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,  2002

                                       OR

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

For the transition period from _______ to ________

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

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

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

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

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

Indicate by check mark  whether the issuer (1) filed all reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

                       Yes         X             No
                              ----------            -----------

As of July 22,  2002,  8,888,047  shares  of .01 par value  Common  Stock of the
registrant were outstanding, not including treasury shares.


<PAGE>

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

                                      INDEX
                                      -----

<TABLE>
<CAPTION>

<S>                                                                                               <C>

PART I. FINANCIAL INFORMATION


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

Condensed Consolidated Balance Sheets-                                                               3
   June 30,  2002 (unaudited) and September 30, 2001

Condensed Consolidated Statements of Income-
  Nine  Months ended June 30, 2002 (unaudited) and 2001 (unaudited)                                  4

Condensed Consolidated Statements of Income-
  Three  Months ended June 30, 2002 (unaudited) and 2001 (unaudited)                                 5

Condensed Consolidated Statements of  Comprehensive Income -
  Three and nine months  ended June 30, 2002 (unaudited) and 2001 (unaudited)                        6

Condensed Consolidated Statements of Cash Flow-
  Nine Months ended June 30 , 2002 (unaudited) and 2001 (unaudited)                                  7

Notes to Condensed Consolidated Financial Statements                                              8-10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations    11-22

Item 3. Quantitative and Qualitative Disclosures about Market Risks                                 22



PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                                          23

Item 5.  Other Information                                                                          23

Item 6.  Exhibits and Reports on form 8-K                                                           23


SIGNATURES
                                                                                                    24
</TABLE>

<PAGE>

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

Item 1. Financial Statements

                    HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                             June 30,
                                                                                                2002          September 30,
                                                                                          (Unaudited)               2001
                                                                              -------------------------------------------
                                    ASSETS
<S>                                                                                          <C>                  <C>

Current Assets:
     Cash and cash  equivalents                                                         $  5,472,658        $  4,422,239
     Accounts receivable, net of various allowances of
       $2,887,000 and $2,867,000                                                           4,363,797           4,243,594
     Income taxes receivable                                                                 501,000             501,000
     Inventories                                                                           6,746,802           8,171,567
     Prepaid expenses and other current assets                                               680,416             518,265
                                                                                             -------             -------
          Total current assets                                                            17,764,673          17,856,665

     Property, plant and equipment, net                                                      657,355             825,847
     Other intangible assets-net                                                                   -              16,400
     Security deposits and other non current assets                                           83,822              85,228
                                                                                              ------              ------
                                                                                        $ 18,505,850        $  18,784,140
                                                                                        ============        =============

 Liabilities and  Stockholders'  Equity :

Current Liabilities:
    Accounts payable                                                                    $  4,755,001        $   5,732,971
    Accrued expenses                                                                       1,453,959            1,585,023
    Income taxes payable                                                                     302,704              280,528
                                                                                             -------              -------
       Total current liabilities                                                           6,511,664            7,598,522

Stockholders' Equity
    Common stock $.01 par value; 25,000,000 shares authorized, 9,386,525
          and 9,364,359  issued, respectively                                                 93,865               93,644
     Additional paid-in capital                                                           12,215,291           12,164,243
     Retained earnings                                                                     1,093,559              566,497
     Accumulated other comprehensive income ( loss)                                           34,300             (267,204)
     Treasury Stock, at cost, 504,117 and 465,086 shares, respectively                    (1,442,829)          (1,371,562)
                                                                                          ----------           ----------
       Total stockholders' equity                                                         11,994,186           11,185,618
                                                                                          ----------           ----------
                                                                                        $ 18,505,850        $  18,784,140
                                                                                        ============        =============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       3

<PAGE>

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


<TABLE>
<CAPTION>

                                                                                            Nine months ended June 30,
                                                                                            2002                 2001
                                                                                           -----                 ----
<S>                                                                                         <C>                    <C>
Net Sales                                                                               $ 32,924,368        $  41,773,593
Cost  of Sales                                                                            24,512,946           32,866,647
                                                                                          ----------           ----------
  Gross Profit                                                                             8,411,422            8,906,946

Selling, General and  Administrative Expenses                                              6,650,857            7,849,728
Research & Development Expenses                                                            1,128,266            1,094,832
Litigation settlement                                                                              -              212,500
                                                                                           ---------              -------
  Income (loss)  from operations                                                             632,299             (250,114)
Other  Income (expense):
  Interest income                                                                             28,085               26,811
  Interest expense                                                                                 -              (26,546)
  Foreign currency                                                                             2,318             (112,824)
  Non operational USD to Euro currency re-measurement                                        (82,143)             109,895
  Insurance proceeds                                                                               -            1,000,000
                                                                                           ---------            ---------
Other  income (expense)                                                                      (51,740)             997,336
                                                                                             -------              -------
  Income  before taxes on income                                                             580,559              747,222
Taxes provision (benefit)                                                                     53,497             (508,300)
                                                                                              ------             --------
  Income  before cumulative effect of a change in accounting principle                       527,062            1,255,522
  Cumulative effect of a change in accounting principle, net of taxes                              -              204,000
                                                                                             -------              -------
      Net income                                                                        $    527,062        $   1,459,522
                                                                                        ============        =============
Net income per  share-basic:
  Income  before cumulative effect of a change in accounting principle                  $       0.06        $        0.14
  Cumulative effect of a change in accounting principle                                 $       0.00        $        0.02
                                                                                        ------------        -------------
Net income  per share-basic                                                             $       0.06        $        0.16
                                                                                        ------------        -------------
Net income per share-diluted
   Income  before cumulative effect of a change in accounting principle                 $       0.06        $        0.14
   Cumulative effect of a change in accounting principle                                $       0.00        $        0.02
                                                                                        ------------        -------------
Net income  per share-basic                                                             $       0.06        $        0.16
                                                                                        ============        =============
</TABLE>
           See accompanying notes to consolidated financial statements

                                       4
<PAGE>

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


<TABLE>
<CAPTION>

                                                                                       Three months ended  June  30,
                                                                                    --------------------------------------
                                                                                             2002                  2001
                                                                                    --------------------------------------

<S>                                                                                     <C>                         <C>
Net Sales                                                                               $ 10,113,135        $   9,382,610
Cost  of Sales                                                                             7,444,435            7,649,976
                                                                                           ---------            ---------
    Gross Profit                                                                           2,668,700            1,732,634

Selling, General and  Administrative Expenses                                              2,189,484            2,385,838
Research & Development Expenses                                                              404,829              353,804
Litigation settlement                                                                              -              212,500
                                                                                           ---------              -------
    Income (loss)  from operations                                                            74,387           (1,219,508)

Other  Income (expense):
  Interest   income                                                                            6,457                8,265
  Interest expense                                                                                 -               (6,826)
  Foreign currency                                                                           (15,718)               7,200
  Non operational USD to Euro currency re-measurement                                        (28,003)             109,895
  Insurance proceeds                                                                               -            1,000,000
                                                                                             -------            ---------
Other  income (expense)                                                                     (37,264)            1,118,534
                                                                                            -------             ---------
      Income  before taxes on income                                                          37,123             (100,974)
Taxes provision (benefit)                                                                     10,997             (296,000)
                                                                                              ------              --------
      Net income                                                                        $     26,126        $     195,026
                                                                                        ============        =============
Net income per shares:
    Basic                                                                               $       0.00        $        0.02
    Diluted                                                                             $       0.00        $        0.02
                                                                                        ============        =============
</TABLE>

          See accompanying notes to consolidated financial statements

                                       5
<PAGE>

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

<TABLE>
<CAPTION>




                                                       Three months  ended  June 30,             Nine months ended June 30,
                                                       ----------------------------              --------------------------
                                                          2002           2001                     2002           2001
                                                          ----           ----                     ----           ----

Other comprehensive income:
---------------------------
<S>                                                       <C>            <C>                       <C>            <C>

Net income                                             $ 26,126      $  195,026                $ 527,062       $ 1,459,522
Foreign currency translation gain  (loss)               411,902        (297,392)                 301,504          (260,207)
                                                     --------------------------------------------------------------------------
Other  comprehensive income                            $438,028      $ (102,366)               $ 828,566       $ 1,199,315
                                                     ==========================================================================
</TABLE>


          See accompanying notes to consolidated financial statements

                                       6

<PAGE>


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

<TABLE>
<CAPTION>

                                                                           Nine months ended June 30,
                                                                        -------------------------------
<S>                                                                      <C>                 <C>
  Net income                                                             $  527,062          $ 1,459,522
                                                                         ----------          -----------
   Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
    Depreciation and amortization                                           248,067              303,865
    Provision for uncollectible accounts receivable                          20,000               10,000
    Deferred tax benefits                                                         -             (180,136)
    Other non cash items                                                     29,507               28,503
  Changes in current assets and liabilities:
     Accounts receivable                                                   (140,203)           3,462,401
     Inventories                                                          1,424,765             (311,613)
     Income taxes receivable                                                      -               67,974
     Insurance proceeds                                                           -           (1,000,000)
    Prepaid expenses and other current assets                              (162,151)            (403,747)
    Accounts payable and other current liabilities                       (1,086,858)          (1,828,385)
                                                                          ----------           ----------
        Total adjustments                                                   333,127              148,862
                                                                            -------              -------
   Net cash  provided by  operating activities                              860,189            1,608,384
                                                                            -------            ---------
Cash Flows From Investing Activities:
    Purchases of property, plant and equipment                              (62,775)            (151,259)
                                                                            -------              --------
       Net cash used in investing activities                                (62,775)            (151,259)
                                                                            -------              --------
Cash Flows From Financing Activities:
    Loan repayments-net of borrowings                                             -             (340,000)
    Proceeds from employee stock purchases                                   22,768               62,655
    Purchase of treasury stock                                              (71,267)                   -
                                                                            -------             --------
        Net cash used in  financing activities                              (48,499)            (277,345)
                                                                            -------              --------
        Net increase in cash and cash equivalents                           748,915            1,179,780
Effect of exchange rate changes on cash and cash equivalents                301,504             (260,207)
Cash and cash equivalents, beginning of period                            4,422,239            2,744,855
                                                                          ---------            ---------
Cash and cash equivalents, end of period                                 $5,472,658          $ 3,664,428
                                                                         ==========          ===========
Supplemental disclosures:
   Interest paid                                                         $        -          $    24,546
   Income taxes paid                                                     $   25,386          $     4,506
                                                                         ==========          ===========

</TABLE>

 See accompanying notes to consolidated financial statements

                                       7
<PAGE>

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

Note 1.  Basis of  Presentation

The accompanying  unaudited condensed consolidated financial statements included
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles for interim period  reporting in conjunction with the instructions to
Form 10-Q.  Accordingly,  these statements do not include all of the information
required  by  generally  accepted  accounting  principles  for annual  financial
statements.  In the opinion of management,  all known adjustments (consisting of
normal  recurring  accruals  and  reserves)  necessary  to  present  fairly  the
financial position,  results of operations and cash flows for the three and nine
month period ended June 30, 2002 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, 2001 Form 10-K.

The  operating  results for the three and nine month  period ended June 30, 2002
are not  necessarily  indicative of the results to be expected for the September
30, 2002 year end.

Note 2.    Derivative Financial   Instruments

The Company uses  derivatives to reduce its exposure to  fluctuations in foreign
currencies. Derivative products, such as foreign currency forward contracts, are
used to hedge the foreign currency market exposures  underlying  forecasted Euro
sales transactions with customers.  The Company's  accounting policies for these
instruments  are  based  on its  designation  of  such  instruments  as  hedging
transactions. The Company does not use derivative instruments for purposes other
than hedging.  The Company  records all derivatives on the balance sheet at fair
value.  As of June 30, 2002, a liability of $453,162,  reflecting the fair value
of the Company's outstanding foreign currency forward contracts, was recorded on
the  balance  sheet.  The  Company  recognizes  gains and  losses on  derivative
contracts as an  adjustment  to net sales.  For the three and nine month periods
ended June 30, 2002,  the Company  recorded a decrease to net sales of $ 750,000
and $653,000.  For the three and nine month  periods  ended June 30,  2001,  the
Company  recorded  an  increase  to  net  sales  of $  226,000  and  $1,014,000,
respectively.

As of June  30,  2002 , none of the  Company's  derivatives  qualify  for  hedge
accounting.

The effect of implementing SFAS No.133,  "Accounting for Derivative  Instruments
and Hedging  Activities",  which was adopted on October 1, 2000, is presented in
this form 10-Q as a cumulative  effect of a change in  accounting  principle for
the nine months ended June 30, 2001.

Note 3.  Inventories

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

                               June 30,                 September 30,
                                 2002                       2001
                                 ----                       ----
     Component Parts         $ 2,390,370                $2,421,420
     Work in Progress             11,750                    92,070
     Finished Goods            4,344,682                 5,658,077
                               ---------                 ---------
                             $ 6,746,802                $8,171,567
                             ===========                ==========

                                       8
<PAGE>

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

Note 4.  Net Income Per  Share

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

<TABLE>
<CAPTION>

                                                                           Three Months Ended              Nine Months Ended
                                                                               June  30                       June 30 ,
                                                                         2002             2001         2002            2001
                                                                         ----             ----         ----            ----
<S>                                                                       <C>            <C>           <C>             <C>
 Weighted average shares outstanding-basic                              8,886,755      8,920,504     8,888,926       8,903,812
 Number of shares issued on the assumed exercise of stock options         155,816        243,992       168,476         367,683
                                                                          -------        -------       -------         -------
 Weighted average shares outstanding-diluted                            9,042,571      9,164,496     9,057,402       9,271,495
                                                                        =========      =========     =========       =========
</TABLE>

Options to  purchase  1,025,822  and  590,222  shares of common  stock at prices
ranging $2.07 to $ 10.06 and $3.94 and $10.06,  respectively,  were  outstanding
for the three month period ending June 30, 2002 and 2001, respectively, but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Options to  purchase  1,025,822  and  530,222  shares of common  stock at prices
ranging $2.07 to $ 10.06 and $3.94 and $10.06,  respectively,  were  outstanding
for the nine month period ending June 30, 2002 and 2001, respectively,  but were
not included in the computation of diluted  earnings per share because they were
anti-dilutive.

Note 5.  Accumulated other comprehensive income ( loss)

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  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 differing  exchange
rates results in foreign currency  translation gains or losses,  which are shown
as a component  of  stockholders'  equity under the caption  "accumulated  other
comprehensive income (loss)".

As of June 30, 2002,  "Accumulated  other  comprehensive  income  (loss)"  under
stockholders'  equity  was  a  translation  gain  of  $34,300,   compared  to  a
translation  loss of $267,204 at September  30, 2001.  The  translation  gain of
$34,300  was  primarily  due to the  strengthening  of the Euro to the US dollar
during the quarter ended June 30, 2002.

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

                                       9

<PAGE>

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

Note  6.  Recent Accounting Pronouncements

In April 2001, the Emerging  Issues Task Force  ("EITF")  issued EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the  Vendor's  Products,"  which was later  codified  along with  other  similar
issues,  into EITF 01-09,  "Accounting for Consideration  Given by a Vendor to a
Customer or a Reseller of the  Vendor's  Products"  ("EITF  01-09").  EITF 01-09
clarifies the income statement  classification  of costs incurred by a vendor in
connection with the reseller's  purchase or promotion of the vendor's  products,
resulting in certain  cooperative  advertising and product placement costs. EITF
01-09 became effective for the Company in the quarter ended March 31, 2002.

The  majority of vendor  consideration  granted by the Company  relates to co-op
advertising  agreements  with  the  Company's  retail  customers.  Based  on the
requirements of EITF 01-09,  the Company has properly  included these costs as a
component  of  selling,  general  and  administrative  expenses  for all periods
presented. In the opinion of management, it appears that the effect of all other
vendor  consideration  arrangements  would  not have a  material  effect  on the
statement of operations based on the requirements of the pronouncement.



                                       10

<PAGE>

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

Nine Month Period ended June 30, 2002 compared to  June 30, 2001
-------------------------------------------------  -------------

Results for the nine month  period ended June 30, 2002 are detailed in the table
below:

<TABLE>
<CAPTION>


                                                          Nine Months   Nine Months
                                                             Ended         Ended        Variance      Percentage of sales
                                                            6/30/02       6/30/01          $         2002    2001   Variance
                                                            -------       -------          -         ----    ----   --------
<S>                                                             <C>         <C>            <C>        <C>      <C>    <C>
Sales                                                     $ 32,924,368   $41,773,593  $(8,849,225)   100.0%  100.0%     0%
Cost of sales                                               24,512,946    32,866,647   (8,353,701)    74.5%   78.7%  (4.2%)
                                                            ----------    ----------   ----------     ----    ----   ----
Gross Profit                                                 8,411,422     8,906,946     (495,524)    25.5%   21.3%   4.2%
Gross Profit %                                                   25.5%         21.3%         4.2%

Selling, General and Administrative expenses:
Sales & Marketing                                            4,204,455     4,996,234     (791,779)    12.8%   12.0%   0.8%
Technical Support                                              287,999       292,476       (4,477)     0.9%    0.7%   0.2%
General  & Administrative                                    2,158,403     2,561,018     (402,615)     6.5%    6.1%   0.4%
                                                             ---------     ---------     --------      ---     ---    ---
     Selling, General and Administrative expenses            6,650,857     7,849,728    (1,198,871)   20.2%   18.8%   1.4%
Research & Development expenses                              1,128,266     1,094,832        33,434     3.4%    2.6%   0.8%
Litigation settlement                                                -       212,500      (212,500)      0%    0.5%  (0.5%)
                                                             ---------       -------      --------       -     ---   ----
      Total expenses                                         7,779,123     9,157,060    (1,377,937)   23.6%   21.9%   1.7%
                                                             ---------     ---------    ----------    ----    ----    ---
Income (loss) from operations                                  632,299     (250,114)       882,413     1.9%   (0.6%)  2.5%

Other income (expense)
Interest income                                                 28,085       26,811          1,274     0.1%    0.1%   0.0%
Interest expense                                                     -      (26,546)        26,546     0.0%   (0.1%)  0.1%
Foreign currency                                                 2,318     (112,824)       115,142     0.0%   (0.3%)  0.3%
Non operational USD to Euro re-measurement gain (loss)         (82,143)     109,895       (192,038)   (0.3%)   0.3%  (0.6%)
Insurance proceeds                                                   -    1,000,000     (1,000,000)    0.0%    2.4%  (2.4%)
                                                              --------    ---------     ----------     ---     ---    ----
   Other income (expense)                                      (51,740)     997,336     (1,049,076)   (0.2%)   2.4%  (2.6%)
                                                               -------      -------     ----------    ----     ---   ----
Income before taxes on income                                  580,559      747,222       (166,663)    1.7%    1.8%  (0.1%)
Tax provision (benefit)                                         53,497     (508,300)       561,797     0.1%   (1.2%) (1.3%)
                                                                ------     --------        -------     ---    ----   ----
Income before  cumulative effect of  change in
   accounting principle                                        527,062     1,255,522   (728,460)       1.6%    3.0%  (1.4%)
Cumulative effect of a change in  accounting principle,
   net of taxes                                                      -       204,000   (204,000)       0.0%    0.5%  (0.5%)
                                                               -------       -------   --------        ---     ---   ----
Net income                                                 $   527,062   $ 1,459,522  $(932,460)       1.6%    3.5%  (1.9%)
                                                           ===========   ===========  =========        ===     ===   ====

</TABLE>

Sales  decreased $ 8,849,225 for the nine months ended June 30, 2002 compared to
the same period of the prior fiscal year as detailed in the table below:

<TABLE>
<CAPTION>
                                                                                            Percentage of sales by
                                Nine months ended June 30,       Dollar       Percent        by geographic region
                                2002                  2001     (Decrease)   (Decrease)       2002          2001
                                ----------------------------------------------------------------------------------
<S>                              <C>                  <C>            <C>         <C>          <C>           <C>
Domestic                     $  7,814,106       $  9,436,542   $ (1,622,436)    (17%)        24%           23%
Europe                         24,344,373         29,189,274     (4,844,901)    (17%)        74%           70%
Asia                              765,889          3,147,777     (2,381,888)    (76%)         2%            7%
                                  -------          ---------     ----------     ---         ---           ---
 Total                       $ 32,924,368       $ 41,773,593   $ (8,849,225)    (21%)       100%          100%
                             ============       ============   ============     ===         ===           ===
</TABLE>

                                       11
<PAGE>

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

The primary forces causing the sales decrease were:

        o        Sluggish worldwide economic conditions
        o        Reduction in analog  board sales
        o        Lower OEM sales activity
        o        Lower Asian sales

Sales to  domestic  customers  were 24% of net sales for the nine month  periods
ending June 30, 2002  compared to 23% for the nine months  ended June 30,  2001.
Sales to European  customers  were 74% of net sales compared to 70% for the same
period of last year.  Sales to Asian  customers  were 2%  compared to 7% for the
same period last year.

Gross margins decreased $ 495,524 for the nine months ended June 30, 2002. Gross
margin  percentage for the nine months ended June 30, 2002 was 25.5% compared to
21.3% for the nine months  ended June 30,  2001.  The  components  of the margin
decrease are detailed below:

                                                                     Increase
                                                                    (decrease)
                                                                    ----------
Decrease due to lower sales                                     $ (2,565,914)
Increase  due to higher margins on assembled boards                1,432,142
Increase due to decrease in labor and other related costs            638,248
                                                                     -------
      Total  decrease in margins                                $   (495,524)
                                                                ============

The increase in gross margin  percentage of 4.23% for the nine months ended June
30, 2002 compared to the same period of fiscal 2001 is as follows:


                                                                     Increase
                                                                    (decrease)
Increase in margin on assembled boards                               4.35%
Labor and other related costs as a larger percent of sales          (0.12%)
                                                                    ------
Net increase                                                         4.23%
                                                                     =====

The improved margin  percentage on assembled  boards was primarily  derived from
unit price  reductions  from our  suppliers  and  subcontractors  coupled with a
larger  sales mix of higher  gross  margin  product.  The decrease in the margin
percentage  attributable  to labor and related  costs was due to the  percentage
decrease  in sales of 20.2%  for the nine  month  period of  fiscal  2002  being
greater than the percentage decrease in labor and other related costs of 19.9%.

The  chart  below   illustrates   the   components   of  selling,   general  and
administrative expenses:
<TABLE>
<CAPTION>

                                                         Nine months ended June 30,
                                             Dollar Costs                         Percentage of Sales
                                       --------------------------------------------------------------------------- -----------------
                                                                        Increase                            Increase
                                        2002              2001         (Decrease)       2002      2001     (Decrease)
                                        ----              ----          ----------      ----      ----     ----------
<S>                                    <C>               <C>              <C>             <C>       <C>        <C>
Sales and Promotional              $ 4,204,455        $4,996,234     $  (791,779)       12.8%     12.0%       0.8%
Customer Support                       287,999           292,476          (4,477)        0.9%      0.7%       0.2%
General and Administrative           2,158,403         2,561,018        (402,615)        6.5%      6.1%       0.4%
                                     ---------         ---------        --------         ---       ---        ---
    Total                          $ 6,650,857        $7,849,728     $(1,198,871)       20.2%     18.8%       1.4%

</TABLE>
                                       12

<PAGE>

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

Selling General and Administrative  expenses decreased $1,198,871 from the prior
year. As a percentage of sales, Selling, General and Administrative expenses for
the nine months ended June 30, 2002  increased by 1.4% when compared to the nine
months ended June 30, 2001.

The decrease in sales and promotional expense of $791,779 was mainly due to :

        o     Lower advertising costs of $558,524 due to lower co-operative
              advertising and reduced special promotions
        o     Lower commission payments  of $ 98,907 due to lower sales
        o     Decreased compensation costs of $ 82,042 due to personnel
              reductions

The decrease in General and  Administrative  expenses of $ 402,615 was primarily
due to:

        o     Decrease in compensation costs of $ 221,757 due to personnel
              reductions for administrative personnel
        o     Decreased amortization costs of $55,798 mainly due to the write
              off of goodwill during the fourth quarter of fiscal 2001
        o     Lower rent costs of $ 39,946 and lower communication costs of
              $28,511 due to the consolidation of the Eskape Labs office in
              California into the Hauppauge California office

Research and development  increased $33,434 or approximately  3.4%. The increase
was  mainly due to higher  compensation  and  increased  material  and  contract
services cost.

Litigation settlement

During the third fiscal  quarter ended June 30, 2001,  the Company paid $212,500
to settle a claim pursuant to a copyright infringement dispute.

Other income (expense)

Net other  expense for the nine months ended June 30, 2002 was $51,740  compared
to net other  income of $997,336 for the prior year's nine months ended June 30,
2001 as detailed below:


                                                      Nine months ended June 30,
                                                        2002              2001
                                                        ----              ----
Interest income                                      $ 28,085        $   26,811
Interest expense                                            -           (26,546)
Foreign currency transaction gains (losses)             2,318          (112,824)
Non operational USD to Euro currency re-measurement   (82,143)          109,895
Life insurance proceeds                                     -         1,000,000
                                                     --------         ---------
Total other income  (expense)                        $(51,740)       $  997,336

The decrease in total other income (expense) was due to the receipt of insurance
proceeds  during  fiscal  2001  pursuant  to a key  man  life  insurance  on the
Company's deceased former President and losses in fiscal 2002 resulting from the
"Non  operational  USD to  Euro  currency  re-measurements"  offset  by  foreign
currency transaction gains for fiscal 2002.

                                       13

<PAGE>

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

"Non operational USD to Euro currency re-measurement" results from the revaluing
from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on
the books of our Luxembourg  based  subsidiary,  Hauppauge  Digital Europe SARL.
Since the functional  currency of Hauppauge Digital Europe SARL is the Euro, any
asset,  liability or equity  accounts  which are invested in or purchased  using
U.S. dollars by Hauppauge  Digital Europe SARL need to be revalued into Euros at
the end of each reporting  period.  This revaluation of U.S. dollar  denominated
accounts into Euros results in a non transactional  re-measurement gain or loss,
which  we  have   classified  as  "  Non   operational   USD  to  Euro  currency
re-measurement."

Tax provision (benefit)

Our net tax provision (benefit) for the nine months ended June 30, 2002 and 2001
is as follows:

                                                   Nine months ended June 30,
                                                     2002              2001
                                                    ------            ------
Tax (benefit) attributable to U.S operations     $ (640,000)         $(665,000)
Tax expense Asian operations                              -             44,200
Tax  expense  European operations                    53,497            112,500
Deferred tax asset valuation allowance              640,000               -
                                                    -------          ---------
Net tax provision  (benefit)                     $   53,497          $(508,300)
                                                 ==========          =========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the  Hauppauge  name.  For the last two fiscal  years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax assets as of June 30,  2002 and we  concluded  that under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

The adoption of Financial Accounting  Standards No. 133 (SFAS 133),  "Accounting
for Derivative Instruments and Hedging Activities",  on October 1, 2000 resulted
in a $204,000 gain, net of taxes of $115,000,  due to the cumulative effect of a
change in accounting principle.

As a result of the above, we recorded net income of $527,062 for the nine months
ended June 30 , 2002,  which  resulted in basic and diluted net income per share
of $0.06  on  weighted  average  basic  and  diluted  shares  of  8,888,926  and
9,057,402,  respectively,  compared to a net income of  $1,459,522  for the nine
months ended June 30, 2001,  which  resulted in basic and diluted net income per
share of $0.16 on weighted  average  basic and diluted  shares of 8,903,812  and
9,271,495  respectively.  Options to purchase  1,025,822  and 530,222  shares of
common  stock  at  prices  ranging  $2.07  to $  10.06  and  $3.94  and  $10.06,
respectively,  were  outstanding  for the nine month period ending June 30, 2002
and 2001,  respectively,  but were not  included in the  computation  of diluted
earnings per share because they were anti-dilutive

                                       14

<PAGE>

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

Three Month Period ended June 30, 2002 compared to June 30, 2001
----------------------------------------------------------------

Results for the three month period ended June 30, 2002 are detailed in the table
below:

<TABLE>
<CAPTION>

                                               Three Months   Three Months
                                                  Ended          Ended      Variance         Percentage of sales
                                                6/30/02        6/30/01         $          2002     2001     Variance
                                                -------        -------         -          ----     ----     --------
<S>                                               <C>            <C>           <C>           <C>     <C>       <C>
Sales                                         $10,113,135    $9,382,610    $730,525       100.0%  100.0%         -
Cost of sales                                   7,444,435     7,649,976    (205,541)       73.6%   81.5%      (7.9%)
                                                ---------     ---------    --------        ----    ----       ----
Gross Profit                                    2,668,700     1,732,634     936,066        26.4%   18.5%       7.9%
Gross Profit %                                      26.4%         18.5%        7.9%

Selling, General and Administrative expenses:
Sales & Marketing                               1,332,194     1,414,878     (82,684)       13.2%   15.1%      (1.9%)
Technical Support                                  96,656        98,149      (1,493)        1.0%    1.0%         0%
General  & Administrative expenses                760,634       872,811    (112,177)        7.5%    9.3%      (1.8%)
                                                  -------       -------    --------         ---     ----       ---
 Selling, General and Administrative expenses   2,189,484     2,385,838    (196,354)       21.7%    25.4%     (3.7%)
Research  & Development expenses                  404,829       353,804      51,025         4.0%     3.8%      0.2%
Litigation settlement                                   -       212,500    (212,500)          -      2.3%     (2.3%)
                                                ---------       -------    --------        ----      ---      ----
Total Selling, General and Administrative
  expenses                                      2,594,313     2,952,142    (357,829)       25.7%    31.5%     (5.8%)
                                                ---------     ---------    --------        ----     ----      ----
Income from operations                             74,387    (1,219,508)  1,293,895         0.7%   (13.0%)    13.7%
Other income (expense)
Interest income                                     6,457         8,265      (1,808)        0.1%     0.1%      0.0%
Interest expense                                        -        (6,826)      6,826         0.0%    (0.1%)    (0.1%)
Foreign currency                                  (15,718)        7,200     (22,918)       (0.1%)    0.1%      0.0%
Non operational USD to Euro re-measurement gain
  (loss)                                          (28,003)      109,895    (137,898)       (0.3%)    1.1%     (1.4%)
Insurance settlement                                    -     1,000,000  (1,000,000)          -     10.7%    (10.7%)
                                                 --------     ---------  ----------        ----     ----     -----
    Other income (expense)                        (37,264)    1,118,534  (1,155,798)       (0.3%)   11.9%    (12.2%)
                                                  -------     ---------  ----------        ----     ----     -----
Income before taxes on income                      37,123      (100,974)    138,097         0.4%    (1.1%)    1.5%
Tax provision (benefit)                            10,997      (296,000)    306,997         0.1%    (3.2%)    3.3%
                                                   ------      --------     -------         ---     ----      ---
Net income                                      $  26,126   $   195,026  $ (168,900)        0.3%     2.1%    (1.8%)
                                                =========   ===========  ==========         ====    ====      ===
</TABLE>

Sales  increased $ 730,525 for the three months ended June 30, 2002  compared to
the same  quarter of the prior  fiscal  year as detailed  geographically  in the
table below:

<TABLE>
<CAPTION>

                                                                              Percent         Percentage of sales
                               Three months ended June 30,      Increase      Increase        by geographic region
                                  2002             2001        (Decrease)     (Decrease)     2002              2001
                              --------------------------------------------------------------------------------------
<S>                          <C>                  <C>           <C>            <C>            <C>               <C>
Domestic                     $ 3,006,789       $ 2,843,066   $   163,723       6 %            30%               30%
Europe                         6,862,348         5,878,339       984,009      17 %            68%               63%
Asia                             243,998           661,205      (417,207)    (63)%             2%                7%
                                 -------           -------      --------     ---               -                 -
   Total                     $10,113,135       $ 9,382,610   $   730,525       8 %           100%              100%

</TABLE>

The primary forces causing the sales increase were:

        o        Strong digital satellite product sales in Europe
        o        Increased sales of personal video recorder products

                                       15

<PAGE>

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

Sales to domestic  customers  were 30% of net sales for the three  months  ended
June 30,  2002 and  2001.  Sales to  European  customers  were 68% of net  sales
compared to 63% for the same period of last year.  Sales to Asian customers were
2% compared to 7% for the same period last year.

Gross  margins  increased $ 936,066 for the three  months  ended June 30,  2002.
Gross  margin  percentage  for the three  months  ended June 30,  2002 was 26.4%
compared to 18.5% for the three months ended June 30, 2001.  The  components  of
the margin increase are detailed below:

                                                                  Increase
                                                                 (decrease)
                                                                 ----------
Increase due to higher sales                                     $ 211,984
Increase  due to higher margins on assembled boards                590,630
Increase due to decrease in labor and other related costs          133,452
                                                                   -------
      Total  (decrease) in margins                               $936,066
                                                                 ========

The increase in gross margin percentage of 7.92% for the three months ended June
30, 2002 compared to the third quarter of fiscal 2001 is as follows:


                                                                  Increase
                                                                 (decrease)
                                                                 ----------
Increase in margin on assembled boards                            5.84%
Labor and other related costs as a lower percent of sales         2.08%
                                                                  -----
Net increase                                                      7.92%
                                                                  =====

The improved margin  percentage on assembled  boards was primarily  derived from
unit price reductions from our suppliers and  subcontractors  and a larger sales
mix of higher  gross  margin  product.  The  increase  in the margin  percentage
attributable  to labor and  related  costs was due to the  combination  of sales
increasing by 7.8% and while labor related and other costs decreased by 13.5%.

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

<TABLE>
<CAPTION>

                                                             Three months ended June 30,
                                                Dollar Costs                               Percentage of Sales
                                                                             Increase                          Increase
                                         2002             2001               (Decrease)      2002       2001   (Decrease)
                                         ----             ----               ----------      ----       ----   ----------
<S>                                       <C>              <C>                    <C>         <C>        <C>      <C>
Sales and Promotional                $ 1,332,194      $ 1,414,878         $  (82,684)        13.2%      15.1%    (1.9%)
Customer Support                          96,656           98,149             (1,493)         1.0%       1.0        0%
General and Administrative               760,634          872,811           (112,177)         7.5%       9.3%    (1.8%)
                                         -------          -------           --------          ---        ---     ----
     Total                           $ 2,189,484      $ 2,385,838         $ (196,354)        21.7%     25.4%     (3.7%)
</TABLE>

Selling General and  Administrative  expenses  decreased $196,354 from the prior
year's third fiscal  quarter.  As a percentage  of sales,  Selling,  General and
Administrative  expenses for the three  months ended June 30, 2002  decreased by
3.7% when compared to three months ended June 30, 2001

                                       16

<PAGE>

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

The decrease in sales and promotional expense of $82,684 was mainly due to :

        o   Lower advertising costs of $41,520 due to reduced special promotions
        o   Lower trade show costs $28,576 due to size and frequency
        o   Decreased compensation costs of $14,784 due to personnel reductions

The decrease in General and  Administrative  expenses of $ 112,177 was primarily
due to:

        o   Lower legal costs of $40,446 due to prior year legal fees related to
            the litigation settlement
        o   Decrease in compensation costs of $ 24,904 due to personnel
            reductions
        o   Decreased amortization costs of $24,907 mainly due to the write off
            of goodwill during the fourth quarter of fiscal 2001
        o   Lower rent costs of $ 12,584 and lower communication costs of $8,690
            due to the consolidation of the Eskape Labs office in California
            into the Hauppauge California office

Research and development  expenses increased $51,025 or approximately 14.4%. The
increase  was due to increased  compensation  costs and  increased  material and
contract services consumed.

Litigation settlement

During the third fiscal  quarter ended June 30, 2001,  the Company paid $212,500
to settle a claim pursuant to a copyright infringement dispute.

Other income (expense)

Net other expense for the three months ended June 30, 2002 was $37,264  compared
to net other income of $ 1,118,534 for the prior year's third fiscal  quarter as
detailed below:


                                                     Three months ended June 30,
                                                        2002              2001
                                                        ----              ----
Interest income                                       $  6,457      $    8,265
Interest expense                                             -          (6,826)
Foreign currency transaction gains (losses)            (15,718)          7,200
Non operational USD to Euro currency re-measurement    (28,003)        109,895
Insurance proceeds                                           -       1,000,000
                                                      --------       ---------
Total other income (expense)                          $(37,264)     $1,118,534
                                                      ========      ==========

The decrease in total other income (expense) was due to the receipt of insurance
proceeds  during  fiscal  2001  pursuant  to a key  man  life  insurance  on the
Company's  deceased former  President,  losses in fiscal 2002 resulting from the
"Non  operational USD to Euro currency  re-measurements"  in addition to foreign
currency transaction losses incurred during the third quarter of fiscal 2002.

"Non operational USD to Euro currency re-measurement" results from the revaluing
from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on
the books of our Luxembourg  based  subsidiary,  Hauppauge  Digital Europe SARL.
Since the functional  currency of Hauppauge Digital Europe SARL is the Euro, any
asset,  liability or equity  accounts  which are invested in or purchased  using
U.S. dollars by

                                       17

<PAGE>

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

Hauppauge  Digital Europe SARL need to be revalued into Euros at the end of each
reporting  period.  This  revaluation of U.S. dollar  denominated  accounts into
Euros results in a non transactional  re-measurement gain or loss, which we have
classified as " Non operational USD to Euro currency re-measurement."

Tax provision (benefit)

Our net tax  provision  (benefit)  for the three  months ended June 30, 2002 and
2001 is as follows:

                                                   Three months ended  June 30,
                                                     2002              2001
                                                     ----              ----
Tax (benefit) attributable to U.S operations     $ (163,000)        $(296,000)
Tax  expense  European operations                    10,997                 -
Deferred tax asset valuation allowance              163,000                 -
                                                 ----------         ---------
Net tax provision  (benefit)                     $   10,997         $(296,000)
                                                 ==========         ==========

Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg  corporation,  which  functions  as the  entity  which  services  our
European customers.  The new structure created separate domestic and foreign tax
entities,  with the  Luxembourg  entity  paying a  license  fee to our  domestic
operation for use of the  Hauppauge  name.  For the last two fiscal  years,  our
domestic  operation has incurred losses.  We analyzed the future  realization of
our  deferred  tax assets as of June 30,  2002 and we  concluded  that under the
present  circumstances,  it would be  appropriate  for us to record a  valuation
allowance  against the increase in the deferred  tax asset  attributable  to the
current quarter's loss from domestic operations.

As a result of the above,  we  recorded  net income of $26,126  for the  quarter
ended June 30 , 2002,  which resulted in break even basic and diluted net income
per  share on  weighted  average  basic and  diluted  shares  of  8,886,755  and
9,042,571,  respectively,  compared  to a net income of  $195,026  for the three
months ended June 30, 2001,  which  resulted in basic and diluted net income per
share of $0.02 on weighted  average  basic and diluted  shares of 8,890,504  and
9,164,496  respectively.  Options to purchase  1,025,822  and 590,222  shares of
common  stock  at  prices  ranging  $2.07  to $  10.06  and  $3.94  and  $10.06,
respectively,  were  outstanding for the three month period ending June 30, 2002
and 2001,  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 77%, 71% and 73 % of sales for the
years ended September 30, 2001, 2000 and 1999,  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 seasonality of retail sales.

                                       18

<PAGE>

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

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

                                      June 30,          September 30,
                                        2002                2001
                                      -------               ----
Cash                              $   5,472,658         $  4,422,239
Working Capital                      11,253,009           10,258,143
Stockholders'  Equity                11,994,186           11,185,618

The Company had cash and cash equivalents as of June 30, 2002 of $5,472,658,  an
increase of $1,050,419 over September 30, 2001.

The increase was due to :

Net income adjusted for non cash items                              $   824,636
Decrease in inventories                                               1,424,765
Effect of exchange rate changes on cash and cash equivalents            301,504
Proceeds from employee stock purchases                                   22,768
Less cash used for:
Increase in accounts receivable                                        (140,203)
Decrease in accounts payable and accrued expenses                    (1,086,858)
Increase in prepaid and other current assets                           (162,151)
Purchases of fixed assets                                               (62,775)
Purchase of treasury stock                                              (71,267)
                                                                        --------
   Net increase in cash                                             $ 1,050,419
                                                                     ===========

Net cash of $860,189  provided by operating  activities  was  primarily due to a
decrease in inventory of $1,424,765  and net income  adjusted for non cash items
of  $824,636,  offset  somewhat  by  cash  used to fund  increases  in  accounts
receivable of $140,203,  prepaid  expenses and other current  assets of $162,151
and a decrease in accounts payable and accrued expenses of $1,086,858.

Cash of $62,775  and  $71,267 was used to  purchase  fixed  assets and  purchase
treasury  stock.  Proceeds  from the stock  purchased by  employees  through the
employee stock purchase plan provided additional cash of $22,768.  The effect of
exchange rate changes on cash and cash equivalents increased cash by $301,504.

On April 5, 2001 we extended our agreement with Chase Manhattan Bank, to provide
us with a $6,500,000 credit facility. The facility is secured by our assets, and
expired on March 31, 2002. On January 25, 2002, Chase Manhattan Bank, citing the
current economic  conditions in the technology sector coupled with our two years
of non  profitability,  informed us that our line of credit had been terminated.
No amounts were outstanding under the credit facility on January 25, 2002. It is
the  intention  of the  Company  to  procure  a new  credit  facility  on  terms
acceptable to the Company .

On November 8, 1996, we approved a stock  repurchase  program for the repurchase
of up to  600,000  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, 2002, we held 504,117  treasury  shares  purchased for $1,442,829 at an
average purchase price of approximately $2.86 per share.

We  believe  that  our cash and  cash  equivalents  as of June 30,  2002 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.

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

                                       19

<PAGE>

Financial  Reporting  Release  No.  60,  which  was  recently  released  by  the
Securities  and  Exchange  Commission,  requires  all  companies  to  include  a
discussion of critical accounting policies or methods used in the preparation of
financial statements.

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

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

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

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

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

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

Hedging  program for sales denominated in a  foreign currency
-------------------------------------------------------------

Our European subsidiary accounts for approximately 70% to 75 % of our net sales.
All of our European  sales are  denominated in local  currencies,  primarily the
Euro. As a result of this,  we are a net receiver of  currencies  other than the
U.S dollar.  Changes in the exchange  rate subject us to market risks  resulting
from the fluctuation of the Euro to the U.S.  dollar.  In an attempt to minimize
these  risks,   we  enter  into  forward   exchange   contracts  with  financial
institutions.

                                       20

<PAGE>

Hedging program for  sales denominated in a  foreign currency-continued

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

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

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

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

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

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

The following table shows the Company's contractual obligations related to lease
obligations as of June 30, 2002:

<TABLE>
<CAPTION>

                                                     Payments due by period
                                                     ----------------------
<S>                                            <C>              <C>            <C>              <C>
Contractual obligations                      Total             1 year       1-3 years         4-5 years

Operating lease obligations               $ 2,379,645       $ 654,538       $ 1,325,288       $ 399,819
</TABLE>

Inflation
---------

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

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

                                       21

<PAGE>

In April 2001, the Emerging  Issues Task Force  ("EITF")  issued EITF No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the  Vendor's  Products,"  which was later  codified  along with  other  similar
issues,  into EITF 01-09,  "Accounting for Consideration  Given by a Vendor to a
Customer or a Reseller of the  Vendor's  Products"  ("EITF  01-09").  EITF 01-09
clarifies the income statement  classification  of costs incurred by a vendor in
connection with the reseller's  purchase or promotion of the vendor's  products,
resulting in certain  cooperative  advertising and product placement costs. EITF
01-09 became effective for the Company in the quarter ended March 31, 2002.

The  majority of vendor  consideration  granted by the Company  relates to co-op
advertising  agreements  with  the  Company's  retail  customers.  Based  on the
requirements of EITF 01-09,  the Company has properly  included these costs as a
component  of  selling,  general  and  administrative  expenses  for all periods
presented. In the opinion of management, it appears that the effect of all other
vendor  consideration  arrangements  would  not have a  material  effect  on the
statement of operations based on the requirements of the pronouncement.

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

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

The strength or weakness of the U.S.  dollar  against the Euro and British Pound
Sterling impacts our financial results. Changes in exchange rates may positively
or negatively affect our revenues, gross margins,  operating income and retained
earnings  (which  are all  expressed  in U.S.  dollars).  We engage  in  hedging
programs  aimed at limiting,  in part, the impact of currency  fluctuations.  By
selling  foreign  currency  forward,  we fix the rate of exchange at the time we
enter  into  the  contract.   We  deliver  these  currencies  to  the  financial
institutions at a later date when we actually receive the foreign currency.

As of June 30, 2002, we had foreign  currency forward  contracts  outstanding of
approximately  $ 3,746,000  against  delivery of the Euro. The contracts  expire
through October 2002.

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

For the three and nine month periods ended June 30, 2002, the Company recorded a
decrease to net sales of $750,000 and $653,000, respectively.  For the three and
nine months ended June 30, 2001, the Company  recorded an increase to sales of $
226,000 and $1,014,000, respectively.

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

                                       22

<PAGE>

Certain  statements  in this  Release  constitute  "forward-looking  statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance   or   achievements   expressed   or   implied   by  such
forward-looking  statements.  Such factors  include,  among other things,  those
described in the Company's filings with the Securities and Exchange  Commission,
including  but not limited to the  Company's  Annual Report in Form 10-K for the
fiscal year ended September 30, 2001.

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

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

We have been informed by counsel for the estate of the late Mr. Kenneth Aupperle
("Estate")  that they have  filed a Demand  for  Arbitration  with the  American
Arbitration  Association  claiming  property rights and interest in the Company,
certain  amounts  due  and  owing  to the  Estate  based  on  various  corporate
agreements with Mr. Aupperle and certain insurance  policies,  such amount to be
no less than $2,500,000. As of the date of filing, we have not received a formal
acknowledgement from the American Arbitration Association of the said Demand for
Arbitration.  Management is unable to comment on the merits of the claim without
more  information  from the Estate  and/or its  counsel.  However,  based on the
preliminary  information  presented to us, management believes that the claim is
without merit and will vigorously defend it.

Item 5  Other Information
        -----------------

Effecitve May 1, 2002,  the Company  entered into an employment  agreement  with
Dean  Cirielli,  hiring  Mr.  Cirielli  as the  Company's  President  and  Chief
Operating Officer. The employment agreement is filed with this report as exhibit
10.18.

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

(a)      Exhibits

         10.18   Form of Employment  agreement between Dean Cirielli and
                 Hauppauge Digital Inc.

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

         None

                                       23

<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 14, 2002                       By: /s/ Kenneth Plotkin
                                                --------------------
                                                KENNETH  PLOTKIN
                                                President and
                                                Chief Executive Officer


Date:  August 14, 2002                       By: /s/ Gerald Tucciarone
                                                ----------------------
                                                GERALD TUCCIARONE
                                                Treasurer and Chief
                                                Financial Officer

                                       24
<PAGE>