10-Q

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   December  31,  2008

OR

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

For the transition period from _______ to ________

Commission file number          1-13550

HAUPPAUGE DIGITAL INC.

(Exact name of  registrant as specified in its charter)

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

91 Cabot Court, Hauppauge, New York  11788

(Address of principal executive offices)

(631) 434-1600

(Registrant’s telephone  number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x YES          ¨ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  (See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

¨  LARGE ACCELERATED FILER                                      ¨  ACCELERATED  FILER

¨ NON-ACCELERATED FILER                                           x  SMALLER REPORTING COMPANY

Indicate by check mark whether the registrant is a shell company (as defined in  Rule12b-2 of the Exchange Act).

¨ YES              x  NO

As of  February 2, 2009,  10,044,359 shares of  .01 par value Common  Stock of the issuer were outstanding.

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

INDEX

	Page no.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets – December 31, 2008 (unaudited) and September 30, 2008	4
Condensed Consolidated Statements of Operations - Three Months ended December 31, 2008 (unaudited) and 2007  (unaudited)	5
Condensed Consolidated Statements of Other Comprehensive Income (Loss) Three Months ended December 31, 2008 (unaudited)  and 2007  (unaudited)	6
Condensed Consolidated Statements of Cash Flows-three months ended December 31, 2008 (unaudited) and 2007 (unaudited)	7
Notes to Condensed Consolidated Financial Statements	8-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17-22
Item 3. Quantitative and Qualitative Disclosures about Market Risks	23
Item  4T. Controls and Procedures	23

2

PART II.  OTHER INFORMATION
Item 1. Legal Proceedings	25
Item 1A.  Risk Factors	25
Item  2.  Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6. Exhibits	25-26
Signatures

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2008 (unaudited)			September 30, 2008
Assets:
Cash and cash  equivalents	$	11,372,560		$	14,191,721
Trade receivables, net of  various allowances		7,745,752			6,932,400
Other non trade receivables		4,005,106			2,316,057
Inventories		12,460,945			12,236,166
Deferred tax asset-current		1,133,073			1,133,073
Prepaid expenses and other current assets		984,288			1,093,406
Total  current assets		37,701,724			37,902,823
Intangible assets		4,094,014			-
Goodwill		1,023,504			-
Property, plant and equipment, net		938,485			769,288
Security deposits and other non current assets		108,400			102,227
Deferred tax asset-non current		887,611			887,611
Total assets	$	44,753,738		$	39,661,949
Liabilities and  Stockholders’  Equity:
Current Liabilities:
Accounts payable	$	13,123,510		$	10,406,836
Accrued expenses –license  fees		8,995,828			7,952,244
Accrued expenses – other		2,808,309			2,256,099
Note payable		2,500,000			-
Income taxes payable		84,504			58,234
Total current  liabilities		27,512,151			20,673,413
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized,
10,795,239  and 10,784,717  issued, respectively		107,952			107,847
Additional paid-in capital		16,852,689			16,709,201
Retained earnings		6,166,382			7,938,695
Accumulated other comprehensive loss		(3,481,099	)		(3,362,870	)
Treasury Stock, at cost, 759,579 shares		(2,404,337	)		(2,404,337	)
Total stockholders' equity		17,241,587			18,988,536
Total  liabilities and  stockholders' equity	$	44,753,738		$	39,661,949

See accompanying notes to condensed consolidated financial statements

4

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended December 31,
	2008			2007
Net sales	$	17,288,680		$	37,047,461
Cost  of sales		14,690,419			28,906,400
Gross profit		2,598,261			8,141,061
Selling, general and  administrative expenses		3,838,896			4,552,569
Research and development expenses		845,642			913,757
Income (loss)  from operations		(2,086,277	)		2,674,735
Other  income (expense):
Interest  income		4,469			6,194
Foreign currency  gain (loss)		347,002			(27,609	)
Other income		351,471			(21,415	)
Income (loss) before taxes		(1,734,806	)		2,653,320
Tax  provision		37,507			190,332
Net income (loss)	$	(1,772,313	)	$	2,462,988
Net income (loss)  per share:
Basic	$	(0.18	)	$	0.25
Diluted	$	(0.18	)	$	0.24

See accompanying notes to condensed  consolidated financial statements

5

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED  CONSOLIDATED STATEMENTS OF OTHER  COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three months ended December 31,
	2008			2007
Net income (loss)	$	(1,772,313	)	$	2,462,988
Foreign currency translation loss		(172,963	)		(463,007	)
Forward exchange contracts marked to market gain		54,734			38,793
Other  comprehensive income ( loss)	$	(1,890,542	)	$	2,038,774

See accompanying notes to condensed consolidated financial statements

6

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three months ended December 31
	2008			2007
Net income (loss)	$	(1,772,313	)	$	2,462,988
Adjustments to reconcile net income (loss) to net cash    used in  operating  activities:
Depreciation and amortization		64,995			65,093
Inventory reserve		-			650,000
Bad debt		-			100,000
Stock based  compensation expense		132,593			139,179
Other non cash items		(6,173	)		8,172
Changes in current assets and liabilities, net of effects of acquisition:
Accounts receivable		(2,502,401	)		(6,246,813	)
Inventories		(224,779	)		(1,348,754	)
Prepaid expenses and other current assets		109,118			(662,495	)
Accounts payable		2,559,525			3,400,979
Accrued expenses  and other current liabilities		1,207,564			547,804
Total adjustments		1,340,442			(3,346,835	)
Net cash used in  operating activities		(431,871	)		(883,847	)
Cash Flows From Investing Activities:
PCTV acquisition		(2,273,000	)		-
Purchases of property, plant and equipment		(7,061	)		(138,446	)
Net cash used in investing activities		(2,280,061	)		(138,446	)
Cash Flows From Financing Activities:
Purchase of treasury stock		-			(40,832	)
Proceeds from the exercise of stock options and employee  stock purchases		11,000			18,988
Net cash  provided by (used in)  financing activities		11,000			(21,844	)
Effect of exchange rates on cash		(118,229	)		(424,214	)
Net  decrease  in cash and cash equivalents		(2,819,161	)		(1,468,351	)
Cash and cash equivalents, beginning of period		14,191,721			11,581,657
Cash and cash equivalents, end of period	$	11,372,560		$	10,113,306
Supplemental disclosures:
Income taxes paid	$	11,002		$	159,036
Note payable to Avid Technology, Inc.	$	2,500,000			-

See accompanying notes to condensed consolidated financial statements

7

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1.  Basis of  Presentation

The accompanying unaudited condensed consolidated financial statements for Hauppauge Digital Inc. and subsidiaries (collectively, the “Company”) 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 Company’s consolidated financial position,  results of operations and cash flows as of and for the interim periods 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, 2008 Form 10-K.

The operating results for the three months ended  December 31, 2008 are not necessarily indicative of the results to be expected for the September 30, 2009 year end.

During the three months ended December 31, 2008, the Company completed an acquisition which is reflected in the Company’s financial statements for this period (see Note 11, "Acquisition of PCTV assets from Avid Technology, Inc.").

Certain reclassifications have been made to prior condensed consolidated  financial statements to conform to the current classifications.

Note 2.  Trade Accounts and Other Non-Trade Receivables

Trade receivables consist of:

· Trade receivables from sales to customers

· Allowances, consisting of sales and bad debt

Other non trade receivables consist of :

· Receivables pertaining to component parts purchased from the Company at cost by the Company’s  contract manufacturers which are excluded from sales

· General services tax (GST) and value added tax (VAT) reclaimable on goods purchased by the Company’s Asian and European locations

· Other minor non-trade receivables

Trade receivables  and other non-trade receivables as of  December  31, 2008 and September 30, 2008 consisted of :

8

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	December 31,			September 30,
	2008			2008
Trade receivables	$	12,379,785		$	11,668,214
Allowances and reserves		(4,634,033	)		(4,735,814	)
Total trade receivables		7,745,752			6,932,400
Receivable from contract manufacturers		3,492,614			1,795,225
GST and VAT taxes receivables		469,702			484,086
Other		42,790			36,746
Total non trade receivables	$	4,005,106		$	2,316,057

Note 3.   Foreign Currency Translations and Transactions

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

The financial position and results of operations of the Company’s European subsidiaries are determined using Euros as the functional currency.  Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period  end.  Income statement accounts are translated at the prevailing average spot rate.   Translation adjustments arising from the translation to U.S. dollars at differing exchange rates  are included in the accumulated other comprehensive loss account in stockholders’ equity. Gains and losses resulting from  transactions that are denominated in currencies other than Euros are included in earnings as a component of other income.  The Company had a translation loss of $3,346,325 recorded on the balance sheet  as of September 30, 2008. For the three months ended December 31, 2008, the Company  recorded on the balance sheet a deferred translation loss of $172,963, resulting in a translation loss of $3,519,288 recorded as a component of accumulated other comprehensive loss as of  December 31, 2008.

Note 4.  Inventories

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

	December 31,		September 30,
	2008		2008
Component parts	$	4,410,053	$	4,561,140
Finished goods		8,050,892		7,675,026
	$	12,460,945	$	12,236,166

Note 5.  Net Income (Loss) Per  Share

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

9

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three months
	Ended
	December 31,
	2008		2007
Weighted average shares outstanding-basic		10,035,088		9,843,799
Number of shares issued on the assumed exercise of  stock options		-		294,171
Weighted average shares outstanding-diluted		10,035,088		10,137,970

Options to purchase 1,767,744  and 882,000 shares of common stock  at  prices  ranging from  $1.05 to $8.75 and $3.38 to  $8.75 were outstanding for the three months ended December 31, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 6.  Accumulated  Other Comprehensive Loss

Accumulated other comprehensive loss consists of two components: translation gains  and losses  and FAS 133 mark to market gains and losses  on the Company’s open foreign exchange contracts. As of December 31, 2008,  appearing in the equity section under  “ Accumulated other  comprehensive loss” was a  loss of  $3,481,099, which consisted of a deferred translation loss of $3,519,288 and a deferred gain of $38,189 due to the mark to market  differences between  the  value of  the Company’s open forward exchange  contracts at the contract rates versus the same contracts valued at the period ending forward rate.

The table below  details the gains and losses  that make up the accumulated other  comprehensive  loss  on the Company’s balance sheet as of  December 31, 2008:

Accumulated other comprehensive loss	Balance as of			Oct 08 to Dec 08			Balance as of
Fiscal 2009 activity	Sept 30, 2008			gains (losses)			Dec 31, 2008
Translation  losses	$	(3,346,325	)	$	(172,963	)	$	(3,519,288	)
FAS 133 mark to market adjustment gain (loss)		(16,545	)		54,734			38,189
	$	(3,362,870	)	$	(118,229	)	$	(3,481,099	)

Note 7. Revenue recognition

The Company  sells its products through a sales channel which consist of retailers, PC manufacturers and distributors. The majority of the Company’s customers are granted lines of credit. The  product is shipped on account with the majority of customers primarily given 30 to 60 day payment terms. Those customers deemed as large credit risks either pay in advance or issue the Company a letter of credit.

The Company requires the customer to submit a purchase order to the Company.   The price of the product and payment terms are fixed per the terms of the purchase order.  Upon shipment of the order to the customer, the title to the goods is passed to the customer. The customer is legally obligated to pay for the order within the payment terms stated on the customer’s purchase order.  The obligation to insure the boards and the cost of any pilferage while in the customer’s possession is the responsibility of the customer.  The  Company sells analog, hybrid video recorders or digital  computer boards that are stocked on the shelves of  retailers and are subject to the normal consumer traffic that  retail stores attract. Aside from normal store promotions such as advertisements in the store’s circular, the Company has no further obligation to assist in the resale of the products.

10

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company offers some of its customers a right of return. The Company’s accounting complies with SFAS 48 Revenue Recognition when right of return exists, as typically at the end of every quarter the Company, based on historical data, evaluates its sales reserve level  based on the  previous six months sales.  Due to seasonal nature of the business coupled with the changing economic environment, management exercises some judgment with regard to the historical data  to arrive at the reserve.

The Company offers mail-in rebates on certain products at certain times as determined by the Company. The rebates are recorded as a reduction to sales. The Company also participates in limited cooperative advertising  programs with retailers and distributors and accounts for these in accordance with EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.

Note 8.  Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital TV tuner products for the personal computer market. The products are similar in function and share commonality of component parts and manufacturing processes.  The Company’s products are either sold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells product directly to PC manufacturers. The Company evaluates its product lines under the functional categories of analog TV tuners, digital TV tuners and other non-TV tuner products.

The Company’s products fall under three product categories:

· Analog TV tuners

· Digital  TV tuners, and combination analog and digital TV tuners

· Other non-TV tuner products

The Company’s  analog TV tuner products are TV tuner modules which can be added to a PC and enable  a PC user, among other things, to watch and record analog cable TV in a resizable window on a PC.

The Company’s digital TV and combination analog and digital tuner products are TV tuner modules which enable  a PC user, among other things, to watch and record analog cable TV and digital TV in a resizable window on a PC.

The Company’s  other non-TV tuner products enable a PC user, among other things,  to video conference, watch and listen to PC based videos, music and pictures on a TV set through a home network, and record TV shows on a PC for playback on  portable video players.

 Sales by functional category are as follows:

11

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three months ended December 31,
Product line sales	2008		2007
Analog TV tuner sales	$	656,661	$	11,687,545
Digital and combination analog and digital TV tuner  sales		15,822,858		24,025,631
Other non-TV tuner products		809,161		1,334,285
Total sales	$	17,288,680	$	37,047,461

The Company sells its products through a North American and international network of distributors and retailers. It maintains sales offices in both  Europe and Asia.  Sales percent by geographic region are as follows:

	Three months ended Dec 31,
Geographic region	2008			2007
The Americas		42	%		50	%
Europe		54	%		48	%
Asia		4	%		2	%
Total		100	%		100	%

Note 9. Tax provision

Our  tax provision for the three  months ended  December 31, 2008 and 2007 is as follows:

	Three months ended December 31,
	2008		2007
Federal income tax expense	$	-	$	100,000
Tax  expense  on international  operations		27,507		78,332
State taxes		10,000		12,000
Tax provision	$	37,507	$	190,332

Note 10. Recent Accounting  Pronouncements

The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) on October 1, 2008. SFAS No. 157 defines fair value, establishes a methodology for measuring fair value, and expands the required disclosure for fair value measurements. On February 12, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which amends SFAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The adoption of SFAS No. 157 for the Company’s financial assets and financial liabilities did not have a material impact on its consolidated financial statements.  At December 31, 2008 the Company had forward contracts whose fair value at quarter end was determined via inputs that included quoted prices for similar foreign exchange contracts in active markets and were thus considered to be Level 2 inputs under the SFAS 157 hierarchy (see Note 6).  Effective October 1, 2009, SFAS No. 157 will also apply to all other fair value measurements for the Company.  The Company is evaluating the effect the implementation of SFAS No. 157 will have on its non-financial assets and non-financial liabilities on its consolidated financial statements.

12

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities- An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements.

Note 11. Acquisition of PCTV assets from Avid Technology, Inc.

Effective December 24, 2008, pursuant to an Asset Purchase Agreement, dated as of October 25, 2008, as amended by that certain Amendment No. 1 to the Asset Purchase Agreement (the “Amendment”) (together with the Amendment, the “Asset Purchase Agreement”), PCTV Systems, Sarl, a Luxembourg company (“Buyer”) and  the Company’s  wholly-owned subsidiary,  acquired certain assets and properties (the “Acquired Assets”) of Avid Technology, Inc. (“Avid”), a Delaware corporation, Pinnacle Systems, Inc., a California corporation (“Pinnacle”), Avid Technology GmbH, a limited liability company organized under the laws of Germany, Avid Development GmbH, a limited liability company organized under the laws of Germany, and Avid Technology International BV (collectively, the “Sellers”).  The Acquired Assets were used by the Sellers in the business of, among other things, the development, manufacture and sale of personal devices containing a television tuner for receiving over-the-air, satellite and/or cable television signals that are used in conjunction with personal computers for personal television viewing.   The potential  increase in the Company’s customer base,  the potential  absorption of the PCTV operations into the existing Hauppauge infrastructure with minimal incremental costs  plus  the acquisition  of the seller’s technology, reference designs  and product line  were among the attributes that were considered in the  Company’s decision to complete the acquisition.

The purchase price consisted of $2,238,000 payable in cash; $2,500,000 payable pursuant to Promissory Note, dated December 24, 2008, made payable by the Buyer to Avid (the “Note”) and the assumption of certain liabilities.  The principal amount due pursuant to the Note is payable in 12 equal monthly installments of $208,333. The first such payment was due and payable on January 24, 2009.   Interest on the outstanding principal amount of the Note is payable at a rate equal to (i) from December 24, 2008 until the Maturity Date (as defined in the Note), five percent (5%), (ii) from and after the Maturity Date, or during the continuance of an Event of Default (as defined in the Note), at seven percent (7%).  Pursuant to the terms of the Note, the Buyer and its affiliates are prohibited from (i) declaring or paying any cash dividend, or making a distribution on, repurchasing, or redeeming, any class of stock or other equity or ownership interest in the Buyer or its affiliates, (ii) selling, leasing, transferring or otherwise disposing of any assets or property of the Buyer or any of its affiliates, or attempting to or contracting to do so, other than (a) the sale of inventory in the ordinary course of business and consistent with past practice, (b) the granting of non-exclusive licenses of intellectual property in the ordinary course of business and consistent with past practice and (c) the sale, lease, transfer or disposition of any assets or property (other than the Acquired Assets) with a value not to exceed $500,000 in the aggregate, or (iii) dissolving or liquidating, or merging or consolidating with any other entity, or acquiring all or substantially all of the stock or assets of any other entity.

13

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following allocation of the purchase price and the estimated transaction costs are preliminary and based on information available to the Company’s management at the time the condensed consolidated financial statements were prepared.  Accordingly, the allocation is subject to change and the impact of such changes could be material:

Purchase Price Paid
Cash paid to seller at closing	$	2,238,000
Notes payable assumed		2,500,000
Warranty liability assumed		262,000
Direct acquisition costs		344,649
Total purchase price	$	5,344,649
Allocation of Purchase Price
Identifiable intangible assets	$	4,094,014
Goodwill		1,023,504
Fixed assets		227,131
	$	5,344,649

The values allocated to goodwill and identifiable intangible assets in the acquisition are expected to be deductible for income tax purposes.

Because  the acquisition was completed on December 24, 2008, there are no results from the  operations of the acquisition  included in the Company’s December 31, 2008 operating results. The Company  is in the process of  obtaining  a purchase  price  allocation from an independent third party. On the Company’s  December 31, 2008 balance sheet the acquisition was recorded by allocating the purchase price to the assets acquired, including intangible assets such as customer lists, technology and reference designs,  based on an estimate  provided by the Company’s management. The Company expects the independent allocation to be completed during the Company’s second fiscal quarter.

The following unaudtited pro forma results assume the acquisition occurred on October 1, 2007.  The pro forma results do not purport to represent what our results of operations actually would have been if the transactions set forth above had occurred on the date indicated or what our results of operations will be in future periods.  The financial results for the periods prior to the acquisition were based on internal financial statements as provided by the sellers. 

14

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three months			Three months
	ended			ended
	December 31,			December 31,
Pro forma statements:	2008			2007
Revenue	$	28,311,680		$	49,505,461
Net income (loss)	$	(1,279,937	)	$	3,076,564
Net income (loss) per share
Basic	$	(0.13	)	$	0.31
Diluted	$	(0.13	)	$	0.30

In connection with the transactions contemplated by the Asset Purchase Agreement, the Buyer, Hauppauge Digital Europe Sarl (“HDES”), and Hauppauge Computer Works, Inc. (“HCW”), each a wholly-owned subsidiary of ours (collectively, the “Subsidiaries”) and the Sellers entered into a Transition Services Agreement, dated December 24, 2008 (the “TSA”), pursuant to which, among other things, the parties agreed to provide each other with certain services relating to infrastructure and systems, order processing and related matters and systems transition and related matters (the “Services”), as set forth in detail in the TSA.  The fees for such Services are set forth in the TSA.  The term of the TSA shall be until the earlier to occur of (i) 18 months following the Closing or (ii) termination of the last of the Services to be provided pursuant to the TSA.  The TSA may be terminated by the Subsidiaries at any time upon thirty (30) days prior written notice to the Sellers and may be terminated with respect to any particular Service to be provided pursuant to the TSA upon ten (10) days prior written notice to Seller.

Further, Avid, Avid Technology International BV (collectively, the “Consignor”), and HCW and HDES (collectively, the “Consignee”) entered into an Inventory and Product Return Agreement, dated December 24, 2008 (the “Inventory Agreement”).  Pursuant to the terms of the Inventory Agreement, the Consignor is obligated to deliver the Consigned Inventory (as defined in the Inventory Agreement) to the Consignee and the Consignee is obligated to, as applicable, fill orders from products held as Consigned Inventory before filling any such orders with products or inventory other than the Consigned Inventory.  Upon the sale of Consigned Inventory by the Consignee, the Consignee has agreed to pay the Consignor for such Consigned Inventory as follows: (i) if Consignee sells Consigned Inventory for a price equal to or greater than Consignor’s Cost (as defined in the Inventory Agreement) for such Consigned Inventory, then Consignee has agreed to pay Consignor an amount equal to one hundred percent (100%) of the Consignor Cost for such Consigned Inventory; or (ii) if Consignee sells Consigned Inventory for a price less than the Consignor Cost for such Consigned Inventory, then Consignee has agreed to pay Consignor an amount equal to eighty percent (80%) of the sales price for such Consigned Inventory.  The term of the Inventory Agreement expires 18 months from the date of execution.

15

In connection with the transactions contemplated by the Asset Purchase Agreement, Avid, Pinnacle and the Buyer also entered into an Intellectual Property License Agreement, dated December 24, 2008 (the “IP Agreement”).  Pursuant to the terms of the IP Agreement, Avid and Pinnacle have granted the Buyer certain irrevocable, personal, non-exclusive, worldwide, fully paid, royalty-free and non-transferable licenses to certain copyrights and other intellectual property rights owned by Avid, Pinnacle and their respective subsidiaries, subject to certain termination provisions as set forth in the IP Agreement.

16

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF   FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

THREE MONTH PERIOD  ENDED DECEMBER  31, 2008 COMPARED TO THREE

MONTH PERIOD ENDED DECEMBER 31, 2007

Results of operations for the three months ended  December 31, 2008 compared to December  31, 2007 are as follows:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	12/31/08			12/31/07			$			2008			2007			Variance
Net sales	$	17,288,680		$	37,047,461		$	(19,758,781	)		100.00	%		100.00	%		-
Cost of sales		14,690,419			28,906,400			(14,215,981	)		84.97	%		78.03	%		6.94	%
Gross profit		2,598,261			8,141,061			(5,542,800	)		15.03	%		21.97	%		-6.94	%
Gross profit %		15.03	%		21.97	%		-6.94	%
Selling, general and administrative expenses:
Sales and marketing		2,759,291			3,249,853			(490,562	)		15.96	%		8.77	%		7.19	%
Technical support		135,384			150,007			(14,623	)		0.78	%		0.40	%		0.38	%
General  and administrative		858,793			1,057,468			(198,675	)		4.97	%		2.85	%		2.12	%
Stock compensation		85,428			95,241			(9,813	)		0.49	%		0.26	%		0.23	%
Total selling, general and administrative expenses		3,838,896			4,552,569			(713,673	)		22.20	%		12.28	%		9.92	%
Research and development expenses		798,477			869,819			(71,342	)		4.62	%		2.35	%		2.27	%
Research & development stock compensation		47,165			43,938			3,227			0.27	%		0.12	%		0.15	%
Total expenses		4,684,538			5,466,326			(781,788	)		27.09	%		14.75	%		12.34	%
Net operating income (loss)		(2,086,277	)		2,674,735			(4,761,012	)		-12.06	%		7.22	%		-19.28	%
Other income (expense) :
Interest income		4,469			6,194			(1,725	)		0.03	%		0.02	%		0.01	%
Foreign currency		347,002			(27,609	)		374,611			2.01	%		-0.07	%		2.08	%
Total other income (expense)		351,471			(21,415	)		372,886			2.04	%		-0.05	%		2.09	%
Income (loss)  before taxes		(1,734,806	)		2,653,320			(4,388,126	)		-10.02	%		7.17	%		-17.19	%
Taxes  on income (loss)		37,507			190,332			(152,825	)		0.22	%		0.51	%		-0.29	%
Net income  (loss)	$	(1,772,313	)	$	2,462,988		$	(4,235,301	)		-10.24	%		6.66	%		-16.90	%

Net sales for the three months ended December 31, 2008 decreased $19,758,781 compared to the three months ended December 31, 2007 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Three Months		Three Months		Dollar			dollar			Geographic region
	ended 12/31/08		ended 12/31/07		Variance			variance %			2008			2007
The Americas		7,273,125		18,701,785		(11,428,660	)		-61	%		42	%		50	%
Europe		9,405,299		17,783,120		(8,377,821	)		-47	%		54	%		48	%
Asia		610,256		562,556		47,700			8	%		4	%		2	%
Total	$	17,288,680	$	37,047,461	$	(19,758,781	)		-53	%		100	%		100	%

17

Net sales to customers in The  Americas were 42%  and 50% of net sales for the three months ended December  31, 2008 and 2007, respectively.  Net sales to customers in Europe were 54%  and 48%  of net sales for the three months ended December 31, 2008 and 2007, respectively.   Net sales to customers in Asia were 4% and 2% of net sales for the three months ended December 31, 2008  and  2007, respectively.  We experienced a decrease in unit sales of about 52% while the dynamics of new production and changes in sales mix lowered the average sales price by about 4%.

Factors driving the  decline in  sales for the first quarter of fiscal 2009 were the effects of a weakened economy which curtailed consumer spending,  the financial problems leadng up to the liquidation of  Circuit City,  the weakening of the Euro and  the shift in emphasis  by the  PC manufacturers  to lower cost PCs which do not include TV tuners.

Gross profit

Gross profit  decreased $5,542,800 for the three months ended December 31, 2008 compared to the  three months ended December 31, 2007.

The decrease in  the gross profit are detailed below:

	Increase (decrease)
Lower sales	$	(5,750,069	)
Higher gross profit on  sales mix		272,656
Decrease in the Euro exchange rate		(884,734	)
Production and production related expenses		819,347
Total  decrease in gross profit	$	(5,542,800	)

Gross profit percentage for the three months  ended December 31, 2008 was 15.03 % compared to 21.97% for the three  months ended  December 31, 2007, resulting in a  gross profit decrease of  6.94%.

The decrease in the gross profit  percentage are detailed below:

	Decrease
Lower  gross profit on sales mix		(0.04	)%
Decrease in the Euro exchange rate		(3.50	)%
Production and production related expenses		(3.40	)%
Net increase in gross profit  percentage		(6.94	)%

Selling, general and administrative expenses

The chart below illustrates the components of Selling, general and administrative expense.

	Three months ended December 31,
	Dollar Costs							Percentage of Sales
	2008		2007		Decrease			2008			2007			Increase
Sales and marketing	$	2,759,291	$	3,249,853	$	(490,562	)		15.96	%		8.77	%		7.19	%
Technical  support		135,384		150,007		(14,623	)		0.78	%		0.40	%		0.38	%
General and administrative		858,793		1,057,468		(198,675	)		4.97	%		2.85	%		2.12	%
Stock compensation		85,428		95,241		(9,813	)		0.49	%		0.26	%		0.23	%
Total	$	3,838,896	$	4,552,569	$	(713,673	)		22.20	%		12.28	%		9.92	%

18

Selling, general and administrative expenses decreased $ 713,673 from the prior  year’s fiscal first quarter.  Sales and marketing expense decreased $490,562.  The  decrease in the Euro accounted for   $186,650  of the  decrease.  The average Euro rate for the first fiscal quarter of 2009 was  $1.3167 to 1 Euro compared to $1.4493 to 1 Euro for the first  fiscal quarter of  2008. Excluding the decrease due to the change in exchange rate sales and marketing expenses decreased $303,912.   Lower sales resulted in expenses related to sales, such as commissions and marketing development and  advertising  expense to decrease by $409,927.  Lower expenses of our European sales offices contributed an expense reduction of $66,683.  Offsetting these increases was in increase of $ 170,576 in sales and marketing personnel related expenses.

The  decrease  in general and administrative expense  of 198,675 was primarily due lower professional fees primarily for  legal fees of  $92,854  and a decrease in bad debt expense of  $100,000 related to the February 2008 liquidation of CompUSA.

Research and  development expenses

Research and development expenses decreased  $71,342.  Lower compensation due to the reduction of personnel and lower project expenses were responsible for the decrease.

Tax provision

Our  tax provision for the three months ended  December 31, 2008 and 2007 is as follows:

	Three months ended December 31,
	2008		2007
Federal income tax expense	$	-	$	100,000
Tax  expense  on international  operations		27,507		78,332
State taxes		10,000		12,000
Tax provision	$	37,507	$	190,332

We recorded a net loss of  $1,772,313, for the three  months ended December 31, 2008, which resulted in basic and diluted net loss per share of $0.18  on weighted average basic and diluted shares of  10,035,088  compared to a net income of $2,462,988 for the three months ended December 31, 2007, which resulted in  basic and diluted net income per share of $0.25 and $0.24, respectively,  on weighted average  basic and diluted shares of 9,843,799 and 10,137,970, respectively.

Options to purchase 1,767,744  and 882,000 shares of common stock  at  prices  ranging from  $1.05 to $8.75 and $3.38 to  $8.75 were outstanding for the three months ended December 31, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

19

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 second fiscal quarter (January  to March). In addition, our international sales, mostly in the European  market, were 52%, 44% and 54% of sales for the years ended September 30, 2008, 2007 and 2006, respectively.  Part of our third  and fourth quarters  (April through June and July to September) can be potentially impacted by the reduction of activity experienced in Europe during the summer holiday period.

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

Liquidity and capital resources

Our cash, working capital and stockholders’ equity position as of  December 31, 2008 and September 30, 2008 is set forth below:

	December 31, 2008		September 30, 2008
Cash	$	11,372,560	$	14,191,721
Working Capital		10,189,573		17,229,410
Stockholders’ Equity		17,241,587		18,988,536

We had cash and cash equivalents as of December 31,2008 of $11,372,560, a decrease of  $2,819,161 from September 30, 2008.

The decrease  in cash was due to :

Sources of cash:
Increase  in  accounts payable and accrued expenses	$	3,767,089
Decrease in prepaid expenses and other current assets		109,118
Proceeds from employee stock purchases		11,000
Less cash used for:
PCTV acquisition-net of note payable		(2,273,000	)
Net loss adjusted for non cash items		(1,580,898	)
Effect of exchange rates on cash		(118,229	)
Increase in  accounts receivables		(2,502,401	)
Increase in inventory		(224,779	)
Capital equipment purchases		(7,061	)
Net cash  decrease	$	(2,819,161	)

Net cash of $431,871 used in operating activities was due to the net loss for the quarter adjusted for non cash items of $1,580,898 and increases in accounts receivable and inventories of $2,502,401 and $224,779, respectively,  offset  by a decrease in accounts payable and accrued expenses of $3,767,089  and a decrease  in prepaid expenses and other current assets of $109,118.  The  increase in   accounts receivable  was due to an increase in sales of approximately 10% between the fourth fiscal quarter of fiscal 2008 and the  first fiscal quarter of 2009.

20

Cash of $2,280,061 was used to in investment activities.  Of this amount, $2,273,000 was used for the acquisition of the PCTV assets and $7,061 was used to purchase fixed assets. The $2,273,000  used for the PCTV acquisition consisted of   $2,238,000 used  against the $5,000,000 purchase price and $35,000   disbursed in payment of direct expenses of the acquisition. We also incurred a Note Payable to Avid Technology, Inc. of $2,500,000 payable with interest over a twelve month period starting January 24, 2009 and ending December 24, 2009. The note bears interest at a 5% annual  rate.

Cash of $11,000 was provided from purchases of stock pursuant to our employee stock purchase plan.

Line of Credit

On December 12, 2008, Hauppauge Computer Works, Inc. (“HCW”), a wholly-owned subsidiary of ours, executed a Fourth Amended and Restated Promissory Note (the “Fourth Amendment”) to the order of JPMorgan Chase Bank, N.A. (the “Bank”). The Fourth Amendment modified the terms and conditions of that certain Promissory Note dated December 1, 2005, executed by HCW and made payable to the order of the Bank (the “Note”), as amended by an Amended and Restated Promissory Note dated March 31, 2006, as further amended by a Second Amended and Restated Promissory Note dated February 28, 2007 and as further amended by a Third Amended and Restated Promissory Note dated March 31, 2008.  The Fourth Amendment, among other things, reduces the amount HCW is authorized to borrow from the Bank from a principal amount of up to Five Million Dollars ($5,000,000) to a principal amount of up to Seven Hundred Thousand Dollars ($700,000), based upon borrowings made under the Fourth Amendment which may be made from time to time by HCW (each, a “Loan”).  The Fourth Amendment matures on March 31, 2009 (the “Maturity Date”) and principal payments are due on the Maturity Date, and thereafter on demand.  Until the Maturity Date, Loans made under the Amendment bear interest annually at HCW’s option of (i) the Eurodollar Rate (as defined in the Fourth Amendment) (each, a “Eurodollar Loan”) or (ii) the Prime Rate (as defined in the Fourth Amendment) minus one percent (1.0%) (each, a “Prime Loan”).  Interest is payable with respect to each Eurodollar Loan at the end of one month after the date of such Loan (the “Interest Period”), provided that, upon the expiration of the first Interest Period and each Interest Period thereafter, each Eurodollar Loan will be automatically continued with an Interest Period of the same duration, unless HCW notifies the Bank that it intends to convert a Eurodollar Loan to a Prime Loan or if the Bank is prohibited from making Eurodollar Loans, and with respect to each Prime Loan the last day of each calendar month during the term of the Fourth Amendment and on the date on which a Prime Loan is converted to a Eurodollar Loan, until such Loan(s) shall be due and payable. Interest due after the Maturity Date shall be payable at a rate of three percent (3%) per annum over the Prime Rate.

In connection with the Fourth Amendment, we agreed that all of the terms and conditions of (i) our Guaranty as entered into with the Bank, dated as of December 1, 2005, and (ii) the Pledge Agreement by and among us, the Bank and HCW, dated as of December 1, 2005 (pursuant to which, among other things, we granted to the Bank a first priority right of pledge on approximately two-thirds of the outstanding capital shares of Hauppauge Digital Europe Sarl), each as amended, restated, supplemented or modified, from time to time and as entered into in connection with the Note, shall remain in full force and effect and apply to the terms and conditions of the Amendment.

Further, on December 12, 2008, in connection with the Fourth Amendment, HCW entered into a Pledge Security Agreement with the Bank (the “Pledge Security Agreement”), whereby HCW grants the Bank a security interest in its certificate of deposit account held with the Bank.  The aggregate value of the Collateral (as defined in the Pledge Security Agreement) held pursuant to the Pledge Security Agreement shall not be less than Seven Hundred Thousand Dollars ($700,000) at any given time.

21

There were no borrowings outstanding  and no letters of credit outstanding  as of  the filing date of this Quarterly Report  on Form 10-Q.

Our cash requirements for the next twelve months will include the cash required to pay off the  note  to Avid Technology, Inc related to the  purchase the  PCTV product line and the cash needed to fund the acquisition’s working capital needs.  With the proper execution of our business and operational integration plan, we believe that our cash and cash equivalents as of  December 31, 2008 and our internally generated cash flow  will provide us with sufficient liquidity to meet our capital needs for the next twelve months.   Failure to meet the operating and integration plan could require the need for additional sources of capital.   In light of the current economic and credit conditions there can be no assurances that we will be able to find external sources of financing to fund our additional working capital needs.

Future contractual  obligations

The following table shows our contractual obligations related to lease obligations as of  December 31, 2008:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Note payable to Avid Technology Inc.	$	2,500,000	$	2,500,000
Operating lease obligations	$	1,576,207	$	580,953	$	910,228	$	85,026
Total	$	4,076,207	$	3,080,953	$	910,228	$	85,026

Effective December 24, 2008, pursuant to an Asset Purchase Agreement dated as of October 25, 2008,  we acquired certain assets and properties of Avid Technology, Inc., Pinnacle Systems, Inc., Avid Technology GmbH, Avid Development GmbH, and Avid Technology International BV.  The purchase price consisted of $2,238,000 payable in cash and $2,500,000 payable pursuant to Promissory Note  made payable by  us to Avid. The principal amount due pursuant to the Note is payable in 12 equal monthly installments of $208,333.  The first payment is due and payable on January 24, 2009.   Interest on the outstanding principal amount of the Note is payable at a rate equal to (i) from December 24, 2008 until the Maturity Date , five percent (5%), (ii) from and after the Maturity Date, or during the continuance of an Event of Default , at seven percent (7%).  Pursuant to the terms of the Note, we and our affiliates are prohibited from (i) declaring or paying any cash dividend, or making a distribution on, repurchasing, or redeeming, any class of stock or other equity or ownership interest in the Buyer or its affiliates, (ii) selling, leasing, transferring or otherwise disposing of any assets or property of the Buyer or any of its affiliates, or attempting to or contracting to do so, other than (a) the sale of inventory in the ordinary course of business and consistent with past practice, (b) the granting of non-exclusive licenses of intellectual property in the ordinary course of business and consistent with past practice and (c) the sale, lease, transfer or disposition of any assets or property (other than the Acquired Assets) with a value not to exceed $500,000 in the aggregate, or (iii) dissolving or liquidating, or merging or consolidating with any other entity, or acquiring all or substantially all of the stock or assets of any other entity.

Inflation

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

22

Item  3.  Quantitative and qualitative disclosures about market risks

For each of the three fiscal years ended September 30, 2008, at least 40% of our  sales were generated by our European subsidiary and were invoiced  and collected  in local currency, which was primarily the Euro. On the supply side, since we predominantly deal with North American and Asian suppliers and contract manufacturers, approximately 90% of our inventory required to support  our European sales are purchased and paid in U.S. Dollars.

The combination of sales billed in Euros supported by inventory purchased in U.S. Dollars results in an absence of a natural local currency hedge. Consequently, our financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.

We attempt to reduce these risks by entering into foreign exchange forward contracts with financial institutions. The purpose of these forward contracts is to hedge the foreign currency market exposures underlying the U.S. Dollar denominated inventory purchases required to support our European sales.

Item 4T. Controls and procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2008.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

23

Special note regarding forward looking statements

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws.  The events described in forward-looking statements contained in this Quarterly Report may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results.  The words “may,” “will,” “expect,” “believe,” “anticipated,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences (including, but not limited to, those set forth in our Annual Report on Form 10-K for the year ended September 30, 2008), many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.  All cautionary statements made in this Quarterly Report should be read as being applicable to all related forward-looking statements wherever they appear.

24

PART II.  OTHER INFORMATION

Item 1.  Legal  proceedings

There have been no material changes with respect to legal proceedings disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

Item 1A.  Risk factors

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

Item 2.  Unregistered sales of equity securities and use of proceeds

None sold  during the first fiscal quarter ended December 31. 2008.

Item 6.  Exhibits

2.1	Asset Purchase Agreement, dated October 25, 2008, by and among Avid Technology, Inc., Pinnacle Systems, Inc., Avid Technology GMBH, Avid Development GMBH, Avid Technology International BV, and PCTV Corp. (1)
2.1.1	Buyer Parent Guaranty, dated October  25, 2008, by Hauppauge Digital, Inc. to and for the benefit of Avid Technology, Inc., Pinnacle Systems, Inc., Avid Technology GMBH, Avid Development GMBH, and Avid Technology International BV (1)
2.1.2	Amendment No. 1 to Asset Purchase Agreement, dated December 24, 2008, by and among Avid Technology, Inc., Pinnacle Systems, Inc., Avid Technology GMBH, Avid Development GMBH, Avid Technology International BV, and PCTV Corp. (2)
2.1.3	Secured Promissory Note, dated December 24, 2008, made by PCTV Systems S.a.r.l. in favor of Avid Technology, Inc. (2)
2.1.4	Transition Services Agreement, dated December 24, 2008, by and among Hauppauge Digital Europe S.a.r.l., PCTV Systems S.a.r.l., Hauppauge Computer Works, Inc., Avid Technology, Inc., Pinnacle Systems, Inc., Avid Technology GMBH, Avid Development GMBH, and Avid Technology International BV. (2)
2.1.5	Inventory and Product Return Agreement, dated December 24, 2008, by and among Avid Technology, Inc., Avid Technology International BV, Hauppauge Computer Works, Inc. and Hauppauge Digital Europe S.a.r.l. (2)
2.1.6	Intellectual Property License Agreement, dated December 24, 2008, by and among Avid Technology, Inc., Pinnacle Systems, Inc. and PCTV Systems S.a.r.l. (2)

25

3.1	Certificate of Incorporation (3)
3.1.1	Certificate of Amendment of the Certificate of Incorporation, dated July 14, 2000 (4)
3.2	By-laws, as amended to date (5)
4.1	Form of Common Stock Certificate (3)
10.1	Fourth Amended and Restated Promissory Note, dated as of December 2, 2008, made payable by Hauppauge Computer Works, Inc. to the order of JP Morgan Chase Bank, N.A. in the original principal amount of Seven Hundred Thousand ($700,000) Dollars. (6)
10.2	Pledge Security Agreement, dated as of December 2, 2008, by Hauppauge Computer Works, Inc. and JP Morgan Chase Bank, N.A. (6)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)           Denotes document filed as an Exhibit to our Form 8-K dated October 25, 2008 and incorporated herein by reference.

(2)           Denotes document filed as an Exhibit to our Form 8-K dated December 24, 2008, and incorporated herein by reference.

(3)           Denotes document filed as an Exhibit to our Registration Statement on Form SB-2 (No. 33-85426), as amended, effective January 10, 1995 and incorporated herein by reference.

(4)           Denotes document filed as an Exhibit to our Form 10-K for the period ended September 30, 2006, and incorporated herein by reference.

(5)           Denotes document filed as an Exhibit to our Form 8-K dated December 26, 2007 and incorporated herein by reference.

(6)           Denotes document filed as an Exhibit to our Form 8-K dated December 12, 2008 and incorporated herein by reference.

26

SIGNATURES

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

		HAUPPAUGE DIGITAL INC. Registrant
Date:	February 13, 2009	By	/s/Kenneth Plotkin
		KENNETH  PLOTKIN
		Chief Executive Officer, Chairman of the
		Board, President (Principal Executive Officer)
Date:	February 13, 2009	By	/s/Gerald Tucciarone
		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer,
		(Principal Financial Officer and Principal
		Accounting Officer) and Secretary

27

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Kenneth Plotkin, certify that:

1.           I have reviewed this Form 10-Q of Hauppauge Digital, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15-(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s  internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2009	/s/Kenneth Plotkin
	Kenneth Plotkin
	Principal  Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Gerald Tucciarone, certify that:

1.           I have reviewed this Form 10-Q of Hauppauge Digital, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15-(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2009	/s/Gerald Tucciarone
	Gerald Tucciarone
	Principal  Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hauppauge Digital, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:   February 13, 2009	/s/ Kenneth Plotkin
	Kenneth Plotkin
	Chief Executive Officer
	/s/ Gerald Tucciarone
	Gerald Tucciarone
	Chief Financial Officer, Treasurer
	and Secretary