UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June 30~~December 31, 2013

¨ 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).

x YES ¨ NO

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

¨ YES x NO

As of ~~August~~January 527, ~~2013~~2014, 10,122,344 shares of $0.01 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
Consolidated Balance Sheets – June 30, 2013 (unaudited) and September 30, 2012	3
Consolidated Balance Sheets – December 31, 2013 (unaudited) and September 30, 2013	3
Consolidated Statements of Operations - Three Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	4
Consolidated Statements of Operations - Three Months ended December 31, 2013 (unaudited) and 2012 (unaudited)	4
Consolidated Statements of Operations - Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	5
Consolidated Statements of Other Comprehensive Loss Three Months ended December 31, 2013 (unaudited) and 2012 (unaudited)	5
Consolidated Statements of Other Comprehensive Loss Three Months and Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	6
Consolidated Statements of Cash Flows - Three Months ended December 31, 2013 (unaudited) and 2012 (unaudited)	6
Consolidated Statements of Cash Flows - Nine Months ended June 30, 2013 (unaudited) and 2012 (unaudited)	7
Notes to Consolidated Financial Statements	7-12
Notes to Consolidated Financial Statements	8-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	20
Item 4. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 6. Exhibits	2621
Signatures	2722

	2

PART I. FINANCIAL INFORMATION

~~Item~~ Item 1. Financial Statements

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2013 (unaudited)				September 30, 2012
	December 31, 2013 (unaudited)			September30, 2013 (Note 1)
Assets:
Cash and cash equivalents	$	21,~~254~~298,~~689~~841		$	$1,482,566	~~5,095,853~~
Trade receivables, net of various allowances		13,~~815~~238,~~014~~028			2,180,276	~~2,618,081~~
Other non trade receivables		2,455,113				1,995,654
Other non-trade receivables		359,616			278,497
Inventories		129,~~055~~405,~~389~~758			10,479,048	~~9,497,856~~
Deferred tax asset-current		~~492~~496,~~673~~569			453,659	~~977,488~~
Prepaid expenses and other current assets		1,~~250~~181,~~176~~969			1,155,054	~~1,088,085~~
Total current assets		2015,~~323~~980,~~054~~781			16,029,100	~~21,273,017~~
Intangible assets, net		1,865,467				2,431,594
Property, plant and equipment, net		122,526			144,596
Property, plant and equipment, net		177,262				235,978
Security deposits and other non-current assets		108,391			115,589
Security deposits and other non-current assets		115,589				109,218
Deferred tax asset-non current		548,906			692,225
Deferred tax asset-non current		580,958				622,272
Total assets	$	16,760,604		$	16,981,510
Total assets	$	23,062,330			$	24,672,079
Liabilities and Stockholders’ Deficit:
Liabilities and Stockholders’ Equity:
Current Liabilities:
Current Liabilities:
Accounts payable	$	4,086,752		$	3,758,876
Accounts payable	$	6,661,809			$	5,865,085
Accrued expenses-fees		12,338,719			12,497,060
Accrued expenses fees		12,549,844				12,943,022
Accrued expenses		2,522,194			2,590,291
Accrued expenses		2,771,337				3,668,491
Income taxes payable		192,512			188,187
Income taxes payable		213,107				230,123
Total current liabilities		19,140,177			19,034,414
Total current liabilities		22,196,097				22,706,721
Stockholders' Deficit:
Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued and 10,122,344 outstanding		108,828			108,828
Common stock, $.01 par value; 25,000,000 shares authorized, 10,882,823 issued		108,828				108,828
Additional paid-in capital		18,457,101			18,428,511
Additional paid-in capital		18,399,765				18,316,085
Accumulated deficit		(13,875,556)			(13,492,346)
Retained deficit		(10,487,112	)			(9,443,408	)
Accumulated other comprehensive loss		(4,664,398)			(4,692,349)
Accumulated other comprehensive loss		(4,749,700	)			(4,610,599	)
Treasury Stock, at cost, 760,479 shares		(2,405,548)			(2,405,548)
Treasury Stock, at cost, 760,479 shares		(2,405,548	)			(2,405,548	)
Total stockholders' deficit		(2,379,573)			(2,052,904)
Total stockholders' equity		866,233				1,965,358
Total liabilities and stockholders' deficit	$	16,760,604		$	16,981,510
Total liabilities and stockholders' equity	$	23,062,330			$	24,672,079

See accompanying notes to consolidated financial statements

	3

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended June 30,
	Three months ended December 31,
	2013			2012	~~2012~~
Net sales	$	56,~~587~~469,~~632~~479		$	$11,930,378	~~9,215,703~~
Cost of sales		43,~~100~~958,~~992~~017			6,538,437	~~6,563,941~~
Gross profit		12,~~486~~511,~~640~~462			5,391,941	~~2,651,762~~
Selling, general and administrative expenses		2,~~650~~067,~~602~~698			2,873,775	~~2,935,797~~
Research and development expenses		~~824~~691,~~637~~782			706,926	~~821,414~~
Loss from operations		(1,988,599	)			(1,105,449	)
(Loss) income from operations		(248,018)			1,811,240
Other income :
Other income (expense) :
Interest income		~~651~~198			1,080	~~967~~
Foreign currency gain		31,954				(3,659	)
Foreign currency gain (loss)		(5,698)			2,070
Total other income		32,605				(2,692	)
Total other income (expense)		(5,500)			3,150
Loss before tax provision		(1,955,994	)			(1,108,141	)
(Loss) income before tax provision		(253,518)			1,814,390
Current tax expense		129,~~591~~283			52,505	~~35,469~~
Deferred tax benefit		(157,187	)			(116,627	)
Deferred tax expense		100,409			471,799
Net loss	$	(1,800,398	)		$	(1,026,983	)
Net (loss) income	$	(383,210)		$	1,290,086
Net loss per share:
Net (loss) income per share:
Basic and diluted	$	(0.1804)	)	$	$0.13	~~(0.10~~	)

See accompanying notes to consolidated financial statements

	4

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~OTHER COMPREHENSIVE LOSS

(UNAUDITED)

	Nine months ended June 30,
	Three months ended December 31,
	~~2013~~	2013			2012
Net sales	$	27,953,945			$	35,963,918
Net (loss) income	$	(383,210)		$	1,290,086
Cost of sales		17,530,937				24,703,077
Foreign currency translation gain		27,951			69,408
Gross profit		10,423,008				11,260,841
Other comprehensive (loss) income	$	(355,259)		$	1,359,494
Selling, general and administrative expenses		8,544,069				9,225,702
Research and development expenses		2,321,475				2,440,008
Loss from operations		(442,536	)			(404,869	)
Other income :
Interest income		2,619				3,802
Foreign currency gain		25,366				12,911
Total other income		27,985				16,713
Loss before tax provision		(414,551	)			(388,156	)
Current tax expense		103,024				107,864
Deferred tax expense		526,129				434,211
Net loss	$	(1,043,704	)		$	(930,231	)
Net loss per share:
Basic and diluted	$	(0.10	)		$	(0.09	)

See accompanying notes to consolidated financial statements

	5

HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OTHER~~CASH ~~COMPREHENSIVE LOSS~~FLOWS

(UNAUDITED)

	Three months ended June 30,
	Three months ended December 31,
	2013			2012	~~2012~~
Net loss	$	(1,800,398	)		$	(1,026,983	)
Cash Flows From Operating Activities
Foreign currency translation loss		(65,530	)			(103,310	)
Net (loss) income	$	(383,210)		$	1,290,086
Other comprehensive loss	$	(1,865,928	)		$	(1,130,293	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		22,942			29,602
Amortization of intangible assets		-			188,709
Stock compensation expense		28,590			26,184
Deferred tax expense		100,409			471,799
Sales reserve, net		-			15,553
Inventory reserve		102,920			100,000
Other items		4,572			(22,475)
Changes in current assets and liabilities
Accounts receivable and other non trade receivables		(1,103,720)			(4,343,882)
Inventories		970,370			(988,408)
Prepaid expenses and other current assets		(22,129)			(53,495)
Accounts payable		318,272			2,450,106
Accrued expenses and other current liabilities		(229,165)			(673,717)
Total adjustments		193,061			(2,800,024)
Net cash used in operating activities		(190,149)			(1,509,938)
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(872)			(12,697)
Net cash used in investing activities		(872)			(12,697)
Effect of exchange rates on cash		7,296			31,238
Net decrease in cash and cash equivalents		(183,725)			(1,491,397)
Cash and cash equivalents, beginning of period		1,482,566			5,095,853
Cash and cash equivalents, end of period	$	1,298,841		$	3,604,456
Supplemental disclosures:
Income taxes paid	$	26,283		$	31,802

	Nine months ended June 30,
	2013			2012
Net loss	$	(1,043,704	)	$	(930,231	)
Foreign currency translation loss		(139,101	)		(137,269	)
Other comprehensive loss	$	(1,182,805	)	$	(1,067,500	)

See accompanying notes to consolidated financial statements

~~See accompanying notes to consolidated financial statements~~6

6HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

HAUPPAUGENotes DIGITALTo INC.Consolidated ANDFinancial SUBSIDIARIESStatements

CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

(UNAUDITED)Note 1. Basis of Presentation

	Nine months ended June 30,
	2013			2012
Net loss	$	(1,043,704	)	$	(930,231	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		88,718			133,515
Amortization of intangible assets		566,127			566,127
Stock compensation expense		83,677			94,931
Deferred tax expense		526,129			434,211
Sales reserve, net		(400,191	)		75,029
Bad debt reserve		0			40,000
Inventory reserve		200,000			340,000
Other items		14,478			24,755
Changes in current assets and liabilities
Accounts receivable and other non trade receivables		1,677,800			1,715,178
Inventories		(3,618,079	)		(1,134,235	)
Prepaid expenses and other current assets		(154,464	)		(163,884	)
Accounts payable		600,897			(2,823,561	)
Accrued expenses and other current liabilities		(1,361,003	)		1,808,119
Total adjustments		(1,775,911	)		1,110,185
Net cash provided by (used in) operating activities		(2,819,615	)		179,954
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(30,002	)		(39,430	)
Net cash used in investing activities		(30,002	)		(39,430	)
Effect of exchange rates on cash		8,453			(71,951	)
Net increase (decrease) in cash and cash equivalents		(2,841,164	)		68,573
Cash and cash equivalents, beginning of period		5,095,853			4,080,537
Cash and cash equivalents, end of period	$	2,254,689		$	4,149,110
Supplemental disclosures:
Income taxes paid	$	92,383		$	117,303

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. The September 30, 2013 consolidated balance sheet has been derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP. 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, 2013 Form 10-K.

~~see~~ ~~accompanying~~The ~~notes~~operating results for the three months ended December 31, 2013 are not necessarily indicative of the results to ~~consolidated~~be ~~financial~~expected ~~statements~~for the fiscal year ending September 30, 2014.

7 The Company’s cash requirements for the next twelve months will include, among other things, the cash to fund its operating and working capital needs. The Company relies exclusively upon cash generated from operations to fund these needs. It does not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from operations is insufficient to fund its capital requirements to sustain operations. The Company’s cash and cash equivalents as of December 31, 2013 and its internally generated cash may not be sufficient to fund its operating needs for the next twelve months and this gives rise to a substantial doubt regarding its ability to continue as a “going concern.”

~~HAUPPAUGE~~ ~~DIGITAL~~The ~~INC~~Company has incurred operating losses for the last six fiscal years and in the three month period ended December 31, 2013. ~~AND~~Those ~~SUBSIDIARIES~~losses are primarily attributable to a continuing decline in sales. In the quarter ended December 31, 2013, the Company experienced an approximate 47% drop in sales from the quarter ended December 31, 2012.

~~Notes To~~ ~~Consolidated~~Since ~~Financial~~the ~~Statements~~fourth quarter of fiscal 2011, the Company has been implementing expense reduction initiatives. The Company switched from air to ocean freight to reduce shipping costs, outsourced most of its shipping and logistics to a third party, reduced personnel, relocated certain facilities to smaller offices, renogotiated certain exisiting leases to reduce rent and closed certain sales offices. The Company believes that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan.

~~(Unaudited)~~ The Company is working to develop a strategy to address its continuing operating losses and loss of sales, and during the latter part of fiscal 2013 the Company retained Corporate Fuel Advisors, an investment bank and advisory firm, which assisted the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs, expense reductions and the restructuring of its business.

~~Note 1. Basis of Presentation~~7

~~The accompanying unaudited consolidated financial~~ ~~statements~~ HAUPPAUGE ~~for~~DIGITAL ~~Hauppauge Digital Inc~~INC. ~~and~~AND ~~subsidiaries~~SUBSIDIARIES Notes ~~(collectively,~~To ~~the~~Consolidated ~~“Company”)~~Financial 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 Statements (~~consisting of normal recurring accruals and reserves~~Unaudited) 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, 2012 Form 10-K.

The ~~operating~~Company ~~results~~cannot ~~for~~assure ~~the~~that ~~three~~it ~~months and~~will ~~nine~~be ~~months~~able ~~ended~~to ~~June~~develop ~~30,~~and ~~2013~~implement ~~are~~a ~~not~~plan ~~necessarily~~that ~~indicative~~will ofenable ~~the~~it ~~results~~ to besuccessfully ~~expected~~address ~~for~~its ~~the~~business ~~fiscal~~and ~~year~~financial ~~ending~~challenges. ~~September 30,~~Among ~~2013.~~other things:

~~The~~⋅ ~~Company’s~~If ~~cash requirements for~~ the ~~next~~Company ~~twelve~~seeks ~~months will include~~financing, ~~among~~it ~~other~~may ~~things, the cash to fund its operating and working capital needs. The Company relies exclusively upon cash generated from its operations to fund these needs. The Company does~~ not ~~have~~be aable ~~working capital line of credit or other borrowing facility in place~~ to ~~draw~~obtain ~~upon~~funding ~~in the event that cash from its operations are insufficient~~ to ~~fund its~~address ~~capital requirements to sustain~~ its operations. Based on the Company’s current scale of operating expenses and the Company’s new product development schedule, the Company has evaluated that its cash and cash equivalents as of June 30, 2013 and its internally generated cash may not provide sufficient liquidity to meet its capital needs ~~for~~on ~~the~~commercially ~~next~~reasonable ~~twelve months~~terms, ~~and~~or ~~that~~at ~~additional sources of cash may be required to meet its capital needs~~all.

~~The~~⋅ ~~Company~~It ~~has~~may ~~incurred~~not ~~operating~~be ~~losses~~able ~~for the last five fiscal years and in the nine month period ended June 30, 2013. Those losses are primarily attributable~~ to adevelop ~~continuing~~new ~~decline in~~lines ~~sales.~~of Inproducts ~~the~~or ~~quarter~~services ~~ended June 30, 2013, the Company experienced an unprecedented and precipitous 46% drop in sales from the quarter ended March 31, 2013. The Company believes~~ that ~~its~~will ~~sales~~be ~~have~~positively ~~declined~~accepted ~~for~~by ~~reasons which we described in Item 1A of~~ the ~~Company’s Annual Report on 10-K for the fiscal year ended September 30, 2012, including, among other things:~~marketplace.

·⋅ ~~Reliance~~It onmay anot ~~small~~be ~~number~~able ofto ~~its~~successfully ~~product~~compete ~~lines~~with ~~being~~its ~~successful,~~competitors’ ~~the~~product ~~failure~~and ofservice ~~any one of which could substantially reduce its sales~~offerings.

·⋅ ~~The~~Customers ~~Companny’s~~and ~~potential~~consumers ~~inability~~may tolose ~~develop~~confidence ~~new~~in ~~products~~the orCompany ~~services~~as ~~that~~a ~~will~~result ~~meet~~of its ~~customers’~~financial ~~needs~~condition and performance and their perceptions of its business prospects and competitive position, and they may cease to do business with the Company or ~~wants~~buy its products.

· If ~~Intense~~any ~~competitive~~strategic ~~pressures~~or ~~from~~restructuring ~~larger~~plan ~~companies~~ that ~~have~~the ~~greater~~Company ~~resources~~develops ~~than~~and implements is not successful, there is a substantial risk that the Company ~~and~~might ~~from~~not ~~new~~be ~~market~~able ~~entrants,~~to ~~stemming~~sustain ~~from~~its ~~frequent~~operations ~~new~~at ~~product~~current ~~introductions~~levels, ~~technological~~which ~~advances,~~would ~~and~~have ~~declining~~a ~~sales~~material ~~prices~~adverse effect on its business, ~~among~~operating ~~other~~results ~~things~~and financial condition.

· The ~~Company’s~~consolidated ~~potential~~balance ~~inability~~sheet toat ~~remain~~September ~~ahead~~30, of2013 was derived from the ~~development~~audited consolidated balance sheet of ~~competing~~Hauppauge ~~technologies,~~Digital ~~products~~Inc. and ~~services~~Subsidiaries, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

· Note ~~Lack~~2. ofTrade ~~market~~Accounts ~~diversification.~~and Other Non-Trade Receivables

· Trade ~~Heavy~~receivables ~~reliance~~consist ~~on retailers, dealers and PC manufacturers to market, sell and distribute the Company’s products~~of:

8⋅ Trade receivables from sales to customers

~~Since~~⋅ ~~the fourth quarter of fiscal 2011~~Allowances, ~~the~~consisting ~~Company has been implementing expense reduction initiatives. The Company switched from air to ocean freight to reduce shipping costs, outsourced most~~ of ~~its shipping and logistics to a third party, reduced personel, relocated certain facilities to smaller offices, renogotiated certain exisitng leases to reduce rent and closed certain~~ sales ~~offices. The Company believes that it may be increasingly difficult to make further material reductions in costs~~ and ~~maintain~~bad a viable operating plan. Addiitonally, absent a recovery in its business, the Company may be required to reduce its current expectations of future cash flows and pre tax operating results, which, in turn, may result in charges for the impairment of its longed lived assets and/or increase the valuation allowance against its net deferred tax assets. Such charges could be material. debt

~~The Company is working to develop a strategy to address its~~ ~~continuing~~Other ~~operating~~non ~~losses~~trade ~~and~~receivables ~~loss~~consist of sales, and the Company has retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs and the restructuring of its business. :

~~The~~⋅ ~~Company~~Receivables ~~cannot~~pertaining ~~assure that it will be able~~ to ~~develop~~component ~~and implement~~parts apurchased ~~plan~~from ~~that~~the ~~will~~Company ~~enable~~at itcost toby ~~successfully~~the ~~address~~Company’s ~~its~~contract ~~business~~manufacturers ~~and~~which ~~financial~~are ~~challenges.~~excluded ~~Among~~from ~~other things:~~sales

·⋅ IfGeneral ~~the~~services ~~Company~~tax ~~seeks~~(GST) ~~financing,~~and ~~the~~value ~~Company~~added ~~may~~tax ~~not~~(VAT) bereclaimable ~~able~~on togoods ~~obtain~~purchased ~~funding~~by tothe ~~address~~Company’s ~~its~~Asian ~~capital~~and ~~needs~~European ~~on commercially reasonable terms, or at all.~~locations

·⋅ ~~The~~Other ~~Company~~minor ~~may~~non-trade ~~not be able to develop new lines of products or services that will be positively accepted by the marketplace.~~receivables

~~· The Company may not be able to successfully compete with its competitors’ product and service offerings.~~8

· HAUPPAUGE ~~Customers~~DIGITAL ~~and~~INC. ~~consumers~~AND ~~may~~SUBSIDIARIES lose confidence in the Company as a result of its financial condition and perfomance, its potential de-listing from Nasdaq, should the Company lose its appeal related to such de-listing, and their perceptions of the Company’s business prospects and competitive position, and they may cease to do business with us or buy the Company’s products.

~~If any strategic or restructuring plan~~ ~~that~~Notes ~~the~~To ~~Company’s~~Consolidated ~~develops~~Financial and implements is not successful, there is a substantial risk that that the Company might not be able to sustain its operations at current levels, which would have a material adverse effect on its business, operating results and financial condition.Statements

~~Note 2. Trade Accounts and Other Non-Trade~~ ~~Receivables~~ (Unaudited)

Trade receivables ~~consist~~and other non-trade receivables as of December 31, 2013 and September 30, 2013 consisted of:

· Trade receivables from sales to customers

	December 31,		September 30,
	2013		2013
Trade receivables	$	5,035,099	$	3,977,347
Allowance for doubtful accounts		(102,123)		(102,123)
Sales reserve		(1,694,948)		(1,694,948)
Net trade receivables	$	3,238,028	$	2,180,276
Receivable from contract manufacturers	$	142,397	$	74,797
GST and VAT tax receivables		159,300		147,816
Other		57,919		55,884
Total other non trade receivables	$	359,616	$	278,497

· Note ~~Allowances,~~3. ~~consisting of sales and bad debt~~Inventories

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

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

	December 31,		September 30,
	2013		2013
Component parts	$	3,994,346	$	3,795,919
Finished goods		4,031,044		5,302,761
Subtotal		8,025,390		9,098,680
Reserve for anticipated sales returns at cost		1,380,368		1,380,368
Total	$	9,405,758	$	10,479,048

· Note ~~General~~4. ~~services~~Net ~~tax~~Income (~~GST~~Loss) ~~and~~Per ~~value added tax (VAT) reclaimable on goods purchased by the Company’s Asian and European locations~~Share

· Basic ~~Other~~net ~~minor~~income ~~non-trade~~(loss) ~~receivables~~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 (loss) 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:

Trade receivables and other non-trade receivables as of June 30, 2013 and September 30, 2012 consisted of:

	Three months ended
	December 31,
	2013		2012
Weighted average shares outstanding-basic		10,122,344		10,122,344
Number of shares issued on the assumed exercise of stock options		-		-
Weighted average shares outstanding-diluted		10,122,344		10,122,344

	June 30,			September 30,
	2013			2012
Trade receivables	$	3,975,540		$	6,319,544
Allowance for doubtful accounts		(102,123	)		(352,123	)
Sales reserve		(2,058,403	)		(3,349,340	)
Net trade receivables		1,815,014		$	2,618,081
Receivable from contract manufacturers		1,857,848		$	1,649,444
GST and VAT tax receivables		542,876			287,446
Other		54,389			58,764
Total other non trade receivables	$	2,455,113		$	1,995,654

	9

9 HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES

~~HAUPPAUGE~~ ~~DIGITAL~~Notes ~~INC.~~To ~~AND~~Consolidated ~~SUBSIDIARIES~~Financial Statements

~~Notes To~~ ~~Consolidated Financial Statements~~(Unaudited)

~~(Unaudited)~~ Options to purchase 1,265,625 and 1,396,625 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the three months December 31, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 35. ~~Inventories~~Product Segment and Geographic Information

~~Inventories~~ The ~~have~~Company ~~been~~operates ~~valued~~primarily atin one business segment, which is the ~~lower~~ development, marketing and manufacturing of ~~average~~TV ~~cost~~receiver orand video recording products for the personal computer market. onMost aof ~~first~~the Company’s products are similar in ~~first~~function ~~out~~and ~~basis~~share commonality of component parts and manufacturing processes. The ~~components~~Company’s ofproducts ~~inventory~~are ~~consist~~either ofsold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells its TV tuner products directly to PC manufacturers. The Company evaluates its product lines under the functional categories:

	June 30,		September 30,
	2013		2012
Component parts	$	3,782,816	$	3,412,673
Finished goods		6,641,421		3,563,284
Subtotal		10,424,237	$	6,975,957
Reserve for anticipated sales returns at cost		1,631,152		2,521,899
Total	$	12,055,389	$	9,497,856

⋅

Video recorder products, such as the USB-Live2, HD-PVR and Colossus,

~~Note~~ ⋅ TV 4.tuner ~~Net~~products ~~Income~~such ~~(Loss)~~as ~~Per~~the ~~Share~~Broadway, digital TV tuners and hybrid digital/analog TV tuners

~~Basic~~⋅ ~~net~~Other ~~income~~video ~~(loss)~~products ~~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~~software. Diluted net income (loss) per share reflects, in the periods in which they have a dilutive effect, the dilution which would occur upon the exercise of stock options. A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

	Three months ended				Nine months ended
	June 30				June 30,
	2013		2012		2013		2012
Weighted average shares outstanding-basic		10,122,344		10,122,344		10,122,344		10,122,344
Number of shares issued on the assumed exercise of stock options		-		-		-		-
Weighted average shares outstanding-diluted		10,122,344		10,122,344		10,122,344		10,122,344

The Company’s TV tuner products enable, among other things, a PC user to watch TV in a resizable window on a PC. The Company’s video recorder products allow consumers to record high definition video from a cable TV or satellite set top box or a game console such as a Xbox 360 or Sony Playstation 3. The Company’s other non-TV tuner products enable, among other things, the ability to watch and listen to PC based videos, music and pictures on a TV set through a home network.

~~Options~~ toSales ~~purchase~~by ~~1,478,125~~functional ~~and~~category ~~1,531,567~~are ~~shares~~as of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the three months and nine months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.follows:

Note 5. Product segment and geographic information

	Three months ended December 31,
	2013		2012
Video recorder products	$	2,860,312	$	7,221,592
TV tuner products		3,377,367		4,432,415
Other video products and software		231,800		276,371
Total sales	$	6,469,479	$	11,930,378

The Company ~~operates~~sells inits ~~one business segment, which is the development, marketing and manufacturing of analog and digital video~~ products ~~for~~through ~~the~~a ~~personal~~North ~~computer~~American ~~market~~ and ~~Apple~~ ~~iPad®~~international ~~and~~network ~~iPhone® market. The products are similar in function and share commonality~~ of ~~component~~distributors ~~parts~~ and ~~manufacturing processes~~retailers. ~~The~~It ~~Company’s~~maintains ~~products~~sales ~~are~~offices ~~either~~in ~~sold,~~the orUnited ~~can be sold~~States, byEurope ~~the same retailers~~ and ~~distributors in the Company’s marketing channel~~Asia. ~~The~~Sales ~~Company~~percentages ~~also~~by ~~sells~~geographic ~~product~~region ~~directly~~are toas ~~PC manufacturers.~~follows:

	Three months ended December 31,
Geographic region	2013			2012
The Americas		51	%		59	%
Europe		45	%		37	%
Asia		4	%		4	%
Total		100	%		100	%

~~HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES~~10

~~Notes To~~ ~~Consolidated~~ HAUPPAUGE ~~Financial~~DIGITAL ~~Statements~~INC. AND SUBSIDIARIES

~~(Unaudited)~~ Notes To Consolidated Financial Statements

~~The Company’s products fall under~~ ~~three product categories:~~(Unaudited)

· Note ~~Video~~6. ~~recorder~~Tax ~~products, such as USB-Live2, which allows consumers to record video tapes to DVD disc or to some of the Company’s products, such as the HD PVR and Colossus~~Provision

· The TVCompany’s ~~receivers,~~tax ~~which~~provision ~~include~~for ~~Broadway~~the ~~and~~three ~~the~~months ~~Company’s~~ended ~~WinTV~~December 31, 2013 and ~~PCTV~~2012 TVis ~~tuner~~as ~~products~~follows:

· Non-TV tuner products such as the ImpactVCB, MediaMVP-HD and the Company’s TV applications for the PC and the Apple iPad® and iPhone®

	Three months ended December 31,
	2013		2012
Current state taxes	$	10,000	$	10,000
Current tax expense on international operations		19,283		42,505
Deferred tax expense		100,409		471,799
Tax provision	$	129,692	$	524,304

~~The Company’s TV tuner products enable, among other things,~~ ~~a PC user to watch TV in a resizable window on a PC.~~ The ~~Company’s~~deferred ~~video~~tax ~~recorder~~expense ~~products~~was ~~allow~~primarily ~~consumers~~due to ~~record~~the ~~high definition~~utilization ~~video~~of ~~from~~net aoperating ~~cable~~losses TVand orthe ~~satellite~~utilization ~~set~~of ~~top~~deferred ~~box~~timing ordifferences arelated ~~game console such as a Xbox 360 or Sony Playstation 3. The Company’s other non-TV tuner products enable, among other things, the ability~~ to ~~watch~~its ~~and~~United ~~listen~~States ~~to PC based videos, music and pictures on a TV set through a home network~~subsidiary.

~~Sales~~ Note by7. ~~functional~~Accrued ~~category are as follows:~~Expense-Fees

	Three months ended June 30,				Nine months ended June 30,
Product line sales	2013		2012		2013		2012
Video recorder products	$	2,252,347	$	4,137,859	$	15,437,377	$	19,115,575
TV tuner products		3,076,013		4,629,434		11,781,107		14,747,645
Other video products and software		259,272		448,410		735,461		2,100,698
Total sales	$	5,587,632	$	9,215,703	$	27,953,945	$	35,963,918

The Company uses various software and technologies in certain of its products. In certain cases, the Company purchases or licenses these software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with the Company's sale of the related products. Such fees are estimated and get accrued and reflected as a component of cost of sales when those sales occur. In certain circumstances, such fees are not specifically covered by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software and technologies. 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. Occasionally, third parties audit the Company's historical determination of fees, and adjustments are made. Accrued fees are subject to elimination after three to seven years if not billed by or requested from the third parties. Based on the Company’s write off policies and information obtained during the first fiscal quarter of 2013, including the completion of a significant third party audit, the Company reduced its accrued expenses - fees balance by $176,857 and $1,765,330, during the first fiscal quarters of 2014 and 2013, respectively. These estimate changes resulted in an improved gross margin for the first fiscal quarters of 2014 and 2013. As of December 31, 2013 and September 30, 2013, accrued expenses-fees amounted to $12,338,719 and $12,497,060, respectively.

~~The~~ During ~~Company~~the ~~sells~~first ~~its~~fiscal ~~products~~quarter ~~through a~~of ~~North~~2014, ~~American~~$250,306 ~~and~~in ~~international~~fees ~~network~~were charged to cost of ~~distributors~~sales exclusive of the estimate changes described above and ~~retailers~~$233,896 in fees were paid to various third parties. ItDuring ~~maintains~~the ~~sales~~first ~~offices~~fiscal quarter of 2013, $331,086 in fees were charged to cost of sales exclusive of the ~~United~~estimate ~~States,~~changes ~~Europe~~ described above and ~~Asia.~~$1,120 ~~Sales~~in ~~percentages~~fees bywere ~~geographic~~paid ~~region~~to ~~are~~various asthird ~~follows:~~parties.

	Three months ended June 30,						Nine months ended June 30,
Geographic region	2013			2013			2013			2012
The Americas		60	%		46	%		62	%		54	%
Europe		32	%		50	%		33	%		42	%
Asia		8	%		4	%		5	%		4	%
Total		100	%		100	%		100	%		100	%

Note 8. Accrued Expenses

11 Accrued expenses are for costs incurred for goods and services which are based on estimates, charged as incurred to operations as period costs, and for which no invoice has been rendered. Accrued expenses consist of the following:

~~HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES~~11

~~Notes~~ HAUPPAUGE ToDIGITAL ~~Consolidated Financial~~INC. ~~Statements~~AND SUBSIDIARIES

~~(Unaudited)~~ Notes To Consolidated Financial Statements

~~Note 6. Tax provision~~ (Unaudited)

The Company’s tax provision for the three and nine months ended June 30, 2013 and 2012 is as follows:

	December 31,		September 30,
	2013		2013
Sales rebate program	$	1,094,122	$	1,232,493
Freight and duty		829,587		858,933
Compensation		300,704		222,595
Warranty repair		79,097		79,667
Inventory accruals		44,097		-
Advertising and marketing		174,587		196,603
Total accrued expenses	$	2,522,194	$	2,590,291

	Three months ended June 30,						Nine months ended June 30,
	2013			2012			2013		2012
Current federal tax expense (benefit)	$	(28,850	)	$	-		$	-	$	-
Current state taxes		10,000			10,000			30,000		30,000
Current tax expense on international operations		20,441			25,469			73,024		77,864
Deferred tax (benefit) expense		(157,187	)		(116,627	)		526,129		434,211
Tax (benefit) provision	$	(155,596	)	$	(81,158	)	$	629,153	$	542,075

Note 9. Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value, and expands the related disclosure requirements. The ~~deferred~~ASC ~~tax~~indicates, ~~expense~~among ~~was~~other ~~primarily due~~things, that a fair value measurement assumes a transaction to sell an asset or transfer a liability occurs in the ~~utilization~~principal market for the asset or liability or, in the absence of ~~net~~a ~~operating~~principal ~~losses~~market, ~~and~~the most advantageous market for the ~~utilization~~asset or liability. The Company also follows the provisions of ~~deferred~~ASC ~~timing~~820-10 ~~differences~~with ~~related~~respect to ~~our~~its ~~United~~non-financial ~~States subsidiary~~assets and liabilities adopted 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:

~~Note~~ • 7Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. ~~Accrued~~The ~~expense-fees~~fair value hierarchy gives the highest priority to Level 1 inputs.

~~The Company uses various software~~ ~~and~~• ~~technologies~~Level in2: ~~certain~~Observable ofprices ~~its~~that products. In certain cases, the Company purchases or licenses these software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with the Company's sale of the related products. Such fees are ~~estimated~~based ~~and get~~on ~~accrued and~~inputs ~~reflected~~not ~~as a~~quoted ~~component~~on ofactive ~~cost of sales when those sales occur. In certain circumstances~~markets, ~~such fees are not specifically covered by contractual arrangements~~ but ~~are~~corroborated nonetheless potentially due to the third party sellers or owners of the software and technologies. 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. Occasionally, third parties audit the Company's historical determination of fees and adjustments are made. Accrued fees are subject to elimination after three to seven years if not billed by ormarket ~~requested from the third parties~~data.

~~Based on new information obtained during~~ ~~fiscal~~• ~~2013,~~Level ~~including~~3: ~~the~~Unobservable ~~completion~~inputs ofare aused ~~significant~~when ~~third~~little ~~party~~or ~~audit,~~no ~~the~~market ~~Company~~data ~~reduced~~is ~~its accrued expenses - fees balance by $2,214,453~~available. ~~This~~ ~~estimate~~The ~~change~~fair ~~resulted~~value inhierarchy angives ~~improved gross margin during fiscal 2013. As of June 30, 2013 and September 30, 2012,~~ the ~~amount~~lowest ofpriority ~~accrued expense-fees amounted~~ to ~~$12,549,844~~Level ~~and~~3 ~~$12,943,022, respectively~~inputs.

~~Note~~ In 8.determining ~~Accrued~~fair ~~Expenses~~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.

~~Accrued~~ ~~expenses~~Additionally, ~~are~~on ~~for~~a ~~costs~~nonrecurring ~~incurred for goods and services which are based on estimates~~basis, ~~charged~~ asthe ~~incurred~~Company touses ~~operations~~fair asvalue ~~period~~measures ~~costs~~when ~~and~~analyzing ~~for~~asset ~~which no invoice has been rendered~~impairment. ~~Accrued~~Long-lived ~~expenses~~assets ~~as of June 30, 2013~~ and ~~September~~certain ~~30,~~identifiable ~~2012~~intangible ~~were~~assets ~~$2,771,337 and $3,668,491, respectively. Included in accrued expenses~~ are ~~accruals~~reviewed for ~~product~~impairment ~~costs,~~whenever ~~accruals~~events ~~for~~or ~~sales~~changes ~~costs~~in ~~relating~~circumstances toindicate ~~sales~~that ~~rebate~~the ~~programs,~~carrying ~~accruals~~amount ~~for~~of ~~freight and~~an ~~duty~~asset ~~expenses,~~may ~~accruals~~not ~~for~~be ~~compensation,~~recoverable. ~~accruals~~If ~~for~~it ~~warranty~~is ~~repair~~determined ~~costs~~such ~~and~~indicators ~~accruals~~are ~~for~~present ~~advertising~~ and ~~marketing costs. For~~ the ~~nine~~review ~~months~~indicates ~~ended~~that ~~June 30, 2013,~~ the ~~Company,~~assets ~~using~~will ~~the~~not ~~most~~be ~~recent~~fully ~~information available~~recoverable, ~~reviewed~~based ~~its~~on ~~estimates~~undiscounted ~~for~~estimated ~~accruals for~~cash ~~which~~flows noover ~~invoice~~the ~~has~~remaining ~~been~~amortization ~~rendered.~~periods, Astheir acarrying ~~result~~values ofare ~~this~~reduced ~~review,~~to ~~the~~estimated ~~Company~~fair ~~recorded~~value. aMeasurements ~~change~~based inon ~~estimate~~undiscounted ofcash ~~$400,697~~flows asare ~~a reduction~~considered ~~in operating expenses related~~ to ~~unused~~be ~~severance~~Level ~~accruals~~3 inputs.

12 The carrying amount of cash, accounts receivable and accounts payable and other short-term financial instruments approximate their fair value due to their short-term nature.

~~HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES~~12

~~Notes To~~ ~~Consolidated~~Item 2. Management's Discussion and Analysis of Financial ~~Statements~~Condition and Results of Operations

~~(Unaudited~~ Three Month Period ENDED DECEMBER 31, 2013 Compared to THE THREE MONTH PERIOD ENDED DECEMBER 31, 2012

~~Note~~ Results 9.of ~~Fair~~operations ~~Value~~for ~~Measurements~~the three months ended December 31, 2013 compared to the three months ended December 31, 2012 are as follows:

ASC Topic 820, “Fair Value Measurements and Disclosures”, 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 follows the provisions of ASC 820-10 with respect to its non-financial assets and liabilities adopted 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:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	12/31/13			12/31/12			$			2013			2012		Variance
Net Sales	$	6,469,479		$	11,930,378		$	(5,460,899)			100.00	%	100.00	%	-
Cost of sales		3,958,017			6,538,437			(2,580,420)			61.18	%	54.80	%	6.38	%
Gross Profit		2,511,462			5,391,941			(2,880,479)			38.82	%	45.20	%	-6.38	%
Gross Profit %		38.82	%		45.20	%		-6.38	%
Expenses:
Sales & marketing		1,223,931			1,992,798			(768,867)			18.92	%	16.70	%	2.22	%
Sales & marketing-PCTV		34,331			69,308			(34,977)			0.53	%	0.58	%	-0.05	%
Technical support		80,053			80,580			(527)			1.24	%	0.68	%	0.56	%
General & administrative		647,466			675,777			(28,311)			10.01	%	5.66	%	4.35	%
General & administrative-PCTV		63,722			63,731			(9)			0.98	%	0.53	%	0.45	%
Amortization of intangible assets		-			188,709			(188,709)			0.00	%	1.58	%	-1.58	%
Severance accrual reversal		-			(213,793)			213,793			0.00	%	-1.79	%	1.79	%
Selling, general and administrative stock compensation expense		18,195			16,665			1,530			0.28	%	0.14	%	0.14	%
Total selling, general and administrative expense		2,067,698			2,873,775			(806,077)			31.96	%	24.08	%	7.88	%
Research and development		419,068			577,404			(158,336)			6.48	%	4.84	%	1.64	%
Research and development-PCTV		262,319			306,907			(44,588)			4.05	%	2.57	%	1.48	%
Severance accrual reversal		-			(186,904)			186,904			0.00	%	-1.57	%	1.57	%
Research and development stock compensation expense		10,395			9,519			876			0.16	%	0.08	%	0.08	%
Total expenses		2,759,480			3,580,701			(821,221)			42.65	%	30.00	%	12.65	%
Income (loss) from operations		(248,018)			1,811,240			(2,059,258)			-3.83	%	15.20	%	-19.03	%

Other income (expense):
Interest income		198			1,080			(882)			0.00	%	0.01	%	-0.01	%
Foreign currency		(5,698)			2,070			(7,768)			-0.09	%	0.02	%	-0.11	%
Total other income (expense)		(5,500)			3,150			(8,650)			-0.09	%	0.03	%	-0.12	%
(Loss) income before tax provision		(253,518)			1,814,390			(2,067,908)			-3.92	%	15.23	%	-19.15	%
Current tax expense		29,283			52,505			(23,222)			0.44	%	0.44	%	0.00	%
Deferred tax expense		100,409			471,799			(371,390)			1.56	%	3.95	%	-2.39	%
Net (loss) income	$	(383,210)		$	1,290,086		$	(1,673,296)			-5.92	%	10.84	%	-16.76	%

~~• 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.~~13

• Net ~~Level~~sales 2:for ~~Observable~~the ~~prices~~three ~~that are~~months ~~based~~ended onDecember ~~inputs~~31, ~~not~~2013 ~~quoted~~decreased on$5,460,899 ~~active~~compared ~~markets~~to the three months ended December 31, ~~but~~2012 ~~corroborated~~as byshown ~~market~~in ~~data~~the table below.

• 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.

					Increase
					(decrease)		Increase			Percentage of sales by
	Three Months		Three Months		Dollar		(decrease)			geographic region
	ended 12/31/13		ended 12/31/12		Variance		variance %			2013			2012
The Americas	$	3,349,612	$	7,111,583	$	(3,761,971)		-53	%		51	%		59	%
Europe		2,911,172		4,365,290		(1,454,118)		-33	%		45	%		37	%
Asia		208,695		453,505		(244,810)		-54	%		4	%		4	%
Total	$	6,469,479	$	11,930,378	$	(5,460,899)		-46	%		100	%		100	%

In Increased ~~determining~~competition, ~~fair~~tepid ~~value~~economic conditions and a reduction in video gaming product sales, ~~the~~which ~~Company utilizes~~management ~~valuation~~believes ~~techniques~~stemmed ~~that~~from ~~maximize~~consumers awaiting the ~~use~~mid-November 2013 release of ~~observable~~a ~~inputs~~new generation game players from Sony and ~~minimize~~Microsoft, had a negative impact on sales. In addition, the ~~use~~first quarter of ~~unobservable~~fiscal ~~inputs~~2013 toincluded the ~~extent possible~~product asrollout ~~well~~of asthe ~~considers~~HD-PVR-2 ~~counterparty~~gaming ~~credit~~unit, ~~risk~~which resulted in ~~its~~a ~~assessment~~concentration of ~~fair~~sales ~~value~~for fiscal 2013 which did not repeat in fiscal 2014.

~~Additionally, on a nonrecurring basis, the~~ ~~Company~~Gross 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.profit

~~The~~ Gross ~~carrying~~profit ~~amount~~decreased ~~of cash~~$2,880,479 ~~accounts~~for ~~receivable and~~the ~~accounts~~three ~~payable~~months ~~and~~ended ~~other~~December ~~short-term~~31, ~~financial~~2013 ~~instruments~~compared ~~approximate~~to ~~their~~the ~~fair~~same ~~value~~quarter ~~due~~in tothe ~~their~~prior ~~short-term~~fiscal ~~nature~~year. The decrease in gross profit was due to:

	Three Months ended
Gross profit in dollars-increase (decrease)	12/31/13
Lower sales	$	(3,038,400)
Stronger Euro		136,641
Lower labor related and other costs		514,750
Higher gross profit due to favorable mix of sales		837,284
Lower license fee adjustments		(1,330,754)
Total decrease in gross profit	$	(2,880,479)

~~Item~~ The 2.decrease ~~Management's~~in ~~Discussion~~the ~~and~~gross ~~Analysis~~profit ofpercentage ~~Financial~~was ~~Condition~~due ~~and Results of Operations~~to:

Three Month Period ENDED JUNE 30, 2013 Compared to THE THREE MONTH PERIOD ENDED JUNE 30, 2012

	Three Months ended
Gross profit percentage-increase (decrease)	12/31/13
Sales mix of higher gross profit sales		1.38	%
Stronger Euro		1.18	%
Labor related and other costs as a higher percentage of sales		(0.86)	%
Lower license fee adjustments		(8.08)	%
Total gross profit percentage decrease		(6.38)	%

~~Results~~ The offactors ~~operations~~contributing ~~for~~to the ~~three~~gross ~~months ended~~profit ~~June~~percentage ~~30,~~decrease ~~2013~~of ~~compared~~6.38% tofor the three months ended ~~June~~December 3031, ~~2012~~2013 iswere ~~as follows~~primarily:

	Three			Three
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/13			6/30/12			$			2013			2012			Variance
Net Sales	$	5,587,632		$	9,215,703		$	(3,628,071	)		100.00	%		100.00	%		-
Cost of sales		4,100,992			6,563,941			(2,462,949	)		73.39	%		71.23	%		2.16	%
Gross Profit		1,486,640			2,651,762			(1,165,122	)		26.61	%		28.77	%		-2.16	%
Gross Profit %		26.61	%		28.77	%		-2.16	%
Expenses:
Sales & marketing		1,514,818			1,748,014			(233,196	)		27.11	%		18.97	%		8.14	%
Sales & marketing-PCTV		50,064			63,065			(13,001	)		0.90	%		0.68	%		0.22	%
Technical support		89,030			90,941			(1,911	)		1.59	%		0.99	%		0.60	%
General & administrative		708,909			753,762			(44,853	)		12.69	%		8.18	%		4.51	%
General & administrative-PCTV		80,778			71,167			9,611			1.45	%		0.77	%		0.68	%
Amortization of intangible assets		188,709			188,709			0			3.38	%		2.05	%		1.33	%
Selling, general and administrative stock compensation expense		18,294			20,139			(1,845	)		0.33	%		0.22	%		0.11	%
Total selling, general and administrative expense		2,650,602			2,935,797			(285,195	)		47.45	%		31.86	%		15.59	%
Research and development		535,822			517,737			18,085			9.59	%		5.62	%		3.97	%
Research and development-PCTV		278,363			292,172			(13,809	)		4.98	%		3.17	%		1.81	%
Research and development stock compensation expense		10,452			11,505			(1,053	)		0.19	%		0.12	%		0.07	%
Total expenses		3,475,239			3,757,211			(281,972	)		62.21	%		40.77	%		21.44	%
Loss from operations		(1,988,599	)		(1,105,449	)		(883,150	)		-35.60	%		-12.00	%		-23.60	%
Other expense:
Interest income		651			967			(316	)		0.01	%		0.01	%		0.00	%
Foreign currency		31,954			(3,659	)		35,613			0.57	%		-0.04	%		0.61	%
Total other expense		32,605			(2,692	)		35,297			0.58	%		-0.03	%		0.61	%
Loss before tax provision		(1,955,994	)		(1,108,141	)		(847,853	)		-35.02	%		-12.03	%		-22.99	%
Current tax expense		1,591			35,469			(33,878	)		0.02	%		0.38	%		-0.36	%
Deferred tax benefit		(157,187	)		(116,627	)		(40,560	)		-2.81	%		-1.27	%		-1.54	%
Net loss	$	(1,800,398	)	$	(1,026,983	)	$	(773,415	)		-32.23	%		-11.14	%		-21.09	%

Higher gross profit percentage due to sales mix of higher gross profit products resulted in an increase of 1.38%.

~~Net~~· ~~sales~~An increase in the USD to Euro exchange rate from $1.2915 for the three months ended ~~June 30~~December 31, ~~2013~~2012 ~~decreased~~to $~~3,628,071~~1.3617 ~~compared~~for to the three months ended ~~June~~December 3031, ~~2012~~2013 asresulted ~~shown~~ in ~~the~~a ~~table~~gross ~~below~~profit increase of 1.18%.

					Increase
					(decrease)			Increase			Percentage of sales by
	Three Months		Three Months		Dollar			(decrease)			geographic region
	ended 6/30/13		ended 6/30/12		Variance			variance %			2013			2012
The Americas	$	3,322,823	$	4,217,404	$	(894,581	)		-21	%		60	%		46	%
Europe		1,824,218		4,673,280		(2,849,062	)		-61	%		32	%		50	%
Asia		440,591		325,019		115,572			36	%		8	%		4	%
Total	$	5,587,632	$	9,215,703	$	(3,628,071	)		-39	%		100	%		100	%

Increase in labor related and other costs as a percentage of sales resulted in a gross profit decrease of 0.86%.

~~Increased~~· ~~competition,~~Lower ~~tepid~~license ~~economic~~fee ~~conditions~~adjustments inresulted ~~Europe and a greater sales decline~~ in ~~our seasonally slow third fiscal quarter had~~ a ~~negative~~gross ~~impact~~profit ondecrease ~~sales~~of 8.08%.

~~Gross~~ Selling, ~~profit~~general and administrative expenses

~~Gross~~ The ~~profit~~chart ~~decreased~~below ~~$1,165,122~~illustrates ~~for~~ the ~~three~~components ~~months~~of ~~ended June 30~~selling, ~~2013~~general ~~compared~~and toadministrative ~~the same quarter in the prior fiscal year~~expense. ~~The decrease in gross profit was due to:~~

	Three Months ended
	Three months ended December 31,
Gross profit in dollars-increase (decrease)	6/30/13
	Dollar Costs							Percentage of Sales
Lower sales	$	(1,498,273	)
						Increase						Increase
Stronger Euro		34,746
	2013			2012		(Decrease)		2013		2012		(Decrease)
Labor related and other costs		378,849
Sales and marketing-HCW	$	1,223,931		$	1,992,798	$	(768,867)	18.92	%	16.70	%	2.22	%
Lower gross profit due to mix of sales		(120,203	)
Sales and marketing-PCTV		34,331			69,308		(34,977)	0.53	%	0.58	%	-0.05	%
License fee adjustment		39,759
Technical support		80,053			80,580		(527)	1.24	%	0.68	%	0.56	%
Total decrease in gross profit	$	(1,165,122	)
General and administrative-HCW		647,466			675,777		(28,311)	10.01	%	5.66	%	4.35	%
General and administrative-PCTV		63,722			63,731		(9)	0.98	%	0.53	%	0.45	%
Amortization of intangible assets		-			188,709		(188,709)	0.00	%	1.58	%	-1.58	%
Severance accrual reversal		-			(213,793)		213,793	0.00	%	-1.79	%	1.79	%
Stock compensation		18,195			16,665		1,530	0.28	%	0.14	%	0.14	%
Total	$	2,067,698		$	2,873,775	$	(806,077)	31.96	%	24.08	%	7.88	%

~~The~~ Selling, ~~decrease~~general inand administrative expense for the ~~gross~~first ~~profit~~quarter ~~percentage was~~of ~~due~~fiscal to2014 decreased $806,077 from the prior year’s first fiscal quarter as follows:

	Three Months ended
Gross profit percentage-increase (decrease)	6/30/13
Sales mix of lower gross profit sales		(2.39	)%
Stronger Euro		0.39	%
Labor related and other costs		(1.35	)%
License fee adjustment		1.19	%
Total gross profit percentage decrease		(2.16	)%

Sales and marketing expenses decreased $803,844, driven primarily by $428,223 in lower commission and co-operative advertising expense, which declined due to lower sales, $54,661 in lower compensation costs due to personnel reductions and $313,645 in lower sales office expense due to closing and downsizing of sales offices.

The ~~factors~~decrease ~~contributing~~in general and administrative expenses of $26,790 was due mainly to lower depreciation expense and lower credit card processing fees due to the ~~gross~~issuing ~~profit percentage~~of credit lines to certain customers who previously purchased product with credit cards. The decrease in the amortization of ~~2.16%~~intangible ~~for~~assets was due to the ~~three~~write-off ~~months~~of ~~ended~~the ~~June~~intangible 30asset to zero in the fourth quarter of fiscal 2013, which eliminated the need for further intangible asset amortization. Offsetting the decrease in expenses was the non-recurring reversal in the first quarter of fiscal 2013 ~~were~~for ~~primarily:~~a severance accrual of $213,793 that had been set up in a prior fiscal year.

· Research ~~Unfavorable~~and ~~gross~~development ~~profit percentage due to sales mix of lower average sales price product resulted in a decrease of 2.39%.~~expenses

· Research Anand ~~increase~~development inexpenses for the ~~USD~~three tomonths ~~Euro~~ended ~~exchange~~December ~~rate~~31, ~~from~~2013 decreased $~~1.2833~~15,144 ~~for~~from the ~~three~~same ~~months~~quarter ~~ended~~in ~~June~~the ~~30,~~prior ~~2012~~fiscal year. The decrease was mainly due to lower compensation and compensation related expenses of $152,668, and lower product development costs of $150,656.~~13069~~ ~~for~~Offsetting the ~~three~~decrease ~~months~~in ~~ended~~expenses ~~June~~was ~~30,~~the ~~2013~~non-recurring ~~resulted~~reversal in athe ~~gross~~first ~~profit~~quarter ~~increase~~of fiscal 2013 for a severance accrual of 0$186,904 that had been set up in a prior fiscal year.~~39%.~~

~~· Increase in labor related and other costs as a percentage of sales resulted in a gross profit decrease of 1.35%.~~15

· Tax ~~Higher license fee adjustments resulted in a gross profit increase of 1.19%.~~provision

15 Our tax provision for the three months ended December 31, 2013 and 2012 is as follows:

Selling, general and administrative expenses

	Three months ended December 31,
	2013		2012
Current state taxes	$	10,000	$	10,000
Current tax expense on international operations		19,283		42,505
Deferred tax expense		100,409		471,799
Tax provision	$	129,692	$	524,304

The ~~chart~~deferred ~~below~~tax ~~illustrates~~expense was primarily due to the ~~components~~utilization of ~~selling,~~net ~~general~~ operating losses and ~~administrative~~the ~~expense~~utilization of deferred timing differences related to our United States subsidiary.

	Three months ended June 30,
	Dollar Costs							Percentage of Sales
					Increase									Increase
	2013		2012		(Decrease)			2013			2012			(Decrease)
Sales and marketing-HCW	$	1,514,818	$	1,748,014	$	(233,196	)		27.11	%		18.97	%		8.14	%
Sales and marketing-PCTV		50,064		63,065		(13,001	)		0.90	%		0.68	%		0.22	%
Technical support		89,030		90,941		(1,911	)		1.59	%		0.99	%		0.60	%
General and administrative-HCW		708,909		753,762		(44,853	)		12.69	%		8.18	%		4.51	%
General and administrative-PCTV		80,778		71,167		9,611			1.45	%		0.77	%		0.68	%
Amortization of intangible assets		188,709		188,709		0			3.38	%		2.05	%		1.33	%
Stock compensation		18,294		20,139		(1,845	)		0.33	%		0.22	%		0.11	%
Total	$	2,650,602	$	2,935,797	$	(285,195	)		47.45	%		31.86	%		15.59	%

Summary of operations

~~Selling,~~ We ~~general~~recorded ~~and~~a ~~administrative~~net ~~expense~~ loss of $383,210 for the ~~third~~three ~~quarter~~months ofended ~~fiscal~~December 31, 2013, ~~decreased~~which resulted in basic and diluted net loss per share of $~~285~~0.04 on weighted average basic and diluted shares of 10,~~195~~122,344, ~~from~~compared to net income of $1,290,086 for the ~~prior~~three ~~year’s~~months ~~third~~ended ~~fiscal~~December ~~quarter~~31, as2012, ~~follows:~~which resulted in basic and diluted net income per share of $0.13 on weighted average basic and diluted shares of 10,122,344.

~~Sales~~ Options ~~and~~to ~~marketing~~purchase ~~expenses~~1,265,625 ~~decreased~~and ~~$246~~1,~~197~~396, ~~driven~~625 ~~primarily~~shares byof ~~$207~~common stock,~~792~~ inat ~~lower~~prices ~~commission~~from $0.74 to $7.45 and ~~co-operative~~from ~~advertising~~$0.77 ~~expense~~to $7.45, ~~which~~were ~~declined~~outstanding ~~due~~for tothe ~~lower~~three ~~sales~~months December 31, 2013 and ~~$36~~2012,~~661~~ respectively, but were not included in ~~lower~~the ~~sales~~computation ~~office~~of ~~expense~~diluted ~~due~~earnings toper ~~reduction~~share inbecause ~~personnel~~they were anti-dilutive.

~~The decrease in technical support of $1,911~~ was primarily due to lower personnel expenses. The decrease in general and administrative expenses of $35,242 was due mainly to lower depreciation expense and lower credit card processing fees due to the issuing of credit lines to certain customers who previously purchased product with credit cards. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.Seasonality

~~Research~~ As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales 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 37% of sales for fiscal year ended September 30, 2013 and ~~development~~44% ~~expenses~~for the fiscal year ended September 30, 2012. Part of our third and fourth quarters (April through June and July to September) can be impacted by the reduction of activity experienced in Europe during the summer holiday period.

~~Research and development expenses for the~~ ~~three~~We ~~months~~target ~~ended~~a ~~June~~wide ~~30,~~range ~~2013~~of ~~increased~~customer ~~slightly~~types ~~by $3,223 from the same quarter in the prior fiscal year. The increase was mainly due~~ to ~~lower~~attempt ~~compensation and compensation related expenses offset by higher product development costs. The decrease in stock compensation expense was due~~ to ~~fewer~~moderate ~~non~~the ~~vested~~seasonal ~~options~~nature ~~outstanding~~of ~~issued~~our atretail ~~a lower fair value price~~sales.

16 Liquidity and capital resources

~~Tax~~ We ~~provision~~had cash and cash equivalents as of December 31, 2013 of $1,298,841, a decrease of $183,725 from September 30, 2013.

~~Our tax provision for the three months ended June 30, 2013 and 2012 is as follows:~~16

	Three months ended June 30,
	2013			2012
Current federal tax expense (benefit)	$	(28,850	)	$	-
Current state taxes		10,000			10,000
Current tax expense on international operations		20,441			25,469
Deferred tax benefit		(157,187	)		(116,627	)
Tax benefit	$	(155,596	)	$	(81,158	)

The decrease in cash was due to:

Deferred tax benefit for the three months ended June 30, 2013 and 2012 was primarily due to increases in net operating losses.

	Operating		Investing		Financing
	Activities		Activities		Activities		Total
Sources of cash:
Decrease in inventory	$	970,370	$	-	$	-	$	970,370
Increase in accounts payable		318,272		-		-	$	318,272
Total sources of cash		1,288,642		-		-		1,288,642
Less cash used for:
Increase in accounts receivable		(1,103,720)		-		-	$	(1,103,720)
Decrease in accrued expenses		(229,165)		-		-		(229,165)
Net loss adjusted for non cash items		(123,777)		-		-		(123,777)
Increase in prepaid expenses and other current assets		(22,129)		-		-		(22,129)
Capital equipment purchases		-		(872)		-		(872)
Total cash usage		(1,478,791)		(872)		-		(1,479,663)
Effect of exchange rates on cash		-		-		-		7,296
Net cash decrease	$	(190,149)	$	(872)	$	-	$	(183,725)

~~Summary~~ Cash used in operating activities of ~~operations~~$190,149 was due to an increase in accounts receivable of $1,103,720, a decrease in accrued expenses of $229,165, the net loss adjusted for non cash items of $123,777 and an increase in prepaid expenses and other current assets of $22,129. Sources of cash came from a decrease in inventory of $970,370 and an increase in accounts payable of $318,272.

We The ~~recorded~~increase in accounts receivable was due to a ~~net~~high ~~loss~~percentage of ~~$1,800,398~~sales ~~for~~occurring in the ~~three~~ ~~months~~last ~~ended~~two ~~June~~months ~~30,~~of ~~2013,~~the ~~which~~quarter. ~~resulted~~The decrease in ~~basic~~accrued ~~and~~expenses ~~diluted~~was ~~net~~due ~~loss~~to ~~per~~payments ~~share~~made ofto $0licensees.18 onThe ~~weighted~~decrease ~~average~~in ~~basic~~inventory ~~and diluted~~was ~~shares~~due to the liquidation of ~~10,122,344,~~inventory ~~compared~~levels tothrough asales ~~net~~and ~~loss~~lowered ofproduction ~~$1,026,983~~volume. ~~for~~The ~~the~~increase ~~three~~in ~~months~~accounts ~~ended~~payable ~~June~~was ~~30,~~due ~~2012,~~to ~~which~~the ~~resulted~~timing ~~in basic~~of ~~and~~payment ~~diluted~~to ~~net~~suppliers. ~~loss~~We ~~per~~had ~~share~~a working capital deficit of $~~0.10~~3,159,396 onas ~~weighted~~of ~~average~~December ~~basic~~31, ~~and~~2013 ~~diluted~~compared ~~shares~~to a working capital deficit of 10$3,~~122~~005,~~344~~314 as of September 30, 2013.

~~Options~~ toOur ~~purchase~~cash 1requirements for the next twelve months will include,~~478~~ among other things,~~125~~ the cash to fund our operating and ~~1,531,567~~working ~~shares~~capital ofneeds. ~~common~~We ~~stock,~~rely atexclusively ~~prices~~upon cash generated from ~~$0.74~~operations to $7fund these needs.45 ~~and~~We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from ~~$0.77~~operations is insufficient to $7fund our capital requirements to sustain operations.~~45,~~ ~~were~~Our ~~outstanding for~~cash ~~the~~and ~~three~~cash ~~months~~equivalents ~~ended~~as ~~June~~of 30December 31, 2013 and ~~2012,~~our ~~respectively,~~internally ~~but~~generated ~~were~~cash may not ~~included~~be insufficient to fund our operating needs for the ~~computation~~next oftwelve ~~diluted~~months ~~earnings~~and ~~per share~~this ~~because~~gives ~~they~~rise ~~were~~to ~~anti-dilutive~~a substantial doubt regarding our ability to continue as a “going concern”.

17 We have incurred operating losses for the last six fiscal years and in the three month period ended December 31, 2013. Those losses are primarily attributable to a continuing decline in sales. In the quarter ended December 31, 2013, we experienced an approximate 47% drop in sales from the quarter ended December 31, 2012. We believe that our sales have declined for the following reasons, including, among other things:

~~NINE~~· ~~Month Period~~Reliance ~~ENDED~~on ~~JUNE~~a 30small number of our product lines being successful, ~~2013~~the ~~Compared~~failure toof ~~THE~~any ~~NINE~~one ~~MONTH~~of ~~PERIOD~~which ~~ENDED~~could ~~JUNE~~substantially ~~30,~~reduce ~~2012~~our sales.

~~Results of operations for the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 is as follows:~~17

	Nine			Nine
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	6/30/13			6/30/12			$			2013			2012			Variance
Net Sales	$	27,953,945		$	35,963,918		$	(8,009,973	)		100.00	%		100.00	%		0.00	%
Cost of sales		17,530,937			24,703,077			(7,172,140	)		62.71	%		68.69	%		-5.98	%
Gross Profit		10,423,008			11,260,841			(837,833	)		37.29	%		31.31	%		5.98	%
Gross Profit %		37.29	%		31.31	%		5.98	%
Expenses:
Sales & marketing		5,143,258			5,674,601			(531,343	)		18.40	%		15.78	%		2.62	%
Sales & marketing-PCTV		166,650			192,686			(26,036	)		0.60	%		0.54	%		0.06	%
Technical support		253,728			277,659			(23,931	)		0.91	%		0.77	%		0.14	%
General & administrative		2,136,524			2,248,113			(111,589	)		7.64	%		6.25	%		1.39	%
General & administrative-PCTV		224,529			206,102			18,427			0.80	%		0.57	%		0.23	%
Amortization of intangible assets		566,127			566,127			0			2.03	%		1.57	%		0.46	%
Selling, general and administrative stock compensation expense		53,253			60,414			(7,161	)		0.19	%		0.17	%		0.02	%
Total selling, general and administrative expense		8,544,069			9,225,702			(681,633	)		30.57	%		25.65	%		4.92	%
Research and development		1,612,446			1,554,715			57,731			5.77	%		4.32	%		1.45	%
Research and development-PCTV		678,606			850,777			(172,171	)		2.43	%		2.37	%		0.06	%
Research and development stock compensation expense		30,423			34,516			(4,093	)		0.11	%		0.10	%		0.01	%
Total expenses		10,865,544			11,665,710			(800,166	)		38.88	%		32.44	%		6.44	%
Loss from operations		(442,536	)		(404,869	)		(37,667	)		-1.59	%		-1.13	%		-0.46	%
Other income:
Interest income		2,619			3,802			(1,183	)		0.01	%		0.01	%		0.00	%
Foreign currency		25,366			12,911			12,455			0.09	%		0.04	%		0.05	%
Total other income		27,985			16,713			11,272			0.10	%		0.05	%		0.05	%
Loss before tax provision		(414,551	)		(388,156	)		(26,395	)		-1.49	%		-1.08	%		-0.41	%
Current tax expense		103,024			107,864			(4,840	)		0.37	%		0.30	%		0.07	%
Deferred tax expense		526,129			434,211			91,918			1.88	%		1.21	%		0.67	%
Net loss	$	(1,043,704	)	$	(930,231	)	$	(113,473	)		-3.74	%		-2.59	%		-1.15	%

Our potential inability to develop new products or services that will meet our customers’ needs or wants.

18· Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.

~~Net~~· ~~sales~~Our ~~for~~potential ~~the~~inability ~~nine~~to ~~months~~remain ~~ended~~ahead ~~June 30,~~of ~~2013 decreased $8,009,973 compared to~~ the ~~nine~~development ~~months~~of ~~ended~~competing ~~June 30~~technologies, ~~2012~~products asand ~~shown in the table below~~services.

					Increase
					(decrease)			Increase			Percentage of sales by
	Nine Months		Nine Months		Dollar			(decrease)			geographic region
	ended 6/30/13		ended 6/30/12		Variance			variance %			2013			2012
The Americas	$	17,436,317	$	19,290,328	$	(1,854,011	)		-10	%		62	%		54	%
Europe		9,100,922		15,225,059		(6,124,137	)		-40	%		33	%		42	%
Asia		1,416,706		1,448,531		(31,825	)		-2	%		5	%		4	%
Total	$	27,953,945	$	35,963,918	$	(8,009,973	)		-22	%		100	%		100	%

Lack of market diversification.

~~Increased~~· ~~competition, tepid~~Heavy ~~economic~~reliance ~~conditions in Europe and a greater sales decline in our seasonally slow third fiscal quarter had a negative impact~~ on ~~sales. In addition~~retailers, ~~fiscal~~dealers ~~2012 included the product rollouts of the DCR-2650 cable card, the Broadway, the HD-PVR gaming unit~~ and ~~the~~PC MYmanufacturers TVto ~~2 Go TV application for the PC~~market, ~~Apple~~sell ~~iPad®~~ and ~~iPhone®~~distribute ~~product.~~our ~~The rollout of these~~ products ~~resulted in a concentration of sales for fiscal 2012, which did not repeat in fiscal 2013~~.

~~Gross~~ Since ~~profit~~the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of our shipping and logistics to a third party, reduced personnel, relocated certain facilities to smaller offices, renogotiated certain exisiting leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan.

~~Gross~~ The ~~profit~~Company ~~decreased~~is ~~$837~~working to develop a strategy to address our continuing operating losses and loss of sales,~~833~~ ~~for~~and during the ~~nine~~latter ~~months~~part ~~ended~~of ~~June 30,~~fiscal 2013 ~~compared~~retained toCorporate ~~the~~Fuel ~~same~~Advisors, ~~period~~an ininvestment ~~the~~bank ~~prior~~and ~~fiscal~~advisory ~~year.~~firm, ~~The~~which ~~decrease~~assisted the Company in ~~gross~~considering ~~profit~~and ~~was~~pursuing ~~due~~strategic alternatives, including possible additional financing to: fund its capital needs, expense reductions and the restructuring of its business.

	Nine Months ended
Gross profit in dollars-increase (decrease)	6/30/13
Lower sales	$	(3,361,279	)
Weaker Euro		(115,328	)
Labor related and other costs		755,611
Higher gross profit due to mix of sales		76,609
License fee adjustment		1,806,554
Total decrease in gross profit	$	(837,833	)

The Company cannot assure that it will be able to develop and implement a plan that will enable it to successfully address its business and financial challenges. Among other things:

~~The~~· ~~increase~~If inwe ~~the~~seek ~~gross~~financing, ~~profit~~we ~~percentage was~~may ~~due~~not be able to: obtain funding to address our capital needs on commercially reasonable terms, or at all.

	Nine Months ended
Gross profit percentage-increase (decrease)	06/30/13
Sales mix of lower gross profit retail sales		(0.32	)%
Weaker Euro		(0.15	)%
Labor related and other costs		(0.35	)%
License fee adjustment		6.80	%
Total gross profit percentage increase		5.98	%

We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.

~~The~~· ~~factors~~We ~~contributing~~may tonot ~~the~~be ~~gross~~able ~~profit percentage~~to ~~increase~~successfully ofcompete ~~5.98%~~with ~~for~~our ~~the~~competitors’ ~~nine~~product ~~months~~and ~~ended~~service ~~June 30, 2013 were primarily:~~offerings.

· ~~Unfavorable~~Customers ~~gross~~and ~~profit~~consumers ~~percentage~~may ~~due~~lose toconfidence ~~sales~~in ~~mix~~us ofas ~~lower~~a ~~average~~result ~~sales~~of ~~price~~our ~~product~~financial ~~resulted~~condition inand aperformance ~~decrease~~and their perceptions of 0our business prospects and competitive position, and they may cease to do business with us or buy our products.~~32%.~~

· If Aany ~~decrease~~strategic inor ~~the~~restructuring ~~USD~~plan tothat ~~Euro~~we ~~exchange~~develop ~~rate~~and ~~from~~implement ~~$1.3142~~is ~~for~~not ~~the~~successful, ~~nine~~there ~~months~~is ~~ended~~a ~~June~~substantial ~~30,~~risk ~~2012~~that towe ~~$1.13083~~might ~~for~~not ~~the~~be ~~nine~~able ~~months~~to ~~ended~~sustain ~~June~~our 30operations at current levels, ~~2013~~which ~~resulted~~would inhave a ~~gross~~material ~~profit~~adverse ~~decrease~~effect ofon 0our business, operating results and financial condition.~~15%.~~

1918

· Future ~~Increase~~contractual ~~in labor related and other costs as a percentage of sales resulted in a gross profit decrease of 0.35%.~~obligations

· The ~~Higher~~following ~~license~~table ~~fee~~shows ~~adjustments~~our ~~resulted~~contractual inobligations arelated ~~gross~~to ~~profit~~lease ~~increase~~obligations as of ~~6.80%.~~December 31, 2013:

Selling, general and administrative expenses

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	1,396,125	$	563,365	$	832,760	$	0

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

	Nine months ended June 30,
	Dollar Costs							Percentage of Sales
					Increase									Increase
	2013		2012		(Decrease)			2013			2012			(Decrease)
Sales and marketing-HCW	$	5,143,258	$	5,674,601	$	(531,343	)		18.40	%		15.78	%		2.62	%
Sales and marketing-PCTV		166,650		192,686		(26,036	)		0.60	%		0.54	%		0.06	%
Technical support		253,728		277,659		(23,931	)		0.91	%		0.77	%		0.14	%
General and administrative-HCW		2,136,524		2,248,113		(111,589	)		7.64	%		6.25	%		1.39	%
General and administrative-PCTV		224,529		206,102		18,427			0.80	%		0.57	%		0.23	%
Amortization of intangible assets		566,127		566,127		0			2.03	%		1.57	%		0.46	%
Stock compensation		53,253		60,414		(7,161	)		0.19	%		0.17	%		0.02	%
Total	$	8,544,069	$	9,225,702	$	(681,633	)		30.57	%		25.65	%		4.92	%

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 effect on us.

~~Selling, general and administrative expense~~ ~~for~~Recent ~~the~~Accounting ~~nine months ended June 30, 2013 decreased $681,633 from same period in the prior fiscal year as follows:~~Pronouncements

~~Sales~~ In ~~and~~February ~~marketing~~2013, ~~expenses~~the ~~decreased~~FASB ~~$557,379, driven~~issued ~~primarily~~new byaccounting ~~$412,461~~guidance inwhich ~~lower~~amended ~~commission~~Accounting ~~and~~Standards ~~co-operative~~Codification ~~advertising~~(“ASC”) ~~expense~~220, ~~which~~“Comprehensive ~~declined~~Income.” ~~due~~The amended guidance required entities to ~~lower~~provide ~~sales~~information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, ~~and~~entities ~~a reduction~~are required to present, either on the face of the financial statements or in ~~expenses~~the notes, significant amounts reclassified out of ~~$213~~accumulated other comprehensive income by the respective line items of net income,~~783~~ ~~for~~but aonly ~~change~~if the amount reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified to net income in ~~estimate~~its ~~for~~entirety ~~unused~~in ~~severance~~the ~~liabilities~~same reporting period. ~~The~~For ~~decrease~~other amounts that are not required under GAAP to be reclassified in ~~expenses~~their ~~was~~entirety ~~offset somewhat~~to bynet ~~$83~~income,~~586~~ inan ~~higher~~entity ~~compensation~~is ~~expenses~~required ~~related~~to cross-reference to other disclosures in the ~~addition~~financial statements. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendments became effective for us in the first quarter of ~~sales~~fiscal ~~and~~year ~~marketing~~2014. ~~resources~~As this is disclosure-only guidance, it did not have an impact on our consolidated financial results.

~~The~~ In ~~decrease~~July in2013, ~~technical~~the ~~support~~FASB issued new accounting guidance which requires the netting of ~~$23,931 was~~unrecognized ~~primarily~~tax ~~due~~benefits toagainst ~~lower~~a ~~personnel~~deferred ~~expenses.~~tax ~~The~~asset ~~decrease~~for ina ~~general~~loss ~~and~~or ~~administrative~~other ~~expenses~~carry forward that would apply in settlement of ~~$93~~the uncertain tax positions. Under the new standard,~~162~~ ~~was~~unrecognized ~~due~~tax ~~primarily to~~benefits ~~decreases~~will inbe ~~rent~~netted ~~and~~against ~~utilities~~all ~~due~~available tosame-jurisdiction ~~the~~loss ~~relocation~~or ofother ~~offices~~tax tocarry ~~smaller~~forwards ~~spaces~~that would be utilized, ~~lower~~rather ~~credit~~than ~~card~~only ~~processing~~against ~~fees~~carry ~~due~~forwards to that are created by the ~~issuing~~unrecognized ~~lines~~tax ofbenefits. ~~credit~~The tonew ~~certain~~guidance ~~customers~~is ~~who~~effective ~~previously~~prospectively ~~purchased~~to ~~product~~all ~~with~~existing ~~credit~~unrecognized ~~cards~~tax benefits, ~~lower~~but ~~bad~~entities ~~debt~~can ~~expense~~choose ~~and lower~~to ~~depreciation~~apply it retrospectively. ~~This~~The ~~was~~guidance ~~offset~~will bybe toeffective ~~higher~~for ~~legal~~us ~~fees~~in ~~for~~our ~~consultation~~first ~~required~~quarter ~~during~~of fiscal ~~2013~~year 2015, with early adoption permitted. ~~The~~We ~~decrease~~are incurrently ~~stock compensation~~assessing ~~expense~~the ~~was~~impact ~~due~~this toguidance ~~fewer~~will ~~non~~have ~~vested~~on ~~options~~our ~~outstanding~~consolidated ~~issued~~statements atof afinancial ~~lower~~position ~~fair~~and ~~value~~cash ~~price~~flows.

~~Research~~ Item 3. Quantitative and ~~development~~Qualitative ~~expenses~~Disclosures About Market Risk

~~Research and development expenses for the~~ ~~nine~~Item ~~months~~305 ~~ended~~of ~~June~~Regulation ~~30,~~S-K ~~2013~~“Quantitative ~~decreased~~and ~~$118,533~~Qualitative ~~from~~Disclosures ~~the~~About ~~same~~Market ~~period~~Risk” inis ~~the~~not ~~prior~~required ~~fiscal year. The decrease was mainly due to lower compensation expenses of $199,112, primarily due to a change in estimate~~ for ~~unused~~Smaller ~~severance~~Reporting ~~liabilities, offset by $81,314 in higher product development related expenses~~Companies. ~~The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.~~

2019

~~Tax~~ Item ~~provision~~4. ~~(Benefit)~~Controls and Procedures

~~Our tax provision for the nine months ended~~ ~~June~~ Disclosure ~~30,~~Controls ~~2013~~ and ~~2012 is as follows:~~Procedures

	Nine months ended June 30,
	2013		2012
Current federal tax expense (benefit)	$	-	$	-
Current state taxes		30,000		30,000
Current tax expense on international operations		73,024	$	77,864
Deferred tax expense		526,129		434,211
Tax expense	$	629,153	$	542,075

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.

~~The deferred~~ ~~tax~~As ~~expense~~required ~~was~~by ~~primarily~~Exchange ~~due~~Act toRule 13a-15(b), as of the ~~utilization~~end of ~~net~~the ~~operating~~period ~~losses~~covered by this Quarterly Report, with the participation of our principal executive officer and principal financial officer, we evaluated the ~~utilization~~effectiveness of ~~deferred~~our ~~timing~~disclosure ~~differences~~controls ~~related to~~and procedures. Based on this evaluation, our ~~United~~principal ~~States~~executive ~~subsidiary~~officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.

~~Summary~~ Changes ofin ~~operations~~Internal Control Over Financial Reporting

We There ~~recorded~~was ano ~~net~~change ~~loss~~in ofour ~~$1,043,704~~internal ~~for~~control ~~the nine~~over ~~months~~financial ~~ended June 30~~reporting, ~~2013,~~identified ~~which resulted~~ in ~~basic~~connection ~~and~~with ~~diluted~~the ~~net~~evaluation ~~loss~~required ~~per~~by ~~share~~paragraph (d) of ~~$0.10~~Rule on13a-15 ~~weighted~~of ~~average~~the ~~basic~~Exchange ~~and diluted shares of 10~~Act,~~122,344,~~ ~~compared~~that tooccurred aduring ~~net~~our ~~loss~~most ofrecently ~~$930,231~~completed ~~for~~fiscal ~~the~~quarter ~~nine~~that ~~months~~has ~~ended~~materially ~~June 30~~affected, ~~2012,~~or ~~which~~is ~~resulted~~reasonably inlikely ~~basic and~~to ~~diluted~~materially ~~net~~affect, ~~loss~~our ~~per~~internal ~~share~~control ofover ~~$0.09~~financial ~~on weighted average basic and diluted shares of 10,122,344~~reporting.

~~Options~~ toSpecial ~~purchase~~note ~~1,478,125~~regarding and 1,531,567 shares of common stock, at prices from $0.74 to $7.45 and from $0.77 to $7.45, were outstanding for the nine months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because they were antiforward-~~dilutive.~~looking statements

~~Seasonality~~ This Quarterly Report on Form 10-Q 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 on Form 10-Q may not occur. Generally these statements relate to 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, continued decline in sales, continued operating losses, our ability to obtain financing on commercial reasonable terms or at all, our ability to formulate and implement a viable restructuring plan, dependence on key members of management, successful integration of acquisitions, economic conditions in the United States and abroad, fluctuation of the value of the Euro versus the U.S. dollar, our ability to make timely filings of the required periodic reports and other reports with the Securities and Exchange Commission, issues relating to our ability to maintain effective internal control over financial reporting and disclosure controls and procedures, the expression of our auditors regarding substantial doubt about our ability to continue as a “going concern.” 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, 2013 and this Quarterly Report on Form 10-Q, and the risk of litigation or governmental investigations or proceedings relating to any of the foregoing matters. 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. All cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear.

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Historically, our peak sales quarter due to holiday season sales 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 44% of sales for fiscal year ended September 30, 2012 and 41% for the fiscal year ended September 30, 2011. 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.20

WePART targetII. aOTHER wide range of customer types to attempt to moderate the seasonal nature of our retail sales.INFORMATION

~~Liquidity~~ Item ~~and~~6. ~~capital resources~~Exhibits.

The Company had cash and cash equivalents as of June 30, 2013 of $2,254,689, a decrease of $2,841,164 from September 30, 2012.

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 Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 INS	XBRL Instance Document **
101 SCH	SCH XBRL Taxonomy Extension Schema Document **
101 CAL	CAL XBRL Taxonomy Extension Calculation Linkbase Document **
101 LAB	LAB XBRL Taxonomy Extension Label Linkbase Document **
101 PRE	PRE XBRL Taxonomy Extension Presentation Linkbase Document**
101 DEF	DEF XBRL Taxonomy Extension Definition Linkbase Document**

	** Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(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 (File Number: 001-13550, Film Number: 061302843) 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.

~~The decrease in cash was due to:~~21

	Operating			Investing			Financing
	Activities			Activities			Activities		Total
Sources of cash:
Decrease in accounts receivable	$	1,677,800		$	0		$	0	$	1,677,800
Net loss adjusted for non cash items		35,234			0			0		35,234
Total sources of cash		1,713,034			0			0		1,713,034
Less cash used for:		\
Increase in inventory		(3,618,079	)		0			0		(3,618,079	)
Decrease in accounts payable and accrued expenses		(760,106	)		0			0		(760,106	)
Increase in prepaid expenses and other current assets		(154,464	)		0			0		(154,464	)
Capital equipment purchases		0			(30,002	)		0		(30,002	)
Total cash usage		(4,532,649	)		(30,002	)		0		(4,562,651	)
Effect of exchange rates on cash		0			0			0		8,453
Net cash decrease	$	(2,819,615	)	$	(30,002	)	$	0	$	(2,841,164	)

SIGNATURES

~~Cash used in operating activities of $2,819,615~~ ~~was~~Pursuant ~~due~~ to anthe ~~increase~~requirements ~~in inventory~~ of ~~$3,618,079, a decrease in accounts payable and accrued expenses of $760,106 and an increase in prepaid expenses and other current assets of $154,464. Sources of cash came from~~ the ~~net~~Securities ~~loss~~Exchange ~~adjusted~~Act ~~for non cash items~~ of ~~$35,234~~ ~~and a decrease in accounts receivable of $1~~1934,~~677,800.~~ ~~The increase in inventory was due to a change in~~ the ~~delivery~~registrant ~~method of~~has ~~product~~duly ~~from~~caused ~~air~~this ~~shipments~~report to ~~boat~~be ~~shipments~~signed ~~and a higher seasonal decline in sales than forecasted. We believe the change in delivery method from air to ocean will save~~ on ~~freight~~its ~~costs~~behalf ~~but~~by ~~require an additional investment in inventory in recognition of~~ the ~~anticipated~~undersigned ~~four~~thereunto toduly ~~five week transit time~~authorized. The decrease in accounts payable and accrued expenses was due to the timing of payment to suppliers. The decrease in accounts receivable was due to cash collections coupled with lower sales in the third fiscal quarter compared to the previous two fiscal quarters. Cash of $30,002 was used to purchase capital equipment. We had a working capital deficit of $1,873,043 as of June 30, 2013 compared to a working capital deficit of $1,433,704 as of September 30, 2012.

Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from our operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from our operations is insufficient to fund our capital requirements to sustain our operations. Based on our current scale of operating expenses and our new product development schedule, we have evaluated that our cash and cash equivalents as of June 30, 2013 and our internally generated cash may not provide sufficient liquidity to meet our capital needs for the next twelve months, and that additional sources of cash may be required to meet our capital needs.

			HAUPPAUGE DIGITAL INC.


Date:	February 14, 2014	By:	/s/Kenneth Plotkin
			KENNETH PLOTKIN
			Chief Executive Officer, Chairman of the
			Board, President (Principal Executive Officer)

We have incurred operating losses for the last five fiscal years and in the nine month period ended June 30, 2013. Those losses are primarily attributable to a continuing decline in sales. In the quarter ended June 30, 2013, we experienced an unprecedented and precipitous 46% drop in sales from the quarter ended March 31, 2013. We believe that our sales have declined for reasons which we described in Item 1A of our Annual Report on 10-K for the fiscal year ended September 30, 2012, including, among other things:

Date:	February 14, 2014	By:	/s/Gerald Tucciarone
			GERALD TUCCIARONE
			Treasurer, Chief Financial Officer,
			(Principal Financial Officer and Principal Accounting Officer) and Secretary

	22

· Reliance on a small number of our product lines being successful, the failure of any one of which could substantially reduce our sales.

· Our potential inability to develop new products or services that will meet our customers’ needs or wants.

· Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.

· Our potential inability to remain ahead of the development of competing technologies, products and services.

· Lack of market diversification.

· Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute our products.

Since the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of our shipping and logistics to a third party, reduced personel, relocated certain facilities to smaller offices, renegotiated certain existing leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and maintain a viable operating plan. Additionally , absent a recovery in our business, we may be required to reduce our current expectations of future cash flows and pre-tax operating results, which, in turn, may result in charges for the impairment of our longed lived assets and/or increase the valuation allowance against our net deferred tax assets. Such charges could be material.

We are working to develop a strategy to address our continuing operating losses and loss of sales, and we have retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist us in considering and pursuing strategic alternatives, including possible additional financing to fund our capital needs and the restructuring of our business.

We cannot assure that we will be able to develop and implement a plan that will enable us to successfully address our business and financial challenges. Among other things:

· If we seek financing, we may not be able to obtain funding to address our capital needs on commercially reasonable terms, or at all.

· We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.

· We may not be able to successfully compete with our competitors’ product and service offerings.

· Customers and consumers may lose confidence in us as a result of our financial condition and performance, our potential de-listing from Nasdaq, should we lose our appeal related to such de-listing, and their perceptions of our business prospects and competitive position, and they may cease to do business with us or buy our products.

If any strategic or restructuring plan that we develop and implement is not successful, there is a substantial risk that that we might not be able to sustain our operations at current levels, which would have a material adverse effect on our business, operating results and financial condition.

Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of June 30, 2013:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	1,444,818	$	601,667	$	843,151	$	0

Inflation

Recent Accounting Pronouncements

In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements.” ASU 2012-04 contains amendments to clarify the ASC, correct unintended application of guidance, or make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments are intended to make the ASC easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments that do not have transition guidance were effective upon issuance. The amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not anticipated to have a material impact on our results of operations or our financial position.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.

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 on Form 10-Q 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 on Form 10-Q may not occur. Generally these statements relate to 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 statements contained herein that are not historical facts are forward-looking statements. 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, continued decline in sales, continued operating losses, our ability to obtain financing on commercial reasonable terms or at all, our ability to formulate and implement a viable restructuring plan, dependence on key members of management, successful integration of acquisitions, economic conditions in the United States and abroad, fluctuation of the value of the Euro versus the U.S. dollar, our ability to make timely filings of the required periodic reports and other reports with the Securities and Exchange Commission, issues relating to our ability to maintain effective internal control over financial reporting and disclosure controls and procedures, our failure to maintain compliance with Nasdaq’s continued listing requirements and our potential de-listing from Nasdaq should we lose our appeal related to such de-listing, 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, 2012, this Quarterly Report on Form 10-Q, the Quarterly Report on Form 10-Q for the three months ended December 31, 2012 and March 31, 2013, and the risk of litigation or governmental investigations or proceedings relating to any of the foregoing matters. 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. All cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear.

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 Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 INS	XBRL Instance Document **
101 SCH	SCH XBRL Taxonomy Extension Schema Document **
101 CAL	CAL XBRL Taxonomy Extension Calculation Linkbase Document **
101 LAB	LAB XBRL Taxonomy Extension Label Linkbase Document **
101 PRE	PRE XBRL Taxonomy Extension Presentation Linkbase Document**
101 DEF	DEF XBRL Taxonomy Extension Definition Linkbase Document**

** Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(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 (File Number: 001-13550, Film Number: 061302843) and incorporated herein by reference.

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

SIGNATURES

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

HAUPPAUGE DIGITAL INC.

Date: August 14, 2013	By:	/s/Kenneth Plotkin
		KENNETH PLOTKIN
		Chief Executive Officer, Chairman of the Board, President (Principal Executive Officer)
Date: August 14, 2013	By:	/s/Gerald Tucciarone
		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer,
		(Principal Financial Officer and Principal Accounting Officer) and Secretary

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