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, 1999

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)

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

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

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

As of May 7, 1999, 4,314,302 shares of .01 par value Common Stock of the registrant were outstanding, not including treasury shares

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
	March 31, 1999 (Unaudited)		September 30, 1998
CURRENT ASSETS:
Cash and cash equivalents	$5,736,065		$6,281,852
Accounts receivable, net of allowance for doubtful accounts	7,610,783		6,497,163
Inventories (Note 2)	9,402,186		8,552,097
Prepaid expenses and other current assets	442,294		468,763
Deferred tax assets	720,031		597,131
Total current assets	23,911,359		22,397,006
Property, plant and equipment-at cost Pment-at cost	1,089,212		805,953
Less: Accumulated depreciation and amortization	436,399		362,343
	652,813		443,610
Security deposits and other non-current assets	55,522		56,838
	$24,619,694		$22,897,454
LIABILITIES AND SHAREHOLDERS' EQUITY :
CURRENT LIABILITIES:
Accounts payable	$9,271,829		$9,497,003
Accrued expenses	2,446,547		2,342,380
Income taxes payable	1,046,458		1,021,173
Total current liabilities	12,764,834		12,860,556
SHAREHOLDERS' EQUITY
Common stock $.01 par value; 10,000,000 shares authorized, 4,521,602 and 4,501,402 issued as of March 31 , 1999 and September 30, 1998	45,216		45,014
Additional paid-in capital	10,528,789		10,465,707
Retained earnings	2,547,984		729,781
Treasury Stock, at cost, 214,300 shares (Note 5)	(1,267,129)		(1,203,604)
Total stockholders’ equity	11,854,860		10,036,898
	$24,619,694		$22,897,454

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	Six Months Ended March 31,
	1999 (Unaudited)		1998 (Unaudited)
NET SALES	$29,569,767		$17,401,235
COST OF SALES	21,525,525		13,192,004
Gross Profit	8,044,242		4,209,231
Selling, General and Administrative Expenses	4,597,699		2,849,464
Research and Development Expenses	526,256		348,281
Income from operations	2,920,287		1,011,486
Other Income :
Interest income	94,147		120,395
Other, net	(74,231)		60,639
Income before income tax provision	2,940,203		1,192,520
Income Tax Provision (Note 4)	1,122,000		392,815
Net income	$1,818,203		$799,705
Net income per share-basic (Note 3)	$0.42		$0.18
Net income per share-diluted (Note 3)	$0.39		$0.18

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended March 31,
	1999 (Unaudited)		1998 (Unaudited)
Net Sales	$14,512,768		$7,825,490
Cost of Sales	10,477,415		5,956,060
Gross Profit	4,035,353		1,869,430
Selling, General and Administrative Expenses	2,288,385		1,327,545
Research and Development Expenses	285,164		174,018
Income from operations	1,461,804		367,867
Other Income :
Interest income	44,742		59,849
Other, net	(115,994)		19,910
Income before income tax provision	1,390,552		447,626
Income Tax Provision (Note 4)	525,000		147,000
Net income	$865,552		$300,626
Net income per share-basic (Note 3)	$0.20		$0.07
Net income per share-diluted (Note 3)	$0.19		$0.07

See accompanying notes to consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
	Six Months Ended March 31,
	1999 (Unaudited)		1998 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$1,818,203		$799,705
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	75,369		31,674
Provision for uncollectible accounts receivable	20,000		10,000
Provision for system board obsolescence	100,000		50,000
Compensation paid in stock	2,400		29,656
Deferred tax benefits	(122,900)		-
Changes in current assets and liabilities:
Accounts receivable	( 1,133,618)		337,199
Inventories	(950,089)		425,401
Prepaid expenses and other current assets	26,469		78,337
Accounts payable	(225,173)		(1,491,978)
Accrued expenses	129,452		388,820
	(2,078,090)		(140,891)
Net cash (used in) provided by operating activities	(259,887)		658,814
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(283,259)		(144,394)
Net cash used in investing activities	(283,259)		(144,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock	(63,525)		(105,046)
Proceeds from the exercise of stock options	60,884		43,880
Net cash used in financing activities	(2,641)		(61,166)
Net (decrease) increase in cash and cash equivalents	(545,787)		453,254
Cash and Cash Equivalents, beginning of period	6,281,852		5,602,412
Cash and Cash Equivalents, end of period	$5,736,065		$6,055,666
SUPPLEMENTAL DISCLOSURES:
Income taxes paid	$1,313,615		$36,062

See accompanying notes to consolidated financial statements

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

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements, and are subject to year-end adjustments. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the financial position, results of operations and cash flows for the three month and six month periods ended March 31, 1999 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, 1998 Form 10-KSB.

The operating results for the three months and six months ended March 31, 1999 are not necessarily indicative of the results to be expected for the September 30, 1999 year end.

NOTE 2. INVENTORIES

Inventories have been valued at the lower of average cost or market. The components of inventory at March 31, 1999 and September 30, 1998 consist of:

	March 31, 1999		September 30, 1998
Component Parts	$2,324,550		$1,445,811
Work in Progress	481,080		511,640
Finished Goods	6,596,556		6,594,646
	9,402,186		8,552,097

NOTE 3. NET INCOME PER SHARE

Earnings per share are computed using Financial Accounting Standards Number 128, (“SFAS 128”) “Earnings per Share.” The statement provides for the calculation of “basic” and “diluted” earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average shares outstanding for the period, and excludes any dilutive effects of stock options, warrants and convertible securities. Diluted earnings per share reflects the dilutive effect of additional shares of common stock that could be issued upon the exercise stock options, warrants and convertible securities. Net income per share amounts for the three months and six months ended March 31, 1999, and 1998 have been presented per the requirements of “SFAS 128”.

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

Net income per share - continued

The table below shows the number of weighted average shares used in determining basic and diluted earnings per share:

	Three Months Ended March 31,
	1999		1998
Weighted average shares outstanding-basic	4,309,201		4,400,524
Number of shares issued on the assumed exercise of stock options	325,985		148,965
Weighted average shares outstanding-diluted	4,635,186		4,549,489

	Six Months Ended March 31,
	1999		1998
Weighted average shares outstanding-basic	4,303,357		4,403,382
Number of shares issued on the assumed exercise of stock options	311,754		115,809
Weighted average shares outstanding-diluted	4,615,111		4,518,991

Shares outstanding for the quarter ended and six months ended March 31, 1999 reflect a reduction on a weighted average basis for repurchased shares. (See note 5).

NOTE 4. INCOME TAXES

Income taxes are based on annualized statutory rates for federal and state income taxes. The provision for income taxes reflects an annualized effective tax rate after deductions for the utilization of restricted net operating loss carry forwards, adjustments for items deductible for book purposes but not currently deductible for tax purposes and the benefit which results from the utilization of a foreign sales corporation The benefits of these operating loss carry forwards and deferred tax benefits had previously been subject to a 100% valuation allowance. However, based on three years of profitability up through the end of fiscal 1998 and projected fiscal 1999 taxable income, management reduced the valuation allowance at September 30, 1998 to $127,000. In recognition of continued profitability, the Company reduced the valuation allowance by $60,000 during the first six months of 1999 and anticipates total elimination of the valuation by the end of the fiscal year.

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

NOTE 5. STOCK REPURCHASE PROGRAM

On November 8, 1996, the Company approved a stock repurchase program for the repurchase of up to 300,000 shares of its own stock. The Company intends to use the repurchased shares for certain employee benefit programs. On December 17, 1997, the stock repurchase program was extended by a resolution of the Board of Directors. Through March 31, 1999, the Company had repurchased 214,300 shares for $1,267,129 at an average purchase price of approximately $5.91 per share.

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

Results of Operations

Six Month Period ended March 31, 1999 versus March 31, 1998

Sales for the six months ended March 31, 1999 were $29,569,767 compared to $17,401,235 for the comparable period ending March 31, 1998, resulting in an increase of $12,168,532 or 70%. The primary forces driving the sales growth was an increase in the Company’s domestic distribution and retail channels, increased European sales due to the Company’s expansion into new geographic markets, increased sales to our existing European customers, plus a growth in sales to direct corporate customers.

Unit sales of digital video and conferencing boards for the six months ended March 31, 1999 increased about 93% to approximately 327,000 as compared to approximately 169,000 for the prior year. Sales to domestic customers for the six month period were 23% of net sales for the current fiscal year and 26% for the prior year. Sales to international customers were 77% of net sales for the current fiscal year compared to 74% for the comparable six month period of the prior fiscal year.

Gross profit increased to $8,044,242 from $4,209,231, an increase of $3,835,011 or 91% over the prior fiscal year. The gross profit percentage was 27% for the six months ended March 31, 1999 compared to 24% for the six months ended March 31, 1998. The increase in margins was primarily due to the shifting of production and shipping for most of the Company’s European sales to a subcontractor in Scotland which reduced unit production costs, absorption of manufacturing overhead over a greater number of units and hedging foreign sales to manage currency exposure.

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

Six months ended March 31,
Dollar Costs Percentage of Sales 1998
Increase / (Decrease)

	1999	1998	Increase	1999	1998	(Decrease)
Sales & Promotional	$2,848,261	1,676,234	1,172,027	9.5%	9.6%	(.1%)
Customer Support	213,449	142,238	71,211	.7%	.8%	(.1%)
Product Handling	280,904	171,205	109,699	.9%	1.0%	(.1%)
General & Admin	1,255,085	859,787	395,298	4.2%	4.9%	(.7%)
Total	$4,597,699	$2,849,464	$1,748,235	15.3%	16.3%	(1.0%)

Item 2. Management's Discussion and Analysis -Continued

As a percentage of sales, Selling, General and Administrative expenses for the six months ended March 31, 1999 declined by 1.0% when compared to the prior fiscal year. Sales & Promotional, Customer Support and Product Handling declined by an aggregate total of .3%, and General and Administrative expenses declined by .7%. Represented in dollars, Selling General and Administrative expenses increased $1,748,235 over the comparable prior year’s six month period. The largest component of this increase was Sales and Promotional expenses whose increase of $1,172,027 over the prior year represents approximately 67% of the total increase. The increase in sales and promotional expenses was primarily due to the expansion of marketing funds required to support product visibility at a higher number of retail locations, higher commissions resulting from the 70% net sales increase and increased personnel costs.

Customer Support, Product Handling, and General and Administrative expenses, which represents approximately 33% of the increase over the prior year, increased $71,211, $109,699 and $395,298 respectively. Additional worldwide staff required to consistently maintain a high level of customer support in light of the Company’s expanding domestic and international customer base caused the Customer Support costs to increase. Increased Product Handling costs was a function of greater shipment volume to customers. The increase in General and Administrative costs was mainly for contractual wage increases, higher professional fees for consulting work performed for the Company, and increased incentive compensation due to the increased profitability of the Company.

Research and development expenses increased $177,975 or approximately 51%. The increase was due to the added funds allocated for increased personnel and prototypes costs as the Company expands its current product line and develops its new line of digital products.

The Company had net other income for the six months ended March 31, 1999 of $19,196 compared to net other income for the prior year of $181,034. The decrease in net other income was primarily due to lower returns on monies invested and foreign currency losses due to the decline of the Euro.

Provision for income taxes was $1,122,000, or an effective tax rate of 38% for the six months ended March 31, 1999 compared to $392,815 or an effective tax rate of 33% for the six months ended March 31, 1998. The increase in the net effective rate is primarily due to the timing of certain reserves which are deductible for book purposes but not currently deductible for tax purposes, which resulted in an addition to the deferred tax asset account of $62,900.

As a result of the above, the Company recorded net income after taxes for the six months ended March 31, 1999 of $1,818,203, which resulted in basic and diluted earnings per share of $0.42 and $0.39, respectively, on weighted average basic and diluted shares outstanding of 4,303,357 and 4,615,111, respectively, compared to net income after taxes of $799,705 for the six months ended March 31, 1998, which resulted in basic and diluted earnings per share of $0.18 on weighted average basic and diluted shares of 4,403,382 and 4,518,991, respectively.

Item 2. Management's Discussion and Analysis -Continued

Three Month Period ended March 31, 1999 versus March 31, 1998

Sales for the three months ended March 31, 1999 were $14,512,768 compared to $7,825,490 for the prior fiscal quarter ending March 31, 1998, resulting in an increase of $6,687,278 or 85%. The primary forces driving the sales growth was an increase in the Company’s domestic distribution and retail channels, increased European sales due to the Company’s expansion into new geographic markets, increased sales to our existing European customers, plus a growth in sales to direct corporate customers.

Unit sales of digital video and conferencing boards for the three months ended March 31, 1999 increased about 117% to approximately 161,000 as compared to approximately 74,000 for the prior year. Sales to domestic customers for this year’s second fiscal quarter were 20% of net sales compared to 29% for the prior year’s second fiscal quarter. Sales to international customers were 80% of net sales for the second fiscal quarter compared to 71% for the comparable second quarter of the prior fiscal year.

Gross profit increased to $4,035,353 from $1,869,430, an increase of $2,165,923 or 116% over the prior fiscal year’s second quarter. The gross profit percentage was 27% for the three months ended March 31, 1999 compared to 24% for the three months ended March 31, 1998. The increase in margins was primarily due to the shifting of production and shipping for most of the Company’s European sales to a subcontractor in Scotland which reduced unit production costs, absorption of manufacturing overhead over a greater number of units and hedging foreign sales to manage currency exposure.

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

Three months ended March 31,
Dollar Costs Percentage of Sales 1998
Increase / (Decrease)

	1999	1998	Increase	1999	1998	(Decrease)
Sales & Promotional	$1,387,423	$794,528	$592,895	9.6%	10.1%	(. 5%)
Customer Support	116,687	67,644	49,043	.8%	.9%	(.1%)
Product Handling	154,675	51,635	103,040	1.0%	.7%	.3%
General & Admin	629,600	413,738	215,862	4.4%	5.3%	(.9%)
Total	$2,288,385	$1,327,545	$960,840	15.8%	17.0%	(1.2%)

Item 2. Management's Discussion and Analysis -Continued

As a percentage of sales, Selling, General and Administrative expenses for the three months ended March 31, 1999 declined by 1.2% when compared to the second quarter of the prior fiscal year. Aggregate declines in Sales and Marketing, Customer Support, and General and Administrative expenses of 1.5% were offset by a .3% increase in Product Handling expense. Represented in dollars, Selling General and Administrative expenses increased $960,840 over the comparable prior year’s three month period. The largest component of this increase was Sales and Promotional expenses whose increase of $592,895 over the prior year’s second fiscal quarter represents approximately 62% of the total increase. The increase in sales and promotional expenses was primarily due to the expansion of marketing and advertising funds required to support product visibility at a higher number of retail locations, higher commissions resulting from the 85% net sales increase and higher personnel costs.

Customer Support, Product Handling, and General and Administrative expenses, which represents approximately 38% of the increase over the prior year, increased $49,043, $103,040 and $215,862 respectively. Additional worldwide staff required to consistently maintain a high level of customer support in light of the Company’s expanding domestic and international customer base caused the Customer Support costs to increase. Increased Product Handling costs was a function of greater shipment volume to customers. The increase in General and Administrative costs was mainly for contractual wage increases, higher professional fees for consulting work performed for the Company, and increased incentive compensation due to the increased profitability of the Company.

Research and development expenses increased $111,146 or approximately 64%. The increase was due to the added funds allocated for increased personnel and prototypes costs as the Company expands its current product line and develops its new line of digital products.

The Company had net other expenses for the three months ended March 31, 1999 of $(71,252) compared to net other income for the prior year of $79,759. The decrease in net other income was primarily due to lower returns on monies invested and foreign currency losses due to the decline of the Euro.

Provision for income taxes was $525,000, or an effective tax rate of 38% for the three months ended March 31, 1999 compared to $147,000 or an effective tax rate of 33% for the three months ended March 31, 1998. The increase in the net effective rate is primarily due to the timing of certain reserves which are deductible for book purposes but not currently deductible for tax purposes.

At the end of fiscal 1998, the Company had a deferred tax valuation allowance of $127,000. In recognition of the continued profitability during the first six months of fiscal 1999, the valuation allowance during the second fiscal quarter was reduced by $30,000. For the six month period ending March 31, 1999, the valuation allowance has been reduced by $60,000.

As a result of the above, the Company recorded net income after taxes for the three months ended March 31, 1999 of $865,552, which resulted in basic and diluted earnings per share of $0.20 and $0.19, respectively, on weighted average basic and diluted shares outstanding of 4,309,201 and 4,635,186, respectively, compared to net income after taxes of $300,626 for the three months ended March 31, 1998, which resulted in basic and diluted earnings per share of $0.07 on weighted average basic and diluted shares of 4,400,524 and 4,549,489, respectively.

In two of the previous four fiscal years, the Company has experienced certain revenue trends. Since the Company's products are primarily sold through distributors and retailers, the Company has historically recorded stronger sales results during the Company's first fiscal quarter (October to December), which due to the holiday season, is a strong quarter for computer equipment sales. The Company experienced this trend in each of the fiscal years ended September 30, 1998 and September 30, 1997. In addition, the Company's international sales, mostly in the European market, were 72 % and 66% of sales for fiscal 1998 and 1997, respectively, and 77% for the first six months of fiscal 1999. Due to this, the Company's sales for its fourth fiscal quarter (July to September) can be potentially impacted by the reduction of activity experienced with Europe during the July and August summer holiday period. To offset the above cycles, the Company is targeting as wide a range of customer types in order to moderate the seasonality of retail sales.

Liquidity and Capital Resources

The Company had a net cash position of $5,736,065 working capital of $11,146,525 and shareholders' equity of $11,854,860 as of March 31, 1999, compared to cash, working capital and shareholders’ equity of $6,281,852, $9,536,450 and $10,036,898, respectively, as of September 30, 1998 . The significant items of cash provided by and cash (consumed ) are detailed below:

Net cash of $ 259,887 consumed by operating activities was primarily due to cash invested in current assets of $2,057,238, increase in deferred tax benefits of $122,900 and cash consumed attributable to the reduction of current liabilities of $95,721, offset partially by the Company’s net income, adjusted for non cash items, of $2,015,972.

Liquidity and Capital Resources-continued

Additional cash was used to purchase fixed assets. Minimal cash was provided by and consumed by the exercise of employee options and the purchase of additional treasury shares, respectively.

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

On November 8, 1996, the Company approved a stock repurchase program for the repurchase of up to 300,000 shares of its own stock. The Company will use the repurchased shares for certain employee benefit programs. On December 17, 1997, the stock repurchase program was extended by a resolution of the Board of Directors. Through March 31, 1999, the Company had repurchased 214,300 shares for $1,267,129 at an average purchase price of approximately $5.91 per share.

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

Year 2000

An issue affecting most companies is whether computer systems and applications will recognize and process the year 2000 and beyond. Many computer systems were not designed to handle dates beyond the year 1999. The Company has evaluated the effect of year 2000 issues relating to its internal computer systems (primarily used for accounting, inventory control, word processing and certain other administrative functions) and has concluded that certain aspects of its system are not year 2000 compliant. In recognition of this, the Company during 1998 studied the feasibility of upgrading its existing computer software or purchasing new software. The Company concluded that the purchase of new software and the upgrading of computer hardware was the best course of action. During the first fiscal quarter of 1999, the Company has selected new software. The hardware upgrades and the implementation of new software began during January 1999. Testing will be performed in house by Company personnel, with assistance from an outside consultant. The Company expects to have the system operational by the middle of 1999. The Company estimates the cost to the Company to remedy the year 2000 issue with regard to their internal computer system will be approximately $150,000. The company expects to fund this project through internally generated cash flow, and will account for the project as prescribed by the rules under generally accepted accounting principles.

The Company initiated communications in February 1999 with third parties the Company does business with in order to identify, if possible, the status of the third parties’ year 2000 readiness. The Company is currently receiving these third party questionnaires and is quantifying these responses. The Company will attempt to have this completed by the middle of 1999. However, the Company has limited or no control over the actions taken by these third parties. Accordingly, there can be no assurance that all the third parties the Company does business with will successfully resolve all of their year 2000 issues. The failure of these third parties to resolve their year 2000 issues could have a potentially adverse affect on the Company. During 1999, the Company will attempt to monitor the readiness of third parties it currently does business with and look to transact business with third parties who are year 2000 compliant in an effort minimize the risk to the Company.

It is the Company’s intention to address its year 2000 issues prior to being affected by them. If the Company identifies significant risks associated with year 2000 compliance, or if the Company’s year 2000 project deviates from its expected completion date, the Company will devise a contingency plan which the Company intends to develop concurrently with the implementation of the new computer system. Management believes that current plans and monitoring actions will provide ample response time to avoid material adverse affects on the Company’s business and financial results.

The Company has evaluated its currently available products and believes that they are Year 2000 compliant. The Company’s currently available products are generally not date sensitive, although the PCs in which they may be installed may have Year 2000 issues not associated with the Company’s products. The inability of any of the Company’s products to operate properly in the Year 2000 could result in increased warranty costs, customer satisfaction issues, litigation, or other material costs and liabilities, which could have a material adverse affect on the Company, its results of operations and financial condition.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS

From time to time, information provided by the company, statements made by its employees or information provided in its Securities and Exchange Commission filings, such as information contained in this Form 10-Q, including certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may contain forward looking information. The words “Estimate, “Plan”, “Intend” “Believes, “Expect”, “Anticipates”, “Projects” and similar words or expressions are intended to identify forward looking statements. These statements speak only as of the date of this report. Such forward looking statements involve and are subject to known and unknown risks, uncertainties and other factors which could cause the actual results, performance and achievements of the Company to be materially different from any future results, performance ( financial or operating), or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following: rapid changes in technology; lack of funds for future research; competition, proprietary patents and rights of others; loss of major customers; loss of sources of supply for digital video processing chips; non-availability of management; government regulation; domestic and foreign economic conditions; currency fluctuations; the inability of the Company to profitably sell its products and the impact of complications due to year 2000 compliance. The market price of the Company's common stock may be volatile at times in response to fluctuation in the company's quarterly operating results, changes in analysts' earnings estimates, market conditions in the computer hardware industry, seasonality of the business cycle, as well as general conditions and other factors external to the Company.

PART II. OTHER INFORMATION

Item 1 Legal Proceedings

In January 1998, Advanced Interactive Incorporated (“AII”) contacted Hauppauge Computer Works, Inc. (“HCW”) and attempted to induce HCW to enter into a patent license or joint venture agreement with AII relative to certain of HCW’s products. AII alleged that such products infringe U.S. Patent No. 4, 426, 698 (the “AII Patent”). At such time, HCW’s engineering staff analyzed the AII Patent and determined that HCW’s products did not infringe any such patent. Accordingly, HCW rejected AII’s offer.

On October 6, 1998, HCW received notice that AII had commenced an action against it and multiple other defendants in the United States District Court for the Northern District of Illinois, alleging that the certain of HCW’s products infringe on certain patent rights allegedly owned by the plaintiff. The complaint seeks unspecified compensatory and statutory damages with interest. HCW denies such allegations and intends to vigorously defend this action. On December 22, 1998, HCW filed its Answer (the “Answer”). Among other things, pursuant to the Answer, HCW denies that its products infringe AII’s patent rights and asserts certain affirmative defenses, including challenging the validity of the Patent.

Notwithstanding the foregoing, because of the uncertainties of litigation, no assurances can be given as to the outcome of the AII litigation. In the event that HCW were not to prevail in this litigation, HCW could be required to pay significant damages to AII and could be enjoined from further use of such technology as it presently exists. Although a negative outcome in the AII litigation would have a material adverse affect on HCW, including, but not limited to, its operations and financial condition, HCW believes that, if it is held that HCW’s products infringe AII’s patent rights, HCW would attempt to design components to replace the infringing components or would attempt to negotiate with AII to utilize its system, although no assurances can be given that HCW would be successful in these attempts. At the present time, HCW can not assess the possible cost of designing and implementing a new system or obtaining rights from AII. As of March 31, 1999, the Company estimated that legal fees incurred were approximately $50,000.

Item 4 Submission of Matters to a Vote of Security Holders

The following propositions were submitted to the shareholders for approval at the annual meeting of shareholders held on March 25,1999 at the offices of the Company and were approved by the votes as indicated:

PART II. OTHER INFORMATION-CONTINUED

No. 1: Election of Directors

The following directors were elected by the votes as indicated to serve until the election and qualification of their respective successors:

No. 2: Appointment of BDO Seidman LLP as independent auditors

The appointment of BDO Seidman LLP as independent auditors for the fiscal year ended September 30, 1999 was approved by the vote as indicated:

Item 6 Exhibits and Reports on Form 8-K

(a) Exhibits

27. Financial Data Schedule

(b) Reports on form 8-K

None

SIGNATURES

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

HAUPPAUGE DIGITAL, INC.
Registrant

Date: May 9, 1999
By /s/ Kenneth Plotkin    x  KENNETH PLOTKIN  
Vice President and Chief Executive Officer

Date: May 9, 1999
By /s/ Gerald Tucciarone    x  GERALD TUCCIARONE  
Treasurer and Chief
Financial Officer