HAUPPAUGE DIGITAL INC

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. The Company’s cash used in operating activities was ($28,907) for the six months ended March 31, 2014. 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 March 31, 2014 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.”

The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Increased competition, tepid economic conditions and a reduction in video gaming product sales, which management believes stemmed from the release of a new generation game players from Sony and Microsoft with recording capabilities, had a negative impact on sales.

The decrease in general and administrative expenses of $71,005 was mainly from lower compensation expense due to personnel reductions, 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 the amortization of intangible assets was due to the write-off of the intangible asset to zero in the fourth quarter of fiscal 2013, which eliminated the need for further intangible asset amortization.

The deferred tax expense was primarily due to the utilization of net operating losses and the utilization of deferred timing differences related to its United States subsidiary. The Effective Tax Rate for the six months ended March 31, 2014 is different than the statutory rate of 34% due to the royalty income charged from the U.S. Entity to the International Entities.