Hauppauge Digital (HAUP) 10-Q 2010 Q2 Quarterly report

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  March 31, 2010

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 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 definitions 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 April 30, 2010, 10,069,070 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	3
Consolidated Balance Sheets – March 31, 2010 (unaudited) and September 30, 2009	3
Consolidated Statements of Operations - Three Months ended March 31, 2010 (unaudited) and 2009 (unaudited)	4
Consolidated Statements of Operations - Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)	5
Consolidated Statements of Other Comprehensive Loss Three Months and Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)	6
Consolidated Statements of Cash Flows - Six Months ended March 31, 2010 (unaudited) and 2009 (unaudited)	7
Notes to Consolidated Financial Statements	8-16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures about Market Risks	26
Item  4T. Controls and Procedures	26
PART II.  OTHER INFORMATION
Item 6. Exhibits	28
Signatures	29

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements 

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2010 (unaudited)			September 30 , 2009
Assets:
Cash and cash equivalents	$	8,712,496		$	8,368,342
Trade receivables, net of various allowances		7,335,968			9,770,584
Other non trade receivables		4,263,465			4,116,392
Inventories		9,961,418			8,616,800
Deferred tax asset-current		1,297,574			1,297,574
Prepaid expenses and other current assets		1,145,158			928,680
Total current assets		32,716,079			33,098,372
Intangible assets, net		4,318,684			4,696,102
Property, plant and equipment, net		641,754			757,488
Security deposits and other non current assets		108,070			108,088
Deferred tax asset-non current		887,611			887,611
Total assets	$	38,672,198		$	39,547,661
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	12,392,648		$	12,478,625
Accrued expenses fees		5,681,983			5,753,546
Accrued expenses		9,716,484			8,131,263
Note payable		0			625,045
Income taxes payable		209,332			224,316
Total current liabilities		28,000,447			27,212,795
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,825,296 and 10,814,042 issued, respectively		108,253			108,140
Additional paid-in capital		17,498,372			17,276,651
Retained earnings (deficit)		(441,750	)		795,674
Accumulated other comprehensive loss		(4,088,787	)		(3,441,262	)
Treasury Stock, at cost, 759,579 shares		(2,404,337	)		(2,404,337	)
Total stockholders' equity		10,671,751			12,334,866
Total liabilities and stockholders' equity	$	38,672,198		$	39,547,661

See accompanying notes to consolidated financial statements

3

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended March 31,
	2010			2009
Net sales	$	13,847,079		$	12,733,429
Cost of sales		9,981,288			9,769,150
Gross profit		3,865,791			2,964,279
Selling, general and administrative expenses		3,777,737			3,861,671
Research and development expenses		1,005,101			1,267,848
Loss from operations		(917,047	)		(2,165,240	)
Other income (expense):
Interest income		1,435			5,156
Interest expense		-			(28,646	)
Foreign currency gain		61,875			296,675
Total other income		63,310			273,185
Loss before tax provision		(853,737	)		(1,892,055	)
Tax provision		49,136			40,015
Net loss	$	(902,873	)	$	(1,932,070	)
Net loss per share:
Basic and diluted	$	(0.09	)	$	(0.19	)

See accompanying notes to consolidated financial statements

4

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Six months ended March 31,
	2010			2009
Net sales	$	31,725,437		$	30,022,109
Cost of sales		22,637,249			24,459,569
Gross profit		9,088,188			5,562,540
Selling, general and administrative expenses		8,110,260			7,700,567
Research and development expenses		2,175,172			2,113,490
Loss from operations		(1,197,244	)		(4,251,517	)
Other income (expense):
Interest income		2,894			9,625
Interest expense		(4,347	)		(28,646	)
Foreign currency gain		61,635			643,677
Total other income		60,182			624,656
Loss before tax provision		(1,137,062	)		(3,626,861	)
Tax provision		100,362			77,522
Net loss	$	(1,237,424	)	$	(3,704,383	)
Net loss per share:
Basic and diluted	$	(0.12	)	$	(0.37	)

See accompanying notes to consolidated financial statements

5

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(UNAUDITED)

	Three months ended March 31,
	2010			2009
Net loss	$	(902,873	)	$	(1,932,070	)
Foreign currency translation loss		(546,772	)		(319,673	)
Forward exchange contracts marked to market gain (loss)		23,911			(17,060	)
Other comprehensive loss	$	(1,425,734	)	$	(2,268,803	)

	Six months ended March 31,
	2010			2009
Net loss	$	(1,237,424	)	$	(3,704,383	)
Foreign currency translation loss		(669,012	)		(492,636	)
Forward exchange contracts marked to market gain		21,487			37,674
Other comprehensive loss	$	(1,884,949	)	$	(4,159,345	)

See accompanying notes to consolidated financial statements

6

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended March 31,
	2010			2009
Net loss	$	(1,237,424	)	$	(3,704,383	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		138,468			129,878
Amortization of intangible assets		377,418			188,709
Stock compensation expense		212,502			265,187
Sales reserve, net		223,300			-
Bad debt reserve		40,000			-
Other non cash items		18			(6,129	)
Changes in current assets and liabilities, net of effects of acquisition:
Accounts receivable		1,354,543			2,125,931
Inventories		(674,918	)		1,754,778
Prepaid expenses and other current assets		(216,478	)		(5,193	)
Accounts payable		(1,527,858	)		(2,614,412	)
Accrued expenses and other current liabilities		2,826,842			1,648,481
Total adjustments		2,753,837			3,487,230
Net cash provided by (used in) operating activities		1,516,413			(217,153	)
Cash Flows From Investing Activities:
PCTV acquisition		(511,332	)		(2,970,499	)
Purchases of property, plant and equipment		(22,734	)		(7,926	)
Net cash used in investing activities		(534,066	)		(2,978,425	)
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options and employee stock purchases		9,332			19,282
Net cash provided by financing activities		9,332			19,282
Effect of exchange rates on cash		(647,525	)		(454,962	)
Net increase (decrease) in cash and cash equivalents		344,154			(3,631,258	)
Cash and cash equivalents, beginning of period		8,368,342			14,191,721
Cash and cash equivalents, end of period	$	8,712,496		$	10,560,463
Supplemental disclosures:
Interest paid	$	4,347		$	28,646
Income taxes paid	$	106,451		$	21,354
Note payable to Avid Technology, Inc.	$	-		$	2,500,000

See accompanying notes to consolidated financial statements

7

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, 2009 Form 10-K.

The operating results for the three and six months ended March 31, 2010 are not necessarily indicative of the results to be expected for the September 30, 2010 year end.

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

Management has evaluated subsequent events after the balance sheet date through the issuance of the financial statements for appropriate accounting and disclosure through the filing date of this Form 10-Q.

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 March 31, 2010 and September 30, 2009 consisted of:

8

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	March 31,			September 30,
	2010			2009
Trade receivables	$	12,165,660		$	13,893,804
Allowances and reserves		(4,829,692	)		(4,123,220	)
Total trade receivables		7,335,968			9,770,584
Receivable from contract manufacturers		3,590,656			2,933,918
GST and VAT taxes receivables		598,557			1,134,331
Other		74,252			48,143
Total non trade receivables	$	4,263,465		$	4,116,392

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:

	March 31,		September 30,
	2010		2009
Component parts	$	3,255,847	$	2,799,723
Finished goods		6,705,571		5,817,077
	$	9,961,418	$	8,616,800

Note 4.  Intangible Assets

The following is a summary of intangible assets as of March 31, 2010:

						Net		Weighted
	Purchase		Accumulated			Book		average remaining
Asset description	cost		Amortization			Value		life (in years)
Customer relationships	$	1,644,353	$	(171,287	)	$	1,473,066		10.75
Value of technology		1,849,897		(330,339	)		1,519,558		5.75
Covenant not to compete		1,767,979		(441,919	)		1,326,060		3.75
Total intangible assets	$	5,262,229	$	(943,545	)	$	4,318,684		8.03

Amortization expense totaled approximately $377,000 for the six months ended March 31, 2010. Amortization expense is expected to be approximately $755,000 for each of the fiscal years ended September 30, 2010, 2011, 2012 and 2013, respectively, and $490,000 for the year ended September 30, 2014.

9

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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:

	Three months ended				Six months ended
	March 31,				March 31,
	2010		2009		2010		2009
Weighted average shares outstanding-basic		10,065,344		10,043,876		10,062,545		10,039,434
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,065,344		10,043,876		10,062,545		10,039,474

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75 were outstanding for the three months and six months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 6.  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 average rate during the year. Translation adjustments arising from the translation to U.S. Dollars at differing exchange rates are included in the accumulated other comprehensive income (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 $3,441,262 recorded on the balance sheet as of September 30, 2009. For the six months ended March 31, 2010 the Company recorded on the balance sheet translation losses of $669,012, resulting in an accumulated translation loss of $4,110,274 recorded as a component of accumulated other comprehensive income as of March 31, 2010.

10

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 7. Derivatives and Hedging Activities

For each of the fiscal years ended September 30, 2009 and 2008 and the six months ended March 31, 2010, at least 40 % of the Company’s sales were generated by its European subsidiary and were invoiced and collected in local currency, which was primarily the Euro. On the supply side, since the Company predominantly deals with North American and Asian suppliers and contract manufacturers, approximately 95% of the Company’s inventory required to support its 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, the Company’s financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.

The Company attempts 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 its European sales.

The Company does not try to hedge against all possible foreign currency exposures because of the inherent difficulty in estimating the volatility of the Euro. The contracts the Company procures are specifically entered into to as a hedge against forecasted or existing foreign currency exposure. The Company does not enter into contracts for speculative purposes. Although the Company maintains these programs to reduce the short term impact of changes in currency exchange rates, long term strengthening or weakening of the U.S. Dollar against the Euro impacts the Company’s sales, gross profit, operating income and retained earnings. Factors that could impact the effectiveness of the Company’s hedging program are:

· volatility of the currency markets

· availability of hedging instruments

· accuracy of the Company’s inventory forecasts

Additionally, there is the risk that foreign exchange fluctuations will make the Company’s products less competitive in foreign markets, which would substantially reduce the Company’s sales.

 As of March 31, 2010, the Company had foreign currency contracts outstanding of approximately $393,000 against the delivery of the Euro. These contracts expire each month through June 30, 2010. The Company had no forward exchange contracts outstanding as of September 30, 2009.

The Company’s accounting policies for these instruments designate such instruments as cash flow hedging transactions. The Company does not enter into such contracts for speculative purposes. The Company records all derivative gains and losses on the balance sheet as a component of stockholders’ equity under the caption “Accumulated other comprehensive loss.” For the six months ended March 31, 2010, the Company recorded on the balance sheet a mark to market deferred forward exchange gain of $21,487.

11

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8. Revenue recognition

The Company sells through a sales channel which is comprised 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 typically given 30 to 45 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.

The Company offers some of its customers a right of return. The Company’s accounting complies with FASB ASC 605-15 (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 the seasonal nature of the business coupled with the changing economic environment, management exercises some judgment with regard to the historical data when calculating 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 FASB ASC 605-50 ( EITF 01-09), “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.

Note 9.  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.

12

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Sales by functional category are as follows:

	Three months ended March 31,				Six months ended March 31,
Product line sales	2010		2009		2010		2009
Analog TV tuner products	$	135,719	$	678,880	$	430,189	$	2,044,463
Digital and combination analog and digital TV tuner products		11,799,562		11,210,311		27,588,278		26,470,036
Other non-TV tuner products		1,911,798		844,238		3,706,970		1,507,610
Total sales	$	13,847,079	$	12,733,429	$	31,725,437	$	30,022,109

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

	Three months ended March 31,						Six months ended March 31,
Geographic region	2010			2009			2010			2009
The Americas		45	%		57	%		44	%		48	%
Europe		52	%		40	%		53	%		48	%
Asia		3	%		3	%		3	%		4	%
Total		100	%		100	%		100	%		100	%

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HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 10. Tax provision

The Company’s tax provision for the three months and six months ended March 31, 2010 and 2009 is as follows:

	Three months ended March 31,				Six months ended March 31,
	2010		2009		2010		2009
Tax expense on international operations	$	39,136	$	30,015	$	80,362	$	57,522
State taxes		10,000		10,000		20,000		20,000
Tax provision	$	49,136	$	40,015	$	100,362	$	77,522

Note 11. Accrued expense- fees

The Company uses technology licensed from third parties in certain products. The Company enters into agreements to license this technology, and in return for the use of the technology, the Company incurs a license fee for each unit sold that includes the licensors’ technology. The licensing amount per unit varies by licensor. The Company is obligated to provide the licensor with reports which quantify the licenses used and these reports are subject to audits by the licensor. The Company recognizes and estimates the amount of licensing fees owed to third parties based on products sold that include software and technology licensed from these third parties. The Company uses all available applicable information in determining these estimates and thus the accrued amounts are subject to change as new information is made available to the Company. The licensing fees are accounted for as a component of product cost and are charged to cost of sales. As of March 31, 2010 and September 30, 2009 the amount of accrued expenses relating to these license agreements amounted to $5,681,983 and $5,753,546, respectively.

Note 12. Fair Value Measurements

Effective October 1, 2008 the Company adopted ASC 820-10, Fair Value Measurements, for financial assets and liabilities. This ASC defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. The ASC indicates, among other things, that a fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company also adopted the provisions of ASC 820-10 with respect to its non-financial assets and liabilities during the first quarter of fiscal 2010. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad Levels, which are described below:

• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

• Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

• Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

14

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

 At March 31, 2010, 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 7).

Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level 3 inputs.

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. 

Note 13. 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.

Because the acquisition was completed on December 24, 2008, results from the operations of the PCTV business effectively started on January 1, 2009. The following unaudited pro forma results assume the acquisition occurred on October 1, 2008. 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. 

15

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Six months
	ended
	March 31,
Pro forma statements:	2009
Revenue	$	41,045,109
Net loss	$	(4,402,393	)
Net  loss per share
Basic net loss per share	$	(0.44	)
Diluted net loss per share	$	(0.44	)

16

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

THREE MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTH PERIOD ENDED MARCH 31, 2009

Results of operations for the three months ended March 31, 2010 compared to March 31, 2009 is as follows:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	3/31/10			3/31/09			$			2010			2009			Variance
Net Sales	$	13,847,079		$	12,733,429		$	1,113,650			100.00	%		100.00	%		-
Cost of sales		9,981,288			9,769,150			212,138			72.08	%		76.72	%		-4.64	%
Gross Profit		3,865,791			2,964,279			901,512			27.92	%		23.28	%		4.64	%
Gross Profit %		27.92	%		23.28	%		4.64	%
Expenses:
Sales & marketing		2,406,232			2,356,129			50,103			17.38	%		18.50	%		-1.12	%
Sales & marketing-PCTV		112,924			88,045			24,879			0.82	%		0.69	%		0.13	%
Technical support		123,329			135,600			(12,271	)		0.89	%		1.06	%		-0.17	%
General & administrative		808,853			864,058			(55,205	)		5.84	%		6.79	%		-0.95	%
General & administrative-PCTV		69,234			143,701			(74,467	)		0.50	%		1.13	%		-0.63	%
Amortization of intangible assets		188,709			188,709			0			1.36	%		1.48	%		-0.12	%
Selling, general and administrative stock compensation expense		68,456			85,429			(16,973	)		0.49	%		0.67	%		-0.18	%
Total selling, general and administrative expense		3,777,737			3,861,671			(83,934	)		27.28	%		30.32	%		-3.04	%
Research and development		524,483			790,265			(265,782	)		3.79	%		6.21	%		-2.42	%
Research and development-PCTV		442,823			430,418			12,405			3.20	%		3.38	%		-0.18	%
Research and development stock compensation expense		37,795			47,165			(9,370	)		0.27	%		0.37	%		-0.10	%
Total expenses		4,782,838			5,129,519			(346,681	)		34.54	%		40.28	%		-5.74	%
Net  loss from operations		(917,047	)		(2,165,240	)		1,248,193			-6.62	%		-17.00	%		10.38	%
Other income :
Interest income		1,442			5,156			(3,714	)		0.01	%		0.04	%		-0.03	%
Interest (expense)		0			(28,646	)		28,646			0.00	%		-0.22	%		0.22	%
Foreign currency		61,868			296,675			(234,807	)		0.45	%		2.33	%		-1.88	%
Total other income		63,310			273,185			(209,875	)		0.46	%		2.15	%		-1.69	%
Loss before tax provision		(853,737	)		(1,892,055	)		1,038,318			-6.16	%		-14.85	%		8.69	%
Income tax provision		49,136			40,015			9,121			0.35	%		0.31	%		0.04	%
Net loss	$	(902,873	)	$	(1,932,070	)	$	1,029,197			-6.51	%		-15.16	%		8.65	%

17

Net sales for the three months ended March 31, 2010 increased $1,113,650 compared to the three months ended March 31, 2009 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Three Months		Three Months		dollar			dollar			geographic region
	ended 3/31/10		ended 3/31/09		variance			variance %			2010			2009
The Americas	$	6,318,133	$	7,233,329	$	(915,196	)		-13	%		45	%		57	%
Europe		7,141,656		5,136,179		2,005,477			39	%		52	%		40	%
Asia		387,290		363,921		23,369			6	%		3	%		3	%
Total	$	13,847,079	$	12,733,429	$	1,113,650			9	%		100	%		100	%

 The sales increase was attributable to increased international sales due to the addition of customers acquired in the PCTV acquisition, increased sales to computer manufacturers and a strengthening of the Euro exchange rate against the U.S. dollar. A favorable mix of higher sales priced product contributed to a 1.67% increase in the average sales price while units sales increased by about 14.50%.

Gross profit

Gross profit increased $901,512 for the three months ended March 31, 2010 compared to the same period in the prior year. The increase in gross profit was due to:

The increase in the gross profit is detailed below:

	Increase (decrease)
Increased sales	$	380,244
Increase due to strengthening of the Euro exchange rate		357,452
Higher gross profit due to favorable sales mix, including PCTV products		266,591
Higher production and production related expenses		(102,775	)
Total increase in gross profit	$	901,512

Gross profit percentage for the three months ended March 31, 2010 was 27.92 % compared to 23.28% for the three months ended March 31, 2009, resulting in a gross profit percentage increase of 4.64%.

The increase in gross profit percentage is detailed below:

	Increase (decrease)
Higher gross profit due to favorable sales mix, including PCTV products		2.68	%
Increase due to strengthening of the Euro exchange rate		1.83	%
Production and production related expenses		0.13	%
Net increase in gross profit percentage		4.64	%

18

Selling, general and administrative expenses

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

	Three months ended March 31,
	Dollar Costs							Percentage of Sales
	2010		2009		Decrease			2010			2009			Increase
Sales and marketing-HCW	$	2,406,232	$	2,356,129	$	50,103			17.38	%		18.50	%		-1.12	%
Sales and marketing-PCTV		112,924		88,045		24,879			0.82	%		0.69	%		0.13	%
Technical support		123,329		135,600		(12,271	)		0.89	%		1.06	%		-0.17	%
General and administrative-HCW		808,853		864,058		(55,205	)		5.84	%		6.79	%		-0.95	%
General and administrative-PCTV		69,234		143,701		(74,467	)		0.50	%		1.13	%		-0.63	%
Amortization of intangible assets		188,709		188,709		0			1.36	%		1.48	%		-0.12	%
Stock compensation		68,456		85,429		(16,973	)		0.49	%		0.67	%		-0.18	%
Total	$	3,777,737	$	3,861,671	$	(83,934	)		27.28	%		30.32	%		-3.04	%

Selling, general and administrative expense decreased $83,934 from last year’s second quarter as follows.

Excluding the PCTV expenses and amortization of intangible assets acquired in the PCTV acquisition, selling, general and administrative expense decreased $34,346 from the prior year’s second quarter. Sales and marketing expense for HCW increased $50,103, driven by a $94,316 expense increase resulting from the increase in the Euro exchange rate compared to the U.S. dollar and an increase in sales volume related expenses, mainly commissions and co-op advertising expense of $72,998, offset by reductions in trade show expenses of $24,025 and lower sales office expenses of $92,686, mainly due to personnel and overhead reductions.

Sales and marketing expenses related to the PCTV product line increased $24,879, primarily due to  personnel and overhead expenses.

The decrease in general and administrative expense for HCW of $55,205 was primarily due to lower professional fees, primarily for legal, consulting fees and directors fees of $106,651 and a decrease in compensation expense of $19,147 due to staff reductions and a 10% salary reduction, offset by higher rent expense of $5,255, higher bad debt expense of $20,000 and higher credit costs of $45,338 due primarily for premiums paid to purchase Euro denominated option put contracts.

General and administrative expenses related to the PCTV product line decreased $74,467, primarily due to expenses related to a transitional services agreement in effect with Avid during the second fiscal quarter of 2009. This agreement was terminated during the third fiscal quarter of 2009.

Research and development expenses

Research and development expense for the three months ended March 31, 2010 decreased $262,747 from the three months ended March 31, 2009 as follows:

	HCW			PCTV		Total
Research and development expense-HCW	$	(265,782	)	$	0	$	(265,782	)
Research and development expense-PCTV		0			12,405		12,405
Stock compensation expense		(9,370	)		0		(9,370	)
Total research and development expense	$	(275,152	)	$	12,405	$	(262,747	)

19

Excluding the expense of the PCTV division, research and development expense decreased $265,782 from the prior year’s second fiscal quarter. The decrease was primarily due to personnel and personnel related reductions and the number of development programs in process.

Offsetting the expense decreases were increases of $12,405 related to personnel and product development programs of the PCTV business.

Tax provision

Our tax provision for the three months ended March 31, 2010 and 2009 is as follows:

	Three months ended March 31,
	2010		2009
Tax expense on international operations	$	39,136	$	30,015
State taxes		10,000		10,000
Tax provision	$	49,136	$	40,015

Summary

We recorded a net loss of $902,873, for the three months ended March 31, 2010, which resulted in basic and diluted net loss per share of $0.09 on weighted average basic and diluted shares of 10,065,344 compared to a net loss of $1,932,070 for the three months ended March 31, 2009, which resulted in basic and diluted net loss per share of $0.19 on weighted average basic and diluted shares of 10,043,876.

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75, were outstanding for the three months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

20

SIX MONTH PERIOD ENDED MARCH 31, 2010 COMPARED TO THE SIX MONTH PERIOD

ENDED MARCH 31, 2009

Results of operations for the six months ended March 31, 2010 compared to March 31, 2009 is as follows:

	Six			Six
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	3/31/10			3/31/09			$				2010		2009			Variance
Net Sales	$	31,725,437		$	30,022,109		$	1,703,328			100.00	%		100.00	%		5.67	%
Cost of sales		22,637,249			24,459,569			(1,822,320	)		71.35	%		81.47	%		-10.12	%
Gross Profit		9,088,188			5,562,540			3,525,648			28.65	%		18.53	%		10.12	%
Gross Profit %		28.65	%		18.53	%		10.12	%
Expenses:
Sales & marketing		5,307,047			5,115,420			191,627			16.73	%		17.04	%		-0.31	%
Sales & marketing-PCTV		237,637			88,045			149,592			0.75	%		0.29	%		0.46	%
Technical support		244,502			270,984			(26,482	)		0.77	%		0.90	%		-0.13	%
General & administrative		1,644,530			1,722,851			(78,321	)		5.18	%		5.74	%		-0.56	%
General & administrative-PCTV		162,214			143,701			18,513			0.51	%		0.48	%		0.03	%
Amortization of intangible assets		377,418			188,709			188,709			1.19	%		0.63	%		0.56	%
Selling, general and administrative stock compensation expense		136,912			170,857			(33,945	)		0.43	%		0.57	%		-0.14	%
Total selling, general and administrative expense		8,110,260			7,700,567			409,693			25.56	%		25.65	%		-0.09	%
Research and development		1,152,240			1,588,742			(436,502	)		3.63	%		5.28	%		-1.65	%
Research and development-PCTV		947,342			430,418			516,924			2.99	%		1.43	%		1.56	%
Research and development stock compensation expense		75,590			94,330			(18,740	)		0.24	%		0.30	%		-0.06	%
Total expenses		10,285,432			9,814,057			471,375			32.42	%		32.66	%		-0.24	%
Loss from operations		(1,197,244	)		(4,251,517	)		3,054,273			-3.77	%		-14.13	%		10.36	%
Other income :
Interest income		2,894			9,625			(6,731	)		0.01	%		0.03	%		-0.02	%
Interest (expense)		(4,347	)		(28,646	)		24,299			-0.01	%		-0.10	%		0.09	%
Foreign currency		61,635			643,677			(582,042	)		0.19	%		2.14	%		-1.95	%
Total other income		60,182			624,656			(564,474	)		0.19	%		2.07	%		-1.88	%
Loss before tax provision		(1,137,062	)		(3,626,861	)		2,489,799			-3.58	%		-12.06	%		8.48	%
Income tax provision		100,362			77,522			22,840			0.32	%		0.26	%		0.06	%
Net loss	$	(1,237,424	)	$	(3,704,383	)	$	2,466,959			-3.90	%		-12.32	%		8.42	%

21

Net sales for the six months ended March 31, 2010 increased $1,703,328 compared to the six months ended March 31, 2009 as shown in the table below.

					Increase			Increase
					(decrease)			(decrease)			Percentage of sales by
	Six Months		Six Months		dollar			dollar			Geographic region
	ended 3/31/10		ended 3/31/09		variance			variance %			2010			2009
The Americas	$	13,981,231	$	14,506,453	$	(525,222	)		-4	%		44	%		48	%
Europe		16,954,082		14,541,478		2,412,604			17	%		53	%		48	%
Asia		790,124		974,178		(184,054	)		-19	%		3	%		4	%
Total	$	31,725,437	$	30,022,109	$	1,703,328			6	%		100	%		100	%

The sales increase was attributable to increased international sales due to the addition of customers acquired in the PCTV acquisition, increased sales to computer manufacturers and a strengthening of the Euro exchange rate against the U.S. dollar. A favorable mix of higher sales priced product contributed to a 8.09% increase in the average sales price while units sales increased by about 3.00%.

Gross profit

Gross profit increased $3,525,648 for the six months ended March 31, 2010 compared to the same period in the prior year.  The increase in gross profit was due to:

The increase in the gross profit is detailed below:

	Increase (decrease)
Increased sales	$	497,446
Increase due to strengthening of the Euro exchange rate		1,143,879
Higher gross profit due to favorable sales mix, including PCTV products		2,081,391
Higher production and production related expenses		(197,068	)
Total increase in gross profit	$	3,525,648

Gross profit percentage for the six months ended March 31, 2010 was 28.65 % compared to 18.53% for the six months ended March 31, 2009, resulting in a gross profit percentage increase of 10.12%.

The increase in gross profit percentage is detailed below:

	Increase (decrease)
Higher gross profit due to favorable sales mix, including PCTV products		7.61	%
Increase due to strengthening of the Euro exchange rate		2.56	%
Production and production related expenses		(0.05	)%
Net increase in gross profit percentage		10.12	%

22

Selling, general and administrative expenses

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

	Six months ended March 31,
	Dollar Costs							Percentage of Sales
	2010		2009		Decrease			2010			2009			Increase
Sales and marketing-HCW	$	5,307,047	$	5,115,420	$	191,627			16.73	%		17.04	%		-0.31	%
Sales and marketing-PCTV		237,637		88,045		149,592			0.75	%		0.29	%		0.46	%
Technical support		244,502		270,984		(26,482	)		0.77	%		0.90	%		-0.13	%
General and administrative-HCW		1,644,530		1,722,851		(78,321	)		5.18	%		5.74	%		-0.56	%
General and administrative-PCTV		162,214		143,701		18,513			0.51	%		0.48	%		0.03	%
Amortization of intangible assets		377,418		188,709		188,709			1.19	%		0.63	%		0.56	%
Stock compensation		136,912		170,857		(33,945	)		0.43	%		0.57	%		-0.14	%
Total	$	8,110,260	$	7,700,567	$	409,693			25.56	%		25.65	%		-0.09	%

Selling, general and administrative expense for the six months ended March 31, 2010 increased $409,693 compared to the same period in the prior year.

Excluding the PCTV expenses and amortization of intangible assets acquired in the PCTV acquisition, selling, general and administrative expense increased $52,879 over the prior year. Sales and marketing expense for HCW increased $191,627, driven by a $302,577 expense increase resulting from the increase in the Euro exchange rate compared to the U.S. dollar and an increase in sales volume related expenses, mainly commissions and co-op advertising expense of $170,500, offset by reductions in trade show expenses of $47,178, lower sales office expenses of $207,783 mainly due to personnel and overhead reductions, and lower sales compensation expense due to personnel reductions of $26,489.

Sales and marketing expenses related to the PCTV product line increased $149,592. The PCTV acquisition was finalized at the end of December 2008, so the results for six months ended March 31, 2009 only included three months of PCTV expense while the results for the six months ended March 31, 2010  included PCTV expenses for six months.

The decrease in general and administrative expense for HCW of $78,321 was primarily due to lower professional fees, mainly for legal, consulting fees and directors fees of $115,793 and a decrease in compensation expense of $44,640 due to staff reductions and a 10% salary reduction, offset by higher rent expense of $6,427, higher bad debt expense of $40,000 and higher credit costs of $35,685 due primarily for premiums paid to purchase Euro denominated option put contracts.

General and administrative expenses related to the PCTV product line increased $18,513. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of PCTV expense, while the results for the six months ended March 31, 2010  included PCTV expenses for six months.

Amortization of intangible assets of $188,709 was related to intangible assets acquired in the purchase of the PCTV business. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of intangible asset amortization while the results for the six months ended March 31, 2010 included six months of intangible asset amortization.

23

Research and development expenses

Research and development expense for the six months ended March 31, 2010 increased $61,682 from the six months ended March 31, 2009 as follows:

	HCW			PCTV		Total
Research and development expense-HCW	$	(436,502	)	$	0	$	(436,502	)
Research and development expense-PCTV		0			516,924		516,924
Stock compensation expense		(18,740	)		0		(18,740	)
Total research and development expense	$	(455,242	)	$	516,924	$	61,682

Excluding the expense of the PCTV division, research and development expense decreased $436,502 from the same period in the prior year. The decrease was primarily due to personnel and personnel related reductions and the number of development programs in process.

Offsetting the expense decreases were $516,924 in expense related to personnel and development programs of the PCTV business acquired at the end of December 2008. The PCTV acquisition was finalized at the end of December 2008, so the results for the six months ended March 31, 2009 only included three months of research and development expense, while the results for the six months ended March 31, 2010 included six months of research and development expense.

Tax provision

Our tax provision for the six months ended March 31, 2010 and 2009 is as follows:

	Six months ended March 31,
	2010		2009
Tax expense on international operations	$	80,362	$	57,522
State taxes		20,000		20,000
Tax provision	$	100,362	$	77,522

Summary

We recorded a net loss of $1,237,424 for the six months ended March 31, 2010, which resulted in basic and diluted net loss per share of $0.12 on weighted average basic and diluted shares of 10,062,545 compared to a net loss of $3,704,383 for the six months ended March 31, 2009, which resulted in basic and diluted net loss per share of $0.37 on weighted average basic and diluted shares of 10,039,434.

Options to purchase 1,335,192 and 1,767,744 shares of common stock, at prices from $1.05 to $7.45 and from $1.05 to $8.75 were outstanding for the six months ended March 31, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

24

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% of sales for the two years ended September 30, 2009 and 2008 respectively, and 56% for the six months ended March 31, 2010.  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.

We target a wide range of customer types to attempt to moderate the seasonal nature of our retail sales.

Liquidity and capital resources

Our cash, working capital and stockholders’ equity position as of March 31, 2010 and September 30, 2009 is set forth below:

	March 31, 2010		September 30, 2009
Cash	$	8,712,496	$	8,368,342
Working Capital		4,715,632		5,885,577
Stockholders’ Equity		10,671,751		12,334,866

The Company had cash and cash equivalents as of March 31, 2010 of $8,712,496, an increase of $344,154 from September 30, 2009.

The increase in cash was due to:

	Operating			Investing			Financing
	Activities			activities			Activities		Total
Sources of cash:
Decrease in accounts receivable	$	1,354,543		$	-		$	-	$	1,354,543
Increase in accounts payable and accrued expenses		1,298,984								1,298,984
Proceeds from employee stock purchases		-			-			9,332		9,332
Total sources of cash		2,653,527			-			9,332		2,662,859
Less cash used for:
Increase in inventory	$	(674,918	)	$	-		$	-	$	(674,918	)
Effect of exchange rates		(647,525	)		-			-		(647,525	)
PCTV acquisition-net of note payable		-			(511,332	)		-		(511,332	)
Net loss adjusted for non cash items		(245,718	)		-			-		(245,718	)
Increase in prepaid expenses and other current assets		(216,478	)		-			-		(216,478	)
Capital equipment purchases		-			(22,734	)		-		(22,734	)
Total usages of cash		(1,784,639	)		(534,066	)		-		(2,318,705	)
Net cash increase	$	868,888		$	(534,066	)	$	9,332	$	344,154

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Net cash provided by operating activities was due to an increase in accounts payable and accrued expenses of $1,298,984 and a decrease in accounts receivable of $1,354,543.  The decrease in accounts receivable was primarily due to lower fiscal second quarter sales compared to fiscal first quarter sales. Offsetting these cash increases were increases in inventory and prepaid expenses of $674,948 and $216,478, respectively.  The increase in inventory was needed to cover expected sales volume for the third fiscal quarter.  The net loss adjusted for non cash items consumed $245,718 in cash.

Cash of $534,066 was used in investing activities.  Of this amount, the Company paid $511,332 on the note payable to Avid Technologies, Inc. and $22,734 was used to purchase fixed assets. As of December 31, 2009, the note to Avid Technologies, Inc. was fully paid.  Cash of $9,332 from financing activities came from purchases of stock under our employee stock purchase plan.

Our cash requirements for the next twelve months will include, among other things, the cash needed to fund our operating and working capital needs.  With the proper execution of our business and operating plan, we believe that our cash and cash equivalents as of March 31, 2010 and our internally generated cash will provide us with sufficient liquidity to meet our capital needs for the next twelve months.   Failure to meet the business and operating 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 capital needs.  In addition, if we are able to obtain financing, there can be no assurances that it will be on financially reasonable terms.

Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of March 31, 2010:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	1,450,447	$	730,938	$	587,462	$	132,047

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

Item 305 of Regulation S-K “Quantitative and Qualitative Disclosures About Market Risks” is not required for Smaller Reporting Companies.

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.

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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 March 31, 2010.

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 our business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results or financial position, and the outcome of any contingencies. Any such forward-looking statements are based on current expectations, estimates and projections of management. We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements. Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that could cause actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited to, the mix of products sold and the profit margins thereon, order cancellation or a reduction in orders from customers, competitive product offerings and pricing actions, the availability and pricing of key raw materials, the availability of financing, dependence on key members of management, successful integration of acquisitions, economic conditions in the United States and abroad, as well as other risks and uncertainties discussed in our reports filed with the Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, our Form 10-Q for the three months ended December 31, 2009 and this Quarterly Report. Copies of these filings are available at www.sec.gov.

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.

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PART II.  OTHER INFORMATION

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.

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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.
Date: May 14, 2010	By	/s/Kenneth Plotkin
		KENNETH  PLOTKIN
		Chief Executive Officer, Chairman of the
		Board, President (Principal Executive Officer)
Date: May 14, 2010		By	/s/Gerald Tucciarone
			GERALD TUCCIARONE
			Treasurer, Chief Financial Officer,
			(Principal Financial Officer and Principal
			Accounting Officer) and Secretary

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