Capital Resources

     The  Company  had a net cash  position  of  $5,379,142  working  capital of
$9,603,848  and  shareholders'  equity of  $10,083,056  as of June 30, 1998. The
significant items of cash provided by and cash (used ) are detailed below:


Net income(adjusted for non cash items)                          $ 1,279,833
Increase in investment for current assets                         (2,372,466)
Operations funded by increase  in current liabilities-net          1,145,265
Purchase of Property, Plant & Equipment                             (251,664)
Purchase of treasury stock                                          (105,046)
Other                                                                 80,808

     Net cash of $52,632  provided by operating  activities was primarily due to
cash  generated  from the Company's net income and cash provided by the increase
in liabilities,  mainly vendor accounts payable,  used to fund operations offset
by the  increase in  investments  for current  assets,  mainly  receivables  and
inventory.

     Additional  cash was used to  purchase  fixed  assets and  treasury  stock.
Minimal cash was provided by the exercise of employee options.

     The Company's asset based credit facility expired on February 28, 1998. The
company has chosen not to renew the loan facility.  The Company feels it is in a
position to obtain new  financing at more  competitive  rates,  and is currently
negotiating with new institutions to replace the expired loan facility.

     On November 8, 1996, the Company  approved a stock  repurchase  program for
the  repurchase of up to 300,000  shares of its own stock.  The Company will use
the repurchased  shares for certain employee benefit  programs.  On December 17,
1997 stock  repurchase  program  was  extended by a  resolution  of the Board of
Directors  until  December  31,  1998.  As of March 31,  1998,  the  Company had
repurchased  81,200  shares  for  $298,999  at  an  average  purchase  price  of
approximately $3.68 per share.

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

                                      -14-
<PAGE>
YEAR 2000 COMPLIANCE

     In  recognition of the issues  associated  with year 2000  compliance,  the
Company is currently  analyzing its needs to address this issue.  The management
of the company  believes that  compliance  with year 2000 issues will not have a
material impact on the Company's operations.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS

From time to time,  information provided by the company,  statements made by its
employees or  information  provided in its  Securities  and Exchange  Commission
filings,  such as information  contained in this Form 10-QSB,  including certain
statements under  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" may contain forward  looking  information.  The words
"Estimate,  "Plan",  "Intend"  "Believes,  "Expect" and similar  expressions are
intended to identify forward looking statements. Such forward looking statements
involve  and are  subject to known and unknown  risks,  uncertainties  and other
factors which could cause the actual results,  performance  and  achievements of
the Company to be  materially  different  from any future  results,  performance
(financial or operating),  or achievements  expressed or implied by such forward
looking  statements.  Such factors include,  among others, the following:  rapid
changes  in  technology;  lack  of  funds  for  future  research;   competition,
proprietary  patents  and rights of  others;  loss of major  customers;  loss of
sources  of supply for  digital  video  processing  chips;  non-availability  of
management;  government  regulation;  domestic and foreign economic  conditions;
currency  fluctuations;  and the inability of the Company to profitably sell its
products.  The market  price of the  Company's  common  stock may be volatile at
times in response to fluctuation in the company's  quarterly  operating results,
changes in  analysts'  earnings  estimates,  market  conditions  in the computer
hardware  industry,  seasonality  of the  business  cycle,  as well  as  general
conditions and other factors external to the Company.

                                      -15-



<PAGE>


PART II. OTHER INFORMATION

Item 5 Other Information

(a)  Effective  July 2, 1998,  Leonard  Neuhaus  resigned  as a director  of the
Company. The resignation was not by reason of any disagreement with the Company.
(b)  Effective  July 2, 1998,  Steven J.  Kuperschmid,  Esq.,  was appointed the
Company's board as an outside director.  Mr. Kuperschmid is a partner in the law
firm of Certilman Balin Adler and Hyman LLP. Certilman Balin Adler and Hyman LLP
are also retained as the Company's outside counsel.

Item 6 Exhibits and Reports on Form 8-K

     (a)  Exhibits
          None

     (b)  Reports on form 8-K
          None


























                                      -16-

<PAGE>


                                   SIGNATURES


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


                                               HAUPPAUGE DIGITAL, INC.
                                               Registrant




Date: August 10, 1998                          By /s/ Kenneth Plotkin           
      ----------------                           ------------------------------
                                                 KENNETH  PLOTKIN
                                                 Vice President and
                                                 Chief Executive Officer



Date: August 10, 1998                          By  /s/ Gerald Tucciarone       
      ----------------                            -----------------------------
                                                  GERALD TUCCIARONE
                                                  Treasurer and Chief
                                                  Financial Officer











                                      -17-