Unassociated Document

10-Q 1 v157906_10q.htm Unassociated Document

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, 2009

¨ 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (' 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ 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
(Do not check if a 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 July 29, 2009, 10,054,463 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	4

Consolidated Balance Sheets – June 30, 2009 (unaudited) and September 30, 2008	4

Consolidated Statements of Operations - Three Months ended June 30, 2009 (unaudited) and 2008 (unaudited)	5

Consolidated Statements of Operations - Nine Months ended June 30, 2009 (unaudited) and 2008 (unaudited)	6

Consolidated Statements of Other Comprehensive Loss Three Months and Nine Months ended June 30, 2009 (unaudited) and 2008 (unaudited)	7

Consolidated Statements of Cash Flows-Nine Months ended June 30, 2009 (unaudited) and 2008 (unaudited)	8

Notes to Consolidated Financial Statements	9-17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-25

Item 3. Quantitative and Qualitative Disclosures about Market Risks	25-26

Item 4T. Controls and Procedures	26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	27

Item 1A. Risk Factors	27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6. Exhibits	27-28

Signatures	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2009 (unaudited)			September 30 , 2008
Assets:
Cash and cash equivalents	$	9,033,115		$	14,191,721
Trade receivables, net of various allowances		7,147,085			6,932,400
Other non trade receivables		3,288,182			2,316,057
Inventories		9,934,266			12,236,166
Deferred tax asset-current		1,133,073			1,133,073
Prepaid expenses and other current assets		1,112,100			1,093,406
Total current assets		31,647,821			37,902,823

Intangible assets, net of amortization		4,884,811			-
Property, plant and equipment, net		818,144			769,288
Security deposits and other non current assets		108,070			102,227
Deferred tax asset-non current		887,611			887,611
Total assets	$	38,346,457		$	39,661,949

Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	9,262,165		$	10,406,836
Accrued expenses – fees		10,567,740			7,952,244
Accrued expenses – other		3,342,408			2,256,099
Note payable		1,250,045			-
Income taxes payable		119,854			58,234
Total current liabilities		24,542,212			20,673,413

Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized,
10,808,775 and 10,784,717 issued, respectively		108,087			107,847
Additional paid-in capital		17,135,030			16,709,201
Retained earnings		2,346,930			7,938,695
Accumulated other comprehensive loss		(3,381,465	)		(3,362,870	)
Treasury Stock, at cost, 759,579 shares		(2,404,337	)		(2,404,337	)
Total stockholders' equity		13,804,245			18,988,536
Total liabilities and stockholders' equity	$	38,346,457		$	39,661,949

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended June 30,
	2009			2008

Net sales	$	13,067,124		$	19,415,731
Cost of sales		9,845,438			15,568,094
Gross profit		3,221,686			3,847,637

Selling, general and administrative expenses		3,954,536			3,997,595
Research and development expenses		1,122,911			966,690
Loss from operations		(1,855,761	)		(1,116,648	)

Other income (expense):
Interest income		1,707			11,816
Interest expense		(20,832	)		-
Foreign currency gain		25,532			15,823
Total other income		6,407			27,639
Loss before taxes		(1,849,354	)		(1,089,009	)
Tax provision		38,028			28,554
Net loss	$	(1,887,382	)	$	(1,117,563	)

Net loss per share:
Basic	$	(0.19	)	$	(0.11	)
Diluted	$	(0.19	)	$	(0.11	)

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Nine months ended June 30,
	2009			2008

Net sales	$	43,089,233		$	73,975,884
Cost of sales		34,305,007			58,647,765
Gross profit		8,784,226			15,328,119

Selling, general and administrative expenses		11,655,103			12,500,452
Research and development expenses		3,236,401			2,859,386
Loss from operations		(6,107,278	)		(31,719	)

Other income (expense):
Interest income		11,332			28,633
Interest expense		(49,478	)		-
Foreign currency gain (loss)		669,209			(16,130	)
Total other income		631,063			12,503
Loss before taxes		(5,476,215	)		(19,216	)
Tax provision		115,550			160,437
Net loss	$	(5,591,765	)	$	(179,653	)

Net loss per share:
Basic	$	(0.56	)	$	(0.02	)
Diluted	$	(0.56	)	$	(0.02	)

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

	Three months ended June 30,
	2009			2008
Net loss	$	(1,887,382	)	$	(1,117,563	)
Foreign currency translation gain ( loss)		494,085			(336,577	)
Forward exchange contracts marked to market (loss) gain		(57,808	)		128,327
Other comprehensive loss	$	(1,451,105	)	$	(1,325,813	)

	Nine months ended June 30,
	2009			2008
Net loss	$	(5,591,765	)	$	(179,653	)
Foreign currency translation gain (loss)		1,449			(462,344	)
Forward exchange contracts marked to market gain (loss)		(20,134	)		81,503
Other comprehensive loss	$	(5,610,450	)	$	(560,494	)

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended June 30,
	2009			2008
Net loss	$	(5,591,765	)	$	(179,653	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		584,012			196,499
Inventory reserve		-			650,000
Bad debt expense		-			120,000
Stock based compensation expense		401,936			543,537
Other non cash items		(5,800	)		7,737
Changes in current assets and liabilities, net of effects of acquisition:
Accounts receivable		(1,186,810	)		10,966,426
Inventories		2,301,900			1,204,545
Prepaid expenses and other current assets		(18,694	)		(430,391	)
Accounts payable		(1,236,820	)		(12,751,795	)
Accrued expenses and other current liabilities		3,356,714			695,098
Total adjustments		4,196,438			1,201,656
Net cash (used in) provided by operating activities		(1,395,327	)		1,022,003

Cash Flows From Investing Activities:
PCTV acquisition		(2,490,500	)		-
Purchases of property, plant and equipment		(28,319	)		(237,896	)
Net cash used in investing activities		(2,518,819	)		(237,896	)

Cash Flows From Financing Activities:
Purchase of treasury stock		-			(40,832	)
Payments on note payable		(1,249,998	)		-
Proceeds from the exercise of stock options and employee stock purchases		24,133			282,925
Net cash (used in) provided by financing activities		(1,225,865	)		242,093
Effect of exchange rates on cash		(18,595	)		(380,841	)
Net (decrease) increase in cash and cash equivalents		(5,158,606	)		645,359
Cash and cash equivalents, beginning of period		14,191,721			11,581,657
Cash and cash equivalents, end of period	$	9,033,115		$	12,227,016
Supplemental disclosures:
Interest paid	$	49,478		$	-
Income taxes paid	$	54,288		$	241,338
Note payable to Avid Technology, Inc.	$	2,500,000		$	-

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited 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 and nine months ended June 30, 2009 are not necessarily indicative of the results to be expected for the September 30, 2009 year end.

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

Subsequent events have been evaluated by Management after the balance sheet date through the financial statement issuance date for appropriate accounting and disclosure.

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 June 30, 2009 and September 30, 2008 consisted of :

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	June 30,			September 30,
	2009			2008
Trade receivables	$	11,235,305		$	11,668,214
Allowances and reserves		(4,088,220	)		(4,735,814	)
Total trade receivables		7,147,085			6,932,400
Receivable from contract manufacturers		2,393,436			1,795,225
GST and VAT taxes receivables		763,203			484,086
Other		131,543			36,746
Total non trade receivables	$	3,288,182		$	2,316,057

Note 3. Inventories

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

	June 30,		September 30,
	2009		2008
Component parts	$	3,657,763	$	4,561,140
Finished goods		6,276,503		7,675,026
	$	9,934,266	$	12,236,166

Note 4. 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:

	Three months ended				Nine months ended
	June 30,				June 30,
	2009		2008		2009		2008
Weighted average shares outstanding-basic		10,048,771		10,018,152		10,042,546		9,951,552
Number of shares issued on the assumed
exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,048,771		10,018,152		10,042,546		9,951,552

Options to purchase 1,522,394 and 1,767,744 shares of common stock, at prices for both periods ranging from $1.05 to $8.75, were outstanding for the three months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Options to purchase 1,522,394 and 1,767,744 shares of common stock at prices for both periods ranging from $1.05 to $8.75, respectively, were outstanding for the nine months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 5. 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 June 30, 2009, appearing in the equity section under “ Accumulated other comprehensive loss” was a loss of $3,381,465, which consisted of a deferred translation loss of $3,344,876 and a deferred loss of $36,589 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 June 30, 2009:

Accumulated other comprehensive loss	Balance as of			Oct 08 to June 09			Balance as of
Fiscal 2009 activity	Sept 30, 2008			gains (losses)			June 30, 2009
Translation gain (losses)	$	(3,346,325	)	$	1,449		$	(3,344,876	)
FAS 133 mark to market loss		(16,545	)		(20,044	)		(36,589	)
	$	(3,362,870	)	$	(18,595	)	$	(3,381,465	)

Note 6. 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.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO 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 7. 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 tuner boards

Digital TV tuner, and combination analog and digital TV tuner, boards

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.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Sales by functional category are as follows:

	Three months ended June 30,				Nine months ended June 30,
Product line sales	2009		2008		2009		2008
Analog TV tuner products	$	336,030	$	1,000,041	$	2,380,493	$	7,146,937
Digital and combination analog and digital TV tuner products		11,841,827		17,180,626		37,447,228		64,071,903
Other non-TV tuner products		889,267		1,235,064		3,261,512		2,757,044
Total sales	$	13,067,124	$	19,415,731	$	43,089,233	$	73,975,884

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 June 30,						Nine months ended June 30,
Geographic region	2009			2008			2009			2008
The Americas		53	%		42	%		50	%		48	%
Europe		44	%		54	%		47	%		49	%
Asia		3	%		4	%		3	%		3	%
Total		100	%		100	%		100	%		100	%

Note 8. Tax provision

The Company’s tax provision for the three months and nine months ended June 30, 2009 and 2008 is as follows:

	Three months ended June 30,				Nine months ended June 30,
	2009		2008		2009		2008
Tax expense on international operations	$	28,028	$	28,554	$	85,550		143,437
State taxes		10,000		-		30,000		17,000
Tax provision	$	38,028	$	28,554	$	115,550	$	160,437

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 9. Fair Value Measurements

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 June 30, 2009 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 5). 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.

The carrying amount of cash, accounts receivables and accounts payables and other short-term financial instruments approximate their fair value due to their short-term nature. The Company believes that borrowings outstanding under its note payable approximate fair value due to the short-term duration of the loan.

Note 10. 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.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 paid 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. As of June 30, 2009, the note payable to Avid Technologies Inc. was $1,250,045. The interest paid on the note was $49,478 for nine months ended June 30, 2009.

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 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		489,060
Total purchase price	$	5,489,060

Allocation of Purchase Price
Identifiable intangible assets	$	5,261,929
Fixed assets		227,131
Total allocation of purchase price	$	5,489,060

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

Because the acquisition was completed on December 24, 2008, results from the operations of the PCTV business effectively started on January 1, 2009. On the Company’s June 30, 2009 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 a purchase price allocation provided by an independent business valuation company.

The following unaudited pro forma results assume the acquisition occurred on October 1, 2007. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions set forth above had occurred on the date indicated or what the Company’s 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.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three months			Nine months			Nine months
	ended			ended			ended
	June 30,			June 30,			June 30,
Pro forma statements:	2008			2009			2008
Revenue	$	30,438,731		$	54,112,223		$	107,044,884

Net loss	$	(2,985,563	)	$	(6,289,775	)	$	(5,783,653	)
Net loss per share
Basic net loss per share	$	(0.30	)	$	(0.63	)	$	(0.58	)
Diluted net loss per share	$	(0.30	)	$	(0.63	)	$	(0.58	)

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 the Company (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 and 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.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED JUNE 30 2009 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2008

Results of operations for the three months ended June 30, 2009 compared to June 30, 2008 are as follows:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/09			6//30/08			$			2009			2008			Variance
Net sales	$	13,067,124		$	19,415,731		$	(6,348,607	)		100.00	%		100.00	%		-
Cost of sales		9,845,438			15,568,094			(5,722,656	)		75.35	%		80.18	%		-4.83	%
Gross profit		3,221,686			3,847,637			(625,951	)		24.65	%		19.82	%		4.83	%
Gross profit %		24.65	%		19.82	%		4.83	%
Selling, general and administrative expenses:
Sales and marketing		2,753,296			2,776,622			(23,326	)		21.07	%		14.30	%		6.77	%
Technical support		127,922			131,393			(3,471	)		0.98	%		0.68	%		0.30	%
General and administrative		796,503			994,339			(197,836	)		6.11	%		5.12	%		0.99	%
Amortization of intangible assets		188,709			-			188,709			1.45	%		0.00	%		1.45	%
Stock compensation		88,106			95,241			(7,135	)		0.68	%		0.49	%		0.19	%
Total selling, general and administrative expenses		3,954,536			3,997,595			(43,059	)		30.29	%		20.59	%		9.70	%
Research and development expenses		1,074,268			922,752			151,516			8.22	%		4.75	%		3.47	%
Research & development stock compensation		48,643			43,938			4,705			0.36	%		0.24	%		0.12	%
Total expenses		5,077,447			4,964,285			113,162			38.87	%		25.58	%		13.29	%
Net operating loss		(1,855,761	)		(1,116,648	)		(739,113	)		-14.22	%		-5.76	%		-8.46	%

Other income (expense) :
Interest income		1,707			11,816			(10,109	)		0.01	%		0.06	%		-0.05	%
Interest (expense)		(20,832	)		-			(20,832	)		-0.16	%		0.00	%		-0.16	%
Foreign currency		25,532			15,823			9,709			0.19	%		0.08	%		0.11	%
Total other income (expense)		6,407			27,639			(21,232	)		0.04	%		0.14	%		-0.10	%
Loss before taxes		(1,849,354	)		(1,089,009	)		(760,345	)		-14.18	%		-5.62	%		-8.56	%
Taxes provision		38,028			28,554			9,474			0.29	%		0.15	%		0.14	%
Net loss	$	(1,887,382	)	$	(1,117,563	)	$	(769,819	)		-14.47	%		-5.77	%		-8.70	%

Net sales for the three months ended June 30, 2009 decreased $6,348,607 compared to the three months ended June 30, 2008 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Three Months		Three Months		Dollar			dollar			Geographic region
	ended 6/30/09		ended 6/30/08		Variance			variance %			2009			2008
The Americas	$	6,834,846	$	8,112,299	$	(1,277,453	)		-16	%		53	%		42	%
Europe		5,821,748		10,561,243		(4,739,495	)		-45	%		44	%		54	%
Asia		410,530		742,189		(331,659	)		-45	%		3	%		4	%
Total	$	13,067,124	$	19,415,731	$	(6,348,607	)		-33	%		100	%		100	%

Net sales to customers in The Americas were 53% and 42% of net sales for the three months ended June 30, 2009 and 2008, respectively. Net sales to customers in Europe were 44% and 54% of net sales for the three months ended June 30, 2009 and 2008, respectively. Net sales to customers in Asia were 3% and 4% of net sales for the three months ended June 30, 2009 and 2008, respectively. We experienced a decrease in unit sales of about 36% while the change in sales mix increased the average sales price by about 4%.

Factors driving the decline in sales for the third quarter of fiscal 2009 were the effects of a weakened economy which curtailed consumer spending, the liquidation of Circuit City, the weakening of the Euro compared to the U.S. dollar and the shift in emphasis by PC manufacturers to lower cost PCs which do not include TV tuners. Somewhat offsetting the declines caused by the factors listed above was the addition of sales from the PCTV product line that we acquired from Avid Technology, Inc.

Gross profit

Gross profit decreased $625,951 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

The decrease in the gross profit is detailed below:

	Increase (decrease)
Lower sales	$	(1,848,381	)
Decrease in the Euro exchange rate		(812,003	)
Lower production and production related expenses		425,363
Higher gross profit due favorable sales mix		1,609,070
Total decrease in gross profit	$	(625,951	)

Gross profit percentage for the three months ended June 30, 2009 was 24.65 % compared to 19.52% for the three months ended June 30, 2008, resulting in a gross profit increase of 4.83%.

The increase in gross profit percentage is detailed below:

	Increase (decrease)
Higher gross profit due favorable sales mix		11.94	%
Decrease in the Euro exchange rate		(5.85	)%
Production and production related expenses		(1.26	)%
Net increase in gross profit percentage		4.83	%

Selling, general and administrative expenses

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

	Three months ended June 30,
	Dollar Costs							Percentage of Sales
	2009		2008		Decrease			2009			2008			Increase
Sales and marketing-HCW	$	2,637,961	$	2,776,622	$	(138,661	)		20.19	%		14.30	%		5.89	%
Sales and marketing-PCTV		115,335		-		115,335			0.88	%		0.00	%		0.88	%
Technical support		127,922		131,393		(3,471	)		0.98	%		0.68	%		0.30	%
General and administrative-HCW		770,359		994,339		(223,980	)		5.90	%		5.12	%		0.78	%
General and administrative-PCTV		26,144		-		26,144			0.21	%		0.00	%		0.21	%
Amortization of intangible assets		188,709		-		188,709			1.45	%		0.00	%		1.45	%
Stock compensation		88,106		95,241		(7,135	)		0.68	%		0.49	%		0.19	%
Total	$	3,954,536	$	3,997,595	$	(43,059	)		30.29	%		20.59	%		9.70	%

Selling, general and administrative expenses decreased $ 43,059 from the prior year’s fiscal third quarter. Sales and marketing expense for HCW decreased $138,661, primarily driven by the decrease in the Euro exchange rate compared to the U.S. dollar which resulted in an expense reduction of $257,410, lower compensation expense of $21,221 due personnel reductions and lower travel and industry show expenses $42,459 due to the budgeted expense reductions. Offsetting these decreases was an increase of $ 115,335 in sales and marketing expense for PCTV due to personnel expenses related to PCTV employees hired in connection with the acquisition of the PCTV business from Avid Technology, Inc. and increased sales office expenses for HCW of $34,238 related to higher personnel costs.

The decrease in general and administrative expense for HCW of $223,980 was primarily due lower professional fees, primarily for legal and consulting fees of $121,644, a decrease in compensation expense of $31,231 due to staff reductions, a reduction of $36,689 in insurance expense due to lower negotiated premiums, lower communications expenses of $6,643 and lower insurance expense of $36,689 due lower premiums. These decreases were somewhat offset by $26,144 in general and administration expenses related to the PCTV operation. There also was $188,709 in amortization of intangible assets charged to operations for the third quarter of fiscal 2009 related to the acquisition of the PCTV business.

Research and development expenses

Research and development expenses increased $156,221. Higher compensation expense of $426,441 for personnel expenses related to PCTV employees hired in connection with the acquisition of the PCTV business from Avid Technology, Inc., offset by $ 183,183 in lower compensation expense due to staff reductions and $107,240 less in project development expenses due to a lower volume of programs in progress for fiscal 2009.

Tax provision

Our tax provision for the three months ended June 30, 2009 and 2008 is as follows:

	Three months ended June 30,
	2009		2008
Tax expense on international operations	$	28,028	$	28,554
State taxes		10,000		-
Tax provision	$	38,028	$	28,554

We recorded a net loss of $1,887,382, for the three months ended June 30, 2009, which resulted in basic and diluted net loss per share of $0.19 on weighted average basic and diluted shares of 10,048,771 compared to a net loss of $1,117,563 for the three months ended June 30, 2008, which resulted in basic and diluted net loss per share of $0.11 on weighted average basic and diluted shares of 10,018,771.

NINE MONTH PERIOD ENDED JUNE 30, 2009 COMPARED TO NINE MONTH PERIOD ENDED JUNE 30, 2008

Results of operations for the nine months ended June 30, 2009 compared to June 30, 2008 are as follows:

	Nine			Nine
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/09			6/30/08			$			2009			2008			Variance
Net sales	$	43,089,233		$	73,975,884		$	(30,886,651	)		100.00	%		100.00	%		-
Cost of sales		34,305,007			58,647,765			(24,342,758	)		79.61	%		79.28	%		0.33	%
Gross profit		8,784,226			15,328,119			(6,543,893	)		20.39	%		20.72	%		-0.33	%
Gross profit %		20.39	%		20.72	%		-0.33	%
Selling, general and administrative expenses:
Sales and marketing		7,956,761			8,699,273			(742,512	)		18.47	%		11.76	%		6.71	%
Technical support		398,906			434,160			(35,254	)		0.93	%		0.59	%		0.34	%
General and administrative		2,663,055			3,081,296			(418,241	)		6.18	%		4.17	%		2.01	%
Amortization of intangible assets		377,418			-			377,418			0.88	%		0.00	%		0.88	%
Stock compensation		258,963			285,723			(26,760	)		0.60	%		0.39	%		0.21	%
Total selling, general and administrative expenses		11,655,103			12,500,452			(845,349	)		27.06	%		16.91	%		10.15	%
Research and development expenses		3,093,428			2,727,572			365,856			7.18	%		3.69	%		3.49	%
Research & development stock compensation		142,973			131,814			11,159			0.33	%		0.18	%		0.15	%
Total expenses		14,891,504			15,359,838			(468,334	)		34.57	%		20.78	%		13.79	%
Net operating loss		(6,107,278	)		(31,719	)		(6,075,559	)		-14.18	%		-0.06	%		-14.12	%

Other income (expense) :
Interest income		11,332			28,633			(17,301	)		0.03	%		0.04	%		-0.01	%
Interest expense		(49,478	)		-			(49,478	)		-0.11	%		0.00	%		-0.11	%
Foreign currency		669,209			(16,130	)		685,339			1.55	%		-0.02	%		1.57	%
Total other income (expense)		631,063			12,503			618,560			1.47	%		0.02	%		1.45	%
Loss before taxes		(5,476,215	)		(19,216	)		(5,456,999	)		-12.71	%		-0.04	%		-12.67	%
Tax provision		115,550			160,437			(44,887	)		0.27	%		-0.04	%		-9.66	%
Net loss	$	(5,591,765	)	$	(179,653	)	$	(5,412,112	)		-12.98	%		0.00	%		-12.98	%

Net sales for the nine months ended June 30, 2009 decreased $30,886,651 compared to the nine months ended June 30, 2008 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Nine Months		Nine Months		Dollar			Dollar			Geographic region
	ended 6/30/09		ended 6/30/08		Variance			variance %			2009			2008
The Americas		21,341,299		35,497,270		(14,155,971	)		-40	%		50	%		48	%
Europe		20,363,226		36,560,030		(16,196,804	)		-44	%		47	%		49	%
Asia		1,384,708		1,918,584		(533,876	)		-28	%		3	%		3	%
Total	$	43,089,233	$	73,975,884	$	(30,886,651	)		-42	%		100	%		100	%

Net sales to customers in The Americas were 50% and 48% of net sales for the nine months ended June 30, 2009 and 2008, respectively. Net sales to customers in Europe were 47% and 49% of net sales for the nine months ended June 30, 2009 and 2008, respectively. Net sales to customers in Asia were 3% of net sales for the nine months ended June 30, 2009 and 2008, respectively. We experienced a decrease in unit sales of about 43% while the change in sales mix increased the average sales price by about 3%.

Factors driving the decline in sales for the nine months ended June 30, 2009 were the effects of a weakened economy which curtailed consumer spending, 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. Somewhat offsetting the declines caused by the factors listed above was the addition of sales from the PCTV product line that we acquired from Avid Technology, Inc.

Gross profit

Gross profit decreased $6,543,893 for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008.

The decrease in the gross profit is detailed below:

	Increase (decrease)
Lower sales	$	(9,093,029	)
Decrease in the Euro exchange rate		(2,475,837	)
Lower production and production related expenses		1,870,234
Higher gross profit due favorable sales mix		3,154,739
Total decrease in gross profit	$	(6,543,893	)

Gross profit percentage for the nine months ended June 30, 2009 was 20.39 % compared to 20.72% for the nine months ended June 30, 2008, resulting in a gross profit decrease of 0.33%.

The decrease in the gross profit percentage is detailed below:

	Increase (decrease)
Lower gross profit due favorable sales mix		7.01	%
Decrease in the Euro exchange rate		(5.43	)%
Production and production related expenses		(1.91	)%
Net decrease in gross profit percentage		(0.33	)%

Selling, general and administrative expenses

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

	Nine months ended June 30,
	Dollar Costs							Percentage of Sales
	2009		2008		Decrease			2009			2008			Increase
Sales and marketing-HCW	$	7,753,381	$	8,699,273	$	(945,892	)		17.99	%		11.76	%		6.23	%
Sales and marketing-PCTV		203,380		-		203,380			0.48	%		0.00	%		0.48	%
Technical support		398,906		434,160		(35,254	)		0.93	%		0.59	%		0.34	%
General and administrative-HCW		2,521,048		3,081,296		(560,248	)		5.85	%		4.17	%		1.68	%
General and administrative-PCTV		142,007		-		142,007			0.33	%		0.00	%		0.33	%
Amortization of intangible assets		377,418		-		377,418			0.88	%		0.00	%		0.88	%
Stock compensation		258,963		285,723		(26,760	)		0.60	%		0.39	%		0.21	%
Total	$	11,655,103	$	12,500,452	$	(845,349	)		27.06	%		16.91	%		10.15	%

Selling, general and administrative expenses decreased $845,349 compared to the same period in the prior fiscal year. Sales and marketing expense for HCW decreased $945,892, primarily driven by the decrease in the Euro exchange rate compared to the U.S. dollar which resulted in an expense reduction of $676,489, lower compensation expense of $61,273 due personnel reductions, lower travel and industry show expenses $85,757 due to the budgeted expense reductions , lower commissions, marketing development and advertising expense of $293,738 due to lower sales. Offsetting these decreases were higher HCW European sales office expense of $112,433 due to higher personnel costs and $203,380 in sales and marketing expenes for PCTV due to personnel expenses related to PCTV employees hired in connection with the acquisition of the PCTV business from Avid Technology, Inc.

The decrease in general and administrative expense for HCW of $560,248 was primarily due lower professional fees, primarily for legal and consulting fees of $260,705, a decrease in bad debt expense of $120,000 related to the February 2008 liquidation of CompUSA, a decrease in compensation expense of $81,633 due to staff reductions, a reduction of $77,617 in insurance expense due to lower premiums and lower communication expenses of $16,796. These decreases were offset $142,007 in PCTV general and administrative expenses, mainly due to $140,000 paid to Avid Technology, Inc. pursuant to a transitional services agreement. There also was $377,418 in amortization of intangible assets charged to operations related to the acquisition of the PCTV business.

Research and development expenses

Research and development expenses increased $377,015. The primary drivers of the increase were higher compensation expense of $846,191 for personnel expenses related to PCTV employees hired in connection with the acquisition of the PCTV business from Avid Technology, Inc., offset by $239,955 in lower compensation expense due to staff reductions, $241,255 less in project development expenses due to a lower volume of programs in progress during fiscal 2009 and $39,559 less in travel expense due budget restrictions.

Tax provision

Our tax provision for the nine months ended June 30, 2009 and 2008 is as follows:

	Nine months ended June 30,
	2009		2008

Tax expense on international operations	$	85,550		143,437
State taxes		30,000		17,000
Tax provision	$	115,550	$	160,437

We recorded a net loss of $5,591,765, for the nine months ended June 30, 2009, which resulted in basic and diluted net loss per share of $0.56 on weighted average basic and diluted shares of 10,042,546 compared to a net loss of $179,653 for the nine months ended June 30, 2008, which resulted in basic and diluted net loss per share of $0.02 on weighted average basic and diluted shares of 9,951,552. .

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 June 30, 2009 and September 30, 2008 is set forth below:

	June 30, 2009		September 30, 2008

Cash	$	9,033,115	$	14,191,721
Working Capital		7,105,609		17,229,410
Stockholders’ Equity		13,804,245		18,988,536

We had cash and cash equivalents as of June 30, 2009 of $9,033,115, a decrease of $5,158,606 from September 30, 2008.

The decrease in cash was due to :

Sources of cash:
Decrease in inventory	$	2,301,900
Increase in accounts payable and accrued expenses		2,119,894
Proceeds from employee stock purchases		24,133
Less cash used for:
Net loss adjusted for non cash items		(4,611,617	)
PCTV acquisition-net of note payable		(2,490,500	)
Payment on note payable		(1,249,998	)
Increase in accounts receivables		(1,186,810	)
Capital equipment purchases		(28,319	)
Increase in prepaid expenses and other current assets		(18,694	)
Effect of exchange rates on cash		(18,595	)
Net cash decrease	$	(5,158,606	)

Net cash of $1,395,327 used in operating activities was due to the net loss adjusted for non cash items of $4,611,617, an increase in accounts receivable of $1,186,810 plus an increase in prepaid expenses and other current assets of $18,694, offset by a decrease in inventory of $2,301,900 and an increase in accounts payable and accrued expenses of $2,119,894. The increase in accounts receivable was due to sales shipped during June 2009 making up 40% of the sales for the quarter. The decrease in inventory was due to lower sales which resulted in a lower investment in inventory

Cash of $2,518,819 was used in investing activities. Of this amount, $2,490,500 was used for the acquisition of the PCTV business and $28,319 was used to purchase fixed assets. The $2,490,500 used for the PCTV acquisition consisted of $2,238,000 paid against the $5,000,000 purchase price and $252,300 disbursed in payment of direct expenses of the acquisition. We also entered into a Note Payable with Avid Technology, Inc. of $2,500,000, of which $1,249,998 in payments have been made against the note . Cash of $24,133 was provided from purchases of stock pursuant to our employee stock purchase plan.

Our cash requirements for the next twelve months will include, among other things, 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 March 31, 2009 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.

On March 31, 2009 our line of credit with the JP Morgan Chase Bank expired and was not renewed.

Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of June 30, 2009:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Note payable to Avid Technology Inc. (1)	$	1,250,045	$	1,250,045
Operating lease obligations	$	1,355,035	$	484,338	$	785,671	$	85,026
Total	$	2,605,080	$	1,734,383	$	785,671	$	85,026

(1)

See Note 10 to our consolidated financial statements for further details on the note payable to Avid Technologies, Inc.

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.

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

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 June 30, 2009.

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.

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.

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 third fiscal quarter ended June 30. 2009.

Item 6. Exhibits

3.1	Certificate of Incorporation (1)

3.1.1	Certificate of Amendment of the Certificate of Incorporation, dated July 14, 2000 (2)

3.2	By-laws, as amended to date (3)

4.1	Form of Common Stock Certificate (1)

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

32.0	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 Registration Statement on Form SB-2 (No. 33-85426), as amended, effective January 10, 1995 and incorporated herein by reference.

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

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

SIGNATURES

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

	HAUPPAUGE DIGITAL INC.
	Registrant

Date: August 14, 2009	By	/s/Kenneth Plotkin
	KENNETH PLOTKIN
	Chief Executive Officer, Chairman of the
	Board, President (Principal Executive Officer)

Date: August 14, 2009	By	/s/Gerald Tucciarone
	GERALD TUCCIARONE
	Treasurer, Chief Financial Officer,
	(Principal Financial Officer and Principal
	Accounting Officer) and Secretary