UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X)

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

For the quarterly period ended
March 31, 2011

OR

(
  )

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

For the transition period from
____________ to ____________

Commission file number 1-4324

--------

ANDREA ELECTRONICS CORPORATION

---------------------------------------------------------------------

(Exact name of registrant as specified
in its charter)

New York
11-0482020(State or other jurisdiction of
incorporation or organization)(I.R.S. employer identification
no.)65 Orville Drive, Bohemia, New York
11716(Address of principal executive
offices)
(Zip
Code)Registrants telephone number (including area code):
631-719-1800


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. Yes
x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
 ̈    No  ̈

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer
 ̈

Accelerated Filer
                   ̈

Non-Accelerated Filer  
 ̈

Smaller Reporting Company 
x

(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  ̈ No
x

Indicate the number of shares outstanding of each
of the issuer's classes of common equity, as of the latest practicable date: As of May 11, 2011, there were 63,721,035 common shares outstanding.











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PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                             |  |  |  | March 31, 2011 |             | December 31, 2010
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | -------------- | ----------- | -----------------
|                                                                                                                                                             |  |  |  | (unaudited)    |            
|ASSETS                                                                                                                                                       |  |  |  |                |             |                  
|Current
assets:                                                                                                                                              |  |  |  |                |             |                  
|Cash                                                                                                                                                         |  |  |  | $              | 1,978,681   |                  
|Accounts
receivable, net of allowance for doubtful accounts of $12,135 and $11,442, respectively                                                             |  |  |  |                | 637,611     |                  
|Inventories,
net                                                                                                                                             |  |  |  |                | 687,855     |                  
|Short term
customer deposits                                                                                                                                 |  |  |  |                | 79,632      |                  
|Deferred
income taxes, net                                                                                                                                   |  |  |  |                | 17,709      |                  
|Prepaid
expenses and other current assets                                                                                                                    |  |  |  |                | 127,353     |                  
|Total current
assets                                                                                                                                         |  |  |  |                | 3,528,841   |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|Property and
equipment, net                                                                                                                                  |  |  |  |                | 245,621     |                  
|Intangible
assets, net                                                                                                                                       |  |  |  |                | 1,539,234   |                  
|Deferred
income taxes, net                                                                                                                                   |  |  |  |                | 150,700     |                  
|Other assets,
net                                                                                                                                            |  |  |  |                | 12,864      |                  
|Total
assets                                                                                                                                                 |  |  |  | $              | 5,477,260   |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                         |  |  |  |                |             |                  
|Current
liabilities:                                                                                                                                         |  |  |  |                |             |                  
|Trade
accounts payable                                                                                                                                       |  |  |  | $              | 138,618     |                  
|Current
portion of long-term debt                                                                                                                            |  |  |  |                | 26,982      |                  
|Accrued
Series C Preferred Stock Dividends                                                                                                                   |  |  |  |                | 73,921      |                  
|Short-term
deferred revenue                                                                                                                                  |  |  |  |                | 109,632     |                  
|Other current
liabilities                                                                                                                                    |  |  |  |                | 120,088     |                  
|Total current
liabilities                                                                                                                                    |  |  |  |                | 469,241     |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|Long term
debt, net of current portion                                                                                                                       |  |  |  |                | 6,497       |                  
|Series B
Redeemable Convertible Preferred Stock, $.01 par value; authorized: 1,000 shares; issued and outstanding: 0 shares                                  |  |  |  |                |            |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|Commitments
and contingencies                                                                                                                                |  |  |  |                |             |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|Shareholders equity:                                                                                                                                        |  |  |  |                |             |                  
|Preferred
stock, $.01 par value; authorized: 2,497,500 shares; none issued and outstanding                                                                   |  |  |  |                |            |                  
|Series C
Convertible Preferred Stock, net, $.01 par value; authorized: 1,500 shares; issued and outstanding: 44.2 shares; liquidation value:
$442,314        |  |  |  |                | 1           |                  
|Series D
Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000 shares; issued and outstanding: 907,144 shares; liquidation value:
$907,144 |  |  |  |                | 9,072       |                  
|Common stock,
$.01 par value; authorized: 200,000,000 shares; issued and outstanding: 63,721,035 shares                                                      |  |  |  |                | 637,210     |                  
|Additional
paid-in capital                                                                                                                                   |  |  |  |                | 77,357,375  |                  
|Accumulated
deficit                                                                                                                                          |  |  |  |                | (73,002,136 | )                
|                                                                                                                                                             |  |  |  |                |             |                  
|Total
shareholders equity                                                                                                                                   |  |  |  |                | 5,001,522   |                  
|                                                                                                                                                             |  |  |  |                |             |                  
|Total
liabilities and shareholders equity                                                                                                                   |  |  |  | $              | 5,477,260   |                  



See Notes to Condensed Consolidated Financial Statements.



2



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                             |  |  |  | For the Three Months Ended |           
|-------------------------------------------- |  |  |  | -------------------------- | ----------
|                                             |  |  |  | March 31, 2011             |           
|Revenues                                     |  |  |  |                            |           
|Net Product
revenues                         |  |  |  | $                          | 602,206   
|License
revenues                             |  |  |  |                            | 396,807   
|Revenues                                     |  |  |  |                            | 999,013   
|                                             |  |  |  |                            |           
|Cost of
revenues                             |  |  |  |                            | 333,167   
|                                             |  |  |  |                            |           
|Gross
margin                                 |  |  |  |                            | 665,846   
|                                             |  |  |  |                            |           
|Research and
development expenses            |  |  |  |                            | 208,312   
|                                             |  |  |  |                            |           
|General,
administrative and selling expenses |  |  |  |                            | 591,522   
|                                             |  |  |  |                            |           
|Loss from
operations                         |  |  |  |                            | (133,988  
|                                             |  |  |  |                            |           
|Interest
income, net                         |  |  |  |                            | 1,701     
|                                             |  |  |  |                            |           
|Loss before
provision for income taxes       |  |  |  |                            | (132,287  
|                                             |  |  |  |                            |           
|Provision for
income taxes                   |  |  |  |                            | 5,336     
|                                             |  |  |  |                            |           
|Net
loss                                     |  |  |  | $                          | (137,623  
|                                             |  |  |  |                            |           
|Basic and
diluted weighted average shares    |  |  |  |                            | 63,721,035
|                                             |  |  |  |                            |           
|Basic and
diluted net loss per share         |  |  |  | $                          | (0.00     



See Notes to Condensed Consolidated Financial Statements.



3



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011

(UNAUDITED)



|                                                                |  |  |  | Series C Convertible Preferred Stock
Outstanding |           | Series C Convertible Preferred Stock |  | Series D Convertible Preferred Stock
Outstanding |   | Series D Convertible Preferred Stock |  | Common Stock Shares Outstanding |         | Common Stock |  | Additional Paid-In Capital |       | Accumulated Deficit |  | Total Shareholders Equity
|--------------------------------------------------------------- |  |  |  | ------------------------------------------------ | --------- | ------------------------------------ |  | ------------------------------------------------ | - | ------------------------------------ |  | ------------------------------- | ------- | ------------ |  | -------------------------- | ----- | ------------------- |  | --------------------------
|Balance,
January 1, 2011                                        |  |  |  |                                                  | 44.231432 |                                      |  | $                                                | 1 |                                      |  |                                 | 907,144 |              |  | $                          | 9,072 |                     |  |                           
|                                                                |  |  |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Stock-based
Compensation Expense related to Stock Option Grants |  |  |  |                                                  |          |                                      |  |                                                  |  |                                      |  |                                 |        |              |  |                            |      |                     |  |                           
|                                                                |  |  |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Net
loss                                                        |  |  |  |                                                  |          |                                      |  |                                                  |  |                                      |  |                                 |        |              |  |                            |      |                     |  |                           
|                                                                |  |  |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Balance,
March 31, 2011                                         |  |  |  |                                                  | 44.231432 |                                      |  | $                                                | 1 |                                      |  |                                 | 907,144 |              |  | $                          | 9,072 |                     |  |                           



See Notes to Condensed Consolidated Financial Statements.



4



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                          |  |  |  | For the Three Months Ended |          
|----------------------------------------------------------------------------------------- |  |  |  | -------------------------- | ---------
|                                                                                          |  |  |  | March 31, 2011             |          
|Cash flows
from operating activities:                                                     |  |  |  |                            |          
|Net
loss                                                                                  |  |  |  | $                          | (137,623 
|Adjustments
to reconcile net loss to net cash (used in) provided by operating activities: |  |  |  |                            |          
|Depreciation
and amortization                                                             |  |  |  |                            | 132,837  
|Stock based
compensation expense                                                          |  |  |  |                            | 51,788   
|Bad debt
expense                                                                          |  |  |  |                            | 693      
|Inventory
reserve                                                                         |  |  |  |                            | (11,836  
|Deferred
income taxes                                                                     |  |  |  |                            | 5,291    
|Change
in:                                                                                |  |  |  |                            |          
|Accounts
receivable                                                                       |  |  |  |                            | (133,172 
|Inventories                                                                               |  |  |  |                            | 97,655   
|Short term
customer deposit                                                               |  |  |  |                            |         
|Prepaid
expenses and other current assets                                                 |  |  |  |                            | (3,586   
|Trade
accounts payable                                                                    |  |  |  |                            | (164,580 
|Short-term
deferred revenue                                                               |  |  |  |                            |         
|Other current
liabilities                                                                 |  |  |  |                            | (53,784  
|Net cash
(used in) provided by operating activities                                       |  |  |  |                            | (216,317 
|                                                                                          |  |  |  |                            |          
|Cash flows
from investing activities:                                                     |  |  |  |                            |          
|Purchases of
property and equipment                                                       |  |  |  |                            | (9,780   
|Purchases of
patents and trademarks                                                       |  |  |  |                            | (10,022  
|Net cash used
in investing activities                                                     |  |  |  |                            | (19,802  
|Cash flows
from financing activities:                                                     |  |  |  |                            |          
|Principal
repayments of long term debt                                                    |  |  |  |                            | (6,194   
|Net cash used
in financing activities                                                     |  |  |  |                            | (6,194   
|                                                                                          |  |  |  |                            |          
|Net
(decrease) increase in cash                                                           |  |  |  |                            | (242,313 
|                                                                                          |  |  |  |                            |          
|Cash,
beginning of year                                                                   |  |  |  |                            | 2,220,994
|Cash, end of
period                                                                       |  |  |  | $                          | 1,978,681
|                                                                                          |  |  |  |                            |          
|Supplemental
disclosures of cash flow information:                                        |  |  |  |                            |          
|                                                                                          |  |  |  |                            |          
|Cash paid
for:                                                                            |  |  |  |                            |          
|Income
Taxes                                                                              |  |  |  | $                          | 4,510    
|Interest                                                                                  |  |  |  | $                          | 891      



See Notes to Condensed Consolidated Financial Statements.



5



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Note 1.

Basis of Presentation



Basis of Presentation - The accompanying unaudited condensed consolidated interim financial statements
include the accounts of Andrea Electronics Corporation and its subsidiaries ("Andrea" or the Company). All intercompany balances and
transactions have been eliminated in consolidation.



These unaudited condensed consolidated interim financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In addition,
the December 31, 2010 balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP.
 In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for any other interim period or for
the fiscal year.



These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended December 31, 2010 included in the Company's Form 10-K for the fiscal year ended
December 31, 2010, filed on March 17, 2011. The accounting policies used in preparing these unaudited condensed consolidated interim financial statements
are consistent with those described in the December 31, 2010 audited consolidated financial statements.



Note 2.

Summary of Significant Accounting Policies



(Loss) Earnings Per Share - Basic (loss) earnings per share is computed by dividing the net (loss) income
by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings adjusts basic (loss) earnings per share for the
effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive.
 Securities that could potentially dilute basic earnings per share (EPS) in the future that were not included in the computation of the diluted
EPS because to do so would have been anti-dilutive for the periods presented, consist of the following:



Total potential common shares as of:
     
     
     
     March 31, 2011
     
     March 31, 2010Options to
purchase common stock (Note 8)
     
     
     
     
     17,874,474
     
     
     
     16,116,821Series C
Convertible Preferred Stock and related accrued dividends (Note 3)
     
     
     
     
     2,023,658
     
     
     
     2,206,664Series D
Convertible Preferred Stock (Note 4)
     
     
     
     
     3,628,576
     
     
     
     3,628,576Total
potential common shares
     
     
     
     
     23,526,708
     
     
     
     21,952,061




Cash - Cash includes cash and highly liquid investments with original maturities of three months or less.
 At times during the periods ended March 31, 2011 and December 31, 2010, the Company had cash deposits in excess of the maximum amounts insured by the
Federal Deposit Insurance Corporation insurance limits. At March 31, 2011, the Companys cash was held at three financial institutions.



Concentration of Credit Risk - The following customers accounted for 10% or more of Andreas
consolidated net revenues during at least one of the periods presented below:



For the Three Months EndedMarch 31, 2011
     
     March 31, 2010Customer
A
     
     
     
     
     30
     %
     
     
     31
     %Customer
B
     
     
     
     
     *
     
     
     
     11
     %


_________________

* Amounts are less than 10%



As of March 31, 2011, Customer A and Customer B accounted for approximately 47% and 2% of accounts receivable,
respectively. As of December 31, 2010, Customer A and Customer B accounted for approximately 53% and 9% of accounts receivable, respectively.





6



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





The following suppliers accounted for 10% or more of Andreas purchases during the periods presented below:



For the Three Months EndedMarch 31, 2011
     
     March 31, 2010Supplier
A
     
     
     
     
     69
     %
     
     
     95
     %Supplier
B
     
     
     
     
     21
     %
     
     
     *




At March 31, 2011, Supplier A and Supplier B accounted for approximately 18% and 18% of accounts payable,
respectively. At December 31, 2010, Supplier A and Supplier B accounted for approximately 56% and 5% of accounts payable, respectively.



Allowance for Doubtful Accounts - The Company performs on-going credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers current credit worthiness, as determined by the review of their current credit
information. Collections and payments from customers are continuously monitored. The Company maintains an allowance for doubtful accounts, which is
based upon historical experience as well as specific customer collection issues that have been identified. While such bad debt expenses have historically
been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in
the past. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required.



Inventories - Inventories are stated at the lower of cost (on a first-in, first-out) or market basis.
 The cost of inventory is based on the respective cost of materials. Andrea reviews its inventory reserve for obsolescence on a quarterly basis and
establishes reserves on inventories based on the specific identification method as well as a general reserve. Andrea records changes in inventory reserves
as part of cost of revenues.



March 31,2011
     
     December 31, 2010Raw
materials
     
     
     
     $
     36,782
     
     
     $
     36,821Finished
goods
     
     
     
     
     1,317,488
     
     
     
     1,415,1041,354,270
     
     
     
     1,451,925Less: reserve
for obsolescence
     
     
     
     
     (666,415
     )
     
     
     (678,251
     )$
     687,855
     
     
     $
     773,674




Intangible and Lived Assets - Andrea accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 360 Plant, Property and Equipment,  for
purposes of determining and measuring impairment of its long-lived assets (primarily intangible assets) other than goodwill. Andreas policy is to review
the value assigned to its long lived assets to determine if they have been permanently impaired by adverse conditions which may affect Andrea whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. If Andrea identifies a permanent impairment such that the carrying
amount of Andreas long lived assets is not recoverable using the sum of an undiscounted cash flow projection (gross margin dollars from product sales),
the impaired asset is adjusted to its estimated fair value, based on an estimate of future discounted cash flows which becomes the new cost basis for the
impaired asset. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly,
actual results could vary significantly from such estimates. No impairment charges were recognized during the three month periods ended March 31, 2011 and
2010.



Revenue Recognition - Non software-related revenue, which is generally comprised of microphones and
microphone connectivity product revenues, is recognized when title and risk of loss pass to the customer, which is generally upon shipment. With respect
to licensing revenues, Andrea recognizes revenue in accordance with ASC 985, Software and ASC 605 Revenue Recognition. License
revenue is recognized based on the terms and conditions of individual contracts. In addition, fee based services, which are short-term in nature, are
generally performed on a time-and-material basis under separate service arrangements and the corresponding revenue is generally recognized as the services are
performed.



Income Taxes - Andrea accounts for income taxes in accordance with ASC 740, Income Taxes
(ASC 740). ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and establishes for all
entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain expanded disclosures. The provision
for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income.
Deferred income taxes represent the tax effects of differences between the financial reporting and tax bases of the Companys assets and liabilities at the
enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax
assets and establishes a valuation allowance when it is more



7



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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, and
after considering changes in previously existing positive evidence, the Company reduced its valuation allowance to recognize a deferred tax asset of
approximately $174,000 for the year ended December 31, 2010. In addition, Andrea expects it will reduce its valuation in future periods to the extent that
it can demonstrate its ability to utilize the assets. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an
audit and cause changes to previous estimates of tax liability. In managements opinion, adequate provisions for income taxes have been made for all
years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. Income
tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. The Company has identified
its federal tax return and its state tax return in New York as "major" tax jurisdictions. Based on the Company's evaluation, it has been
concluded that there are no significant uncertain tax positions requiring recognition in the Company's condensed consolidated interim financial statements.
 The Company's evaluation was performed for tax years ended 2007 through 2010. The Company believes that its income tax positions and deductions will
be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.



Stock-Based Compensation -At March 31, 2011, Andrea had two stock-based employee compensation plans, which
are described more fully in Note 8. Andrea accounts for stock-based compensation in accordance with ASC 718, Compensation  Stock
Compensation (ASC 718). ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the
provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the
employees requisite service period (generally the vesting period of the equity grant). The fair value of the Companys common stock options are
estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the
expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718, excess tax benefits
realized from the exercise of stock-based awards are classified in cash flows from financing activities. The future realization of the reserved deferred
tax assets related to these tax benefits associated with the exercise of stock options will result in a credit to additional paid in capital if the related tax
deduction reduces taxes payable. The Company has elected the with and without approach regarding ordering of windfall tax benefits to
determine whether the windfall tax benefit did reduce taxes payable in the current year.  Under this approach, the windfall tax benefit would be
recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.



Use of Estimates



The preparation of condensed consolidated interim financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities
and disclosures of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues
and expenses during the reporting period.



Management bases its estimates on historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. The most significant estimates, among other things, are used in accounting for allowances for bad debts, inventory
valuation and obsolescence, product warranty, depreciation, deferred income taxes, expected realizable values for assets (primarily intangible assets),
contingencies, revenue recognition as well as the recording and presentation of the Companys convertible preferred stock. Estimates and assumptions are
periodically reviewed and the effects of any material revisions are reflected in the condensed consolidated interim financial statements in the period that they
are determined to be necessary. Actual results could differ from those estimates and assumptions.



Subsequent Events - The Company evaluates events that occurred after the balance sheet date
but before the condensed consolidated interim financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated interim financial statements.



Note 3.

Series C Redeemable Convertible Preferred Stock



On October 10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C Redeemable Convertible
Preferred Stock (the Series C Preferred Stock). Each of these shares of Series C Preferred Stock had a stated value of $10,000 plus a $1,671
increase in the stated value, which sum is convertible into Common Stock at a conversion price of $0.2551. On February 17, 2004, Andrea announced that it
had entered into an Exchange and Termination Agreement and an Acknowledgment and Waiver Agreement, which eliminated the dividend of 5% per annum on the stated
value. The additional amount of $1,671 represents the 5% per annum from October 10, 2000 through February 17, 2004. The shares of Series C Preferred
Stock are subject to antidilution provisions, which are triggered in the event of certain stock splits, recapitalizations, or other dilutive transactions.
 In addition,



8



---



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



issuances of common stock at a price below the conversion price then in effect (currently $0.2551), or the
issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less than that conversion price, other than
for certain previously outstanding securities and certain excluded securities (as defined in the certificate of amendment), require the adjustment
of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the event that Andrea issues
securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such variable price are more
favorable than the conversion price in the Series C Preferred Stock, the purchasers may elect to substitute the more favorable variable price when making
conversions of the Series C Preferred Stock.



In accordance with Sub Topic 815-40, Andrea evaluated the Series C Preferred Stock and concluded that it is not
indexed to the Companys stock because of the conversion price adjustment feature described above. Accordingly, under the provisions of ASC 815,
Derivatives and Hedging (ASC 815), Andrea evaluated the Series C Preferred Stock embedded conversion feature. The Company has
concluded that the embedded conversion feature would be classified in shareholders equity if it were a freestanding instrument as the Series C Preferred
Stock is more akin to equity and as such it should not be bifurcated from the Series C instrument and accounted for separately.



As of March 31, 2011, there were 44.231432 shares of Series C Preferred Stock outstanding, which were convertible
into 2,023,658 shares of Common Stock and remaining accrued dividends of $73,921.



Note 4.

Series D Redeemable Convertible Preferred Stock



On February 17, 2004, Andrea entered into a Securities Purchase Agreement (including a Registration Rights
Agreement) with certain holders of the Series C Preferred Stock and other investors (collectively, the Buyers) pursuant to which the Buyers agreed
to invest a total of $2,500,000. In connection with this agreement, on February 23, 2004, the Buyers purchased, for a purchase price of $1,250,000, an
aggregate of 1,250,000 shares of a new class of preferred stock, the Series D Preferred Stock, convertible into 5,000,000 shares of Common Stock (an effective
conversion price of $0.25 per share) and Common Stock warrants exercisable for an aggregate of 2,500,000 shares of Common Stock. These warrants were
exercisable at any time after August 17, 2004, at an exercise price of $0.38 per share. On February 23, 2009, these warrants expired without being
exercised.



In addition, on June 4, 2004, the Buyers purchased for an additional $1,250,000, an additional 1,250,000 shares of
Series D Preferred Stock convertible into 5,000,000 shares of Common Stock (an effective conversion price of $0.25 per share) and Common Stock warrants
exercisable for an aggregate of 2,500,000 shares of Common Stock. The warrants were exercisable at any time after December 4, 2004 and before June 4, 2009
at an exercise price of $0.17 per share. On June 4, 2009, these warrants expired without being exercised.



The shares of Series D Preferred Stock are also subject to antidilution provisions, which are triggered in the
event of certain stock splits, recapitalizations, or other dilutive transactions. In addition, issuances of common stock at a price below the conversion price
then in effect (currently $0.25), or the issuance of warrants, options, rights, or convertible securities which have an exercise price or conversion price less
than that conversion price, other than for certain previously outstanding securities and certain excluded securities (as defined in the certificate
of amendment), require the adjustment of the conversion price to that lower price at which shares of common stock have been issued or may be acquired. In the
event that Andrea issues securities in the future which have a conversion price or exercise price which varies with the market price and the terms of such
variable price are more favorable than the conversion price in the Series D Preferred Stock, the purchasers may elect to substitute the more favorable variable
price when making conversions of the Series D Preferred Stock. In addition, the Company is required to use its best efforts to secure the inclusion for
quotation on the Over the Counter Bulletin Board for the common stock issuable under the Series D Preferred Stock and to arrange for at least two market makers
to register with the Financial Industry Regulatory Authority. In the event that the holder of the Series D Preferred Stock and related warrants is unable
to convert these securities into Andrea Common Stock, the Company shall pay to each such holder a Registration Delay Payment. This payment is to be paid
in cash and is equal to the product of (i) the stated value of such Preferred Shares multiplied by (ii) the product of (1) .0005 multiplied by (2) the number of
days that sales cannot be made pursuant to the Registration Statement (excluding any days during that may be considered grace periods as
defined by the Registration Rights Agreement).



In accordance with Sub Topic 815-40, Andrea evaluated the Series D Preferred Stock and concluded that it is not
considered to be indexed to the Companys stock because of the conversion price adjustment feature described above. Accordingly, under the provisions
of ASC 815, Andrea evaluated the Series D Preferred Stock embedded conversion feature. The Company has concluded that the embedded conversion feature
would be classified in shareholders equity if it were a freestanding instrument as the Series D Preferred Stock is more akin to equity and as such it
should not be bifurcated from the Series D instrument and accounted for separately.



9



---



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Additionally, Andrea reviewed the Series D Preferred Stock warrants and concluded that they are considered to be
indexed to the Companys stock within the provisions of ASC 815-40 and were properly classified.



As of March 31, 2011, there were 907,144 shares of Series D Preferred Stock outstanding which were convertible
into 3,628,576 shares of Common Stock.



Note 5.

Licensing Agreements



The Company has entered into various licensing, production and distribution agreements with manufacturers of PC
and related components. These agreements provide for revenues based on the terms of each individual agreement. The Company's two largest licensing
customers accounted for $298,008 and $53,835 of revenues for the three months ended March 31, 2011 and $383,199 and $40,528 of revenues for the three months
ended March 31, 2010.



Note 6.

Long Term Debt



Long-term debt consists of the following:



|                                                                                                                                        |  |  |  | March 31,2011 |        | December 31, 2010
|--------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------- | ------ | -----------------
|HSBC
unsecured bank loan, dated December 9, 2009, is due in 60 monthly installments of $2,362 including principal and interest at 6.4%. |  |  |  | $             | 33,479 |                  
|Less: Current
Portion of Long-Term Debt                                                                                                 |  |  |  |               | 26,982 |                  
|Long-Term
Debt, net of Current Portion                                                                                                  |  |  |  | $             | 6,497  |                  
|                                                                                                                                        |  |  |  |               |        |                  
|As of March
31, 2011, maturities of long term debt are as follows:                                                                      |  |  |  |               |        |                  
|                                                                                                                                        |  |  |  |               |        |                  
|April 1 ,
2011  March 31, 2012                                                                                                         |  |  |  | $             | 26,982 |                  
|April 1 ,
2011  March 31, 2013                                                                                                         |  |  |  |               | 6,497  |                  
|Total                                                                                                                                   |  |  |  | $             | 33,479 |                  



Note 7.

Commitments And Contingencies



Leases



Andrea leases its corporate headquarters located in Bohemia, New York. The lease from an unrelated party,
which currently expires in April 2015, is for approximately 11,000 square feet and houses Andreas warehousing, sales and executive offices. Rent
expense under this operating lease was approximately $22,367 and $21,715 for the three months ended March 31, 2011 and 2010, respectively.



As of March 31, 2011, the minimum annual future lease payments, under this lease and all other noncancellable
operating leases, are as follows:



2011 (April 1
 December 31)
     
     
     
     $
     82,1782012
     
     
     
     
     105,7282013
     
     
     
     
     96,8142014
     
     
     
     
     99,7182015
     
     
     
     
     33,565Total
     
     
     
     $
     418,003




Employment Agreements



In July 2010, the Company entered into an employment agreement with the President, Chief Executive Officer and
Chairman of the Board, Douglas J. Andrea. The effective date of the employment agreement was August 1, 2010. The employment agreement expires July
31, 2012 and is subject to renewal as approved by the Compensation Committee of the Board of Directors. Pursuant to his employment agreement, Mr. Andrea
will receive an annual base salary of $337,500 for the period of August 1, 2010 through



10



---



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



July 31, 2011 and for the period of August 1, 2011 through July 31, 2012 Mr. Andrea will receive an annual base
salary of $350,000. The employment agreement provides for quarterly bonuses equal to 25% of the Companys pre-bonus net after tax quarterly earnings
in excess of $25,000 for a total quarterly bonus amount not to exceed $12,500; and annual bonuses equal to 10% of the Companys annual pre-bonus net after
tax earnings in excess of $300,000. All bonuses shall be payable as soon as the Company's cash flow permits. All bonus determinations or any
additional bonus in excess of the above will be made in the sole discretion of the Compensation Committee. On August 1, 2010, the Board granted Mr. Andrea
1,000,000 stock options with an aggregate fair value of $130,000 (fair value was estimated using the Black-Scholes option-pricing model). The 1,000,000
stock option grant vests in three equal annual installments over a three year period commencing August 1, 2011. These 1,000,000 stock options have an
exercise price of $0.13 per share, which was the fair market value of the Companys common stock at the date of grant, and a term of 10 years.
 Pursuant to the employment agreement and subject to the approval of the Board of Directors, the Compensation Committee will recommend a second grant of
1,000,000 stock options as soon as practical after August 1, 2011, with an exercise price equal to the per share fair market value of the Companys common
stock on the date of grant. Mr. Andrea is also entitled to a change in control payment equal to two times his salary with continuation of health and
medical benefits for two years in the event of a change in control, as defined in the agreement. At March 31, 2011, the future minimum cash commitments
under this agreement aggregate $462,500.



In November 1999, as amended August 2008, the Company entered into a change in control agreement with the Chief
Financial Officer, Corisa L. Guiffre. This agreement provides for a change in control payment equal to three times her average annual compensation for the
five preceding taxable years, with continuation of health and medical benefits for three years in the event of a change in control of the Company, as defined in
the agreement, and subsequent termination of employment other than for cause.



Legal Proceedings



Andrea is involved in routine litigation incidental to the normal course of business. While it is not feasible to
predict or determine the final outcome of the claims, Andrea believes any resolution of these matters will not have a material adverse effect on Andreas
consolidated financial position, results of operations or liquidity.



In addition, in December 2010, Audrey Edwards, Executrix of the Estate of Leon Leroy Edwards, filed a law suit in
the Superior Court of Providence County, Rhode Island, against 3M Company and over 90 other defendants, including the Company, alleging that the Company
processed, manufactured, designed, tested, packaged, distributed, marketed or sold asbestos containing products that contributed to the death of Leon Leroy
Edwards. The Company received service of process in April 2011. The Company has retained legal counsel and has filed a response to the compliant.
 The Company believes the lawsuit is without merit. Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the
Companys financial position or results of operations.



Note 8.

Stock Plans and Stock Based Compensation



In 1998, the Board adopted the 1998 Stock Option Plan (1998 Plan), which was subsequently approved by
the shareholders. The 1998 Plan, as amended, authorizes the granting of awards, the exercise of which would allow up to an aggregate of 6,375,000 shares of
Andreas Common Stock to be acquired by the holders of those awards. The awards can take the form of stock options, stock appreciation rights,
restricted stock, deferred stock, stock reload options or other stock-based awards. Awards may be granted to key employees, officers, directors and consultants.
 No further awards will be granted under the 1998 Plan.



In October 2006, the Board adopted the Andrea Electronics Corporation 2006 Equity Compensation Plan (2006
Plan), which was subsequently approved by the shareholders. The 2006 Plan authorizes the granting of awards, the exercise of which would allow up to
an aggregate of 10,000,000 shares of Andreas Common Stock to be acquired by the holders of those awards. On July 24, 2009, shareholders approved an
amendment to the 2006 Plan to increase the number of shares issuable under the 2006 Plan to 18,000,000. The awards can take the form of stock options,
stock appreciation rights, restricted stock or other stock-based awards. Awards may be granted to key employees, officers, directors and consultants. At
March 31, 2011, there were 4,225,283 shares available for further issuance under the 2006 Plan.



The stock option awards granted under these plans have been granted with an exercise price equal to the market
price of the Companys stock at the date of grant; with vesting periods of up to four years and 10-year contractual terms.



The fair values of each stock option grant is estimated on the date of grant using the Black-Scholes
option-pricing model that uses weighted-average assumptions. Expected volatilities are based on implied volatilities from historical volatility of the
Companys stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The



11



---



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.



There were no options granted during the three months ended March 31, 2011 and 2010.



Option activity during 2011 is summarized as follows:



|                   |  |  |  |  | Options Outstanding |   | Options Exercisable             | 
|------------------ |  |  |  |  | ------------------- | - | ------------------------------- | 
|                   |  |  |  |  | Options Outstanding |   | Weighted Average Exercise Price | 
|At January 1,
2011 |  |  |  |  | 17,940,821          |   | $  0.10                         | 
|Expired            |  |  |  |  | (55,000             | ) | $  1.78                         | 
|Forfeitures        |  |  |  |  | (11,347             | ) | $  0.06                         | 
|                   |  |  |  |  |                     |   |                                 | 
|At March 31,
2011  |  |  |  |  | 17,874,474          |   | $  0.10                         | 



During the three months ended March 31, 2011, 79,185 options vested with a weighted average exercise price and a
weighted average fair value of $0.09 per option. Based on the March 31, 2011 fair market value of the Companys common stock of $0.07, the aggregate
intrinsic value for the 17,874,474 options outstanding and 12,714,479 shares exercisable is $198,250 and $140,898, respectively.



Total compensation expense recognized related to stock option awards was $51,788 and $50,835 for the three months
ended March 31, 2011 and 2010, respectively. In the accompanying condensed consolidated statement of operations for the three months ended March 31, 2011,
$42,044 of expense is included in general, administrative and selling expenses, $6,966 is included in research and development expenses and $2,778 is included
in cost of revenues. In the accompanying condensed consolidated statement of operations for the three months ended March 31, 2010, $37,920 of expense is
included in general, administrative and selling expenses, $8,805 is included in research and development expenses and $4,110 is included in cost of revenues.



As of March 31, 2011, there was $178,947 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the 1998 and 2006 Plans. This unrecognized compensation cost is expected to be recognized over the next three
years ($105,220 in 2011, $59,041 in 2012 and $14,686 in 2013).



Note 9.

Segment Information



Andrea follows the provisions of ASC 280 Segment Reporting (ASC 280). Reportable
operating segments are determined based on Andreas management approach. The management approach, as defined by ASC 280, is based on the way that the chief
operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While Andreas results of
operations are primarily reviewed on a consolidated basis, the chief operating decision-maker also manages the enterprise in two segments: (i) Andrea DSP
Microphone and Audio Software Products and (ii) Andrea Anti-Noise Products. Andrea DSP Microphone and Audio Software Products primarily include products
based on the use of some, or all, of the following technologies: Andrea Digital Super Directional Array microphone technology (DSDA), Andrea Direction Finding
and Tracking Array microphone technology (DFTA), Andrea PureAudio noise filtering technology, and Andrea EchoStop, an advanced acoustic echo cancellation
technology. Andrea Anti-Noise Products include noise cancellation and active noise cancellation computer headset products and related computer peripheral
products.





12



---



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)





The following represents selected condensed consolidated financial information for Andreas segments for the three-month periods
ended March 31, 2011 and 2010.



|2011 Three Month Segment Data           |  |  |  | Andrea DSP Microphone and Audio Software
Products |           | Andrea Anti- Noise Products |  | 2011 Three Month Segment Data
|--------------------------------------- |  |  |  | ------------------------------------------------- | --------- | --------------------------- |  | -----------------------------
|Net revenues
from external customers    |  |  |  | $                                                 | 77,786    |                             |  | $                            
|License
Revenues                        |  |  |  |                                                   | 396,807   |                             |  |                              
|Income (loss)
from operations           |  |  |  |                                                   | 63,625    |                             |  |                              
|Depreciation
and amortization           |  |  |  |                                                   | 119,133   |                             |  |                              
|Purchases of
property and equipments    |  |  |  |                                                   | 6,631     |                             |  |                              
|Purchases of
patents and trademarks     |  |  |  |                                                   | 9,969     |                             |  |                              
|Assets                                  |  |  |  |                                                   | 3,325,881 |                             |  |                              
|Property and
equipment and intangibles  |  |  |  |                                                   | 1,490,776 |                             |  |                              
|                                        |  |  |  |                                                   |           |                             |  |                              
|2010 Three Month Segment Data           |  |  |  | Andrea DSP Microphone and Audio Software Products |           | Andrea Anti- Noise Products |  | 2010 Three Month Segment Data
|Net revenues
from external customers    |  |  |  | $                                                 | 204,434   |                             |  | $                            
|License
Revenues                        |  |  |  |                                                   | 433,252   |                             |  |                              
|Income (loss)
from operations           |  |  |  |                                                   | 152,854   |                             |  |                              
|Depreciation
and amortization           |  |  |  |                                                   | 117,486   |                             |  |                              
|Capital
expenditures                    |  |  |  |                                                   | 9,019     |                             |  |                              
|Purchases of
patents and trademarks     |  |  |  |                                                   |          |                             |  |                              
|                                        |  |  |  |                                                   |           |                             |  |                              
|December 31, 2010 Year End Segment Data |  |  |  | Andrea DSP Microphone and Audio Software Products |           | Andrea Anti- Noise Products |  | 2010 Year End Segment Data   
|Assets                                  |  |  |  | $                                                 | 3,635,905 |                             |  | $                            
|Property and
equipment and intangibles  |  |  |  |                                                   | 1,593,309 |                             |  |                              



Management assesses non-operating income statement data on a consolidated basis only. International revenues are based on the
country in which the end-user is located. For the three-month periods ended March 31, 2011 and 2010, and as of each respective period-end, net revenues
and accounts receivable by geographic area were as follows:



Geographic Data
     
     
     
     March 31, 2011
     
     March 31, 2010Net
revenues:United
States
     
     
     
     $
     833,214
     
     
     $
     1,096,698Foreign(1)
     
     
     
     
     165,799
     
     
     
     145,542$
     999,013
     
     
     $
     1,242,240


(1)

Net revenues to any one foreign country did
not exceed 10% of total net revenues for the three months ended March 31, 2011 and March 31, 2010.

As of March 31, 2011 and December 31, 2010, accounts receivable by geographic area were as follows:



Geographic Data
     
     
     
     March 31, 2011
     
     December 31, 2010Accounts
receivable:United
States
     
     
     
     $
     553,998
     
     
     $
     427,552Foreign(1)
     
     
     
     
     83,613
     
     
     
     77,580$
     637,611
     
     
     $
     505,132






13



---



ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



Our mission is to provide the emerging voice interface markets with state-of-the-art communications
products that facilitate natural language, human/machine interfaces.



Examples of the applications and interfaces for which Andrea DSP Microphone and Audio Software Products and Andrea
Anti-Noise Products provide benefits include: Internet and other computer-based speech; telephony communications; multi-point conferencing; speech recognition;
multimedia; multi-player Internet and CD ROM interactive games; and other applications and interfaces that incorporate natural language processing. We believe
that end users of these applications and interfaces will require high quality microphone and earphone products that enhance voice transmission, particularly in
noisy environments, for use with personal computers, mobile personal computing devices, cellular and other wireless communication devices and automotive
communication systems. Our Andrea DSP Microphone and Audio Software Products use far-field digital signal processing technology to provide high
quality transmission of voice where the user is at a distance from the microphone. High quality audio communication technologies will be required for emerging
far-field voice applications, ranging from continuous speech dictation, to Internet telephony and multiparty video teleconferencing and collaboration, to
natural language-driven interfaces for automobiles, home and office automation and other machines and devices into which voice-controlled microprocessors are
expected to be introduced during the next several years.



Our Critical Accounting Policies



Our unaudited condensed consolidated interim financial statements and the notes to our unaudited condensed
consolidated interim financial statements contain information that is pertinent to management's discussion and analysis. The preparation of unaudited
condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management
bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual
basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable
assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates
and assumptions under different and/or future circumstances. Our significant accounting policies are described in Note 2 of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. A discussion of our critical accounting policies and
estimates are included in Managements Discussion and Analysis or Plan of Operation in our Annual Report on Form 10-K for the year ended December 31, 2010.
Management has discussed the development and selection of these policies with the Audit Committee of the Companys Board of Directors, and the Audit
Committee of the Board of Directors has reviewed the Companys disclosures of these policies. There have been no material changes to the
critical accounting policies or estimates reported in the Managements Discussion and Analysis section of the Annual Report on Form 10-K for the year ended
December 31, 2010.



Cautionary Statement Regarding Forward-Looking Statements



This report contains forward-looking statements that are based on assumptions and may describe future plans,
strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words believe,
expect, intend, anticipate, estimate, project or similar expressions. The Companys
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and its subsidiaries include, but are not limited to, changes in economic, competitive, governmental, technological and other factors
that may affect our business and prospects. Additional factors are discussed below under Risk Factors and in Part I, Item 1A 
Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or
regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated
events.





14



---



Risk Factors



Our operating results are subject to significant fluctuation, period-to-period comparisons of our operating
results may not necessarily be meaningful and you should not rely on them as indications of our future performance.



Our results of operations have historically been and are subject to continued substantial annual and quarterly
fluctuations. The causes of these fluctuations include, among other things:





the volume of sales of our products under our collaborative marketing arrangements;



the cost of development of our products;



the mix of products we sell;



the mix of distribution channels we use;



the timing of our new product releases and those of our competitors;



fluctuations in the computer and communications hardware and software marketplace; and



general economic conditions.



We cannot assure that the level of revenues and gross profit, if any, that we achieve in any particular fiscal
period will not be significantly lower than in other fiscal periods. Our net revenues for the three months ended March 31, 2011 were $999,013 compared to
$1,242,240 for the three months ended March 31, 2010. Net loss for the three months ended March 31, 2011 was $137,623, or $0.00 per share on a basic and
diluted basis, and $21,143, or $0.00 per share on a basic and diluted basis for the three months ended March 31, 2010. We continue to explore
opportunities to grow sales in other business areas; we are also examining additional opportunities for cost reduction, production efficiencies and further
diversification of our business.



Shares Eligible For Future Sale May Have An Adverse Effect On Market Price and Andrea Shareholders May
Experience Substantial Dilution.



Sales of a substantial number of shares of our common stock in the public market could have the effect of
depressing the prevailing market price of our common stock. Of the 200,000,000 shares of common stock presently authorized, 63,721,035 were outstanding as
of May 11, 2011. The number of shares outstanding does not include an aggregate of 27,751,991 shares of common stock that are issuable. This number of
issuable common shares is equal to approximately 44% of the 63,721,035 outstanding shares. These issuable common shares are comprised of: a)
17,874,474 shares of our common stock reserved for issuance upon exercise of outstanding awards granted under our 1998 Stock Plan and 2006 Stock Plan; b)
4,225,283 shares reserved for future grants under our 2006 Stock Plan; c) 2,023,658 shares of common stock that are issuable upon conversion of the Series C
Preferred Stock; and d) 3,628,576 shares of common stock issuable upon conversion of the Series D Preferred Stock.



In addition to the risk factors set forth above and the other information set forth in this report, you should
carefully consider the factors discussed in Part I, Item 1A  Risk Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual
Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
also may materially adversely affect our business, financial condition and/or operating results.





15



---



Results Of Operations



Three Months ended March 31, 2011 compared to Three Months ended March 31, 2010



Net Revenues

|                                                                     |  |  |  | For the Three Months Ended March 31, |        
|-------------------------------------------------------------------- |  |  |  | ------------------------------------ | -------
|                                                                     |  |  |  | 2011                                 |        
|Andrea
Anti-Noise Products net Product revenues                      |  |  |  |                                      |        
|Sales of
products to OEM customers for use with educational software |  |  |  | $                                    | 68,273 
|All other
Andrea Anti-Noise net product revenues                     |  |  |  |                                      | 456,147
|Total Andrea
Anti-Noise Products net Product revenues                |  |  |  | $                                    | 524,420
|                                                                    
|Andrea DSP
Microphone and Audio Software Products revenues           |  |  |  |                                      |        
|Sales of
automotive array microphone products                        |  |  |  |                                      | 14,789 
|All other
Andrea DSP Microphone and Audio product revenues           |  |  |  |                                      | 62,997 
|License
revenues                                                     |  |  |  |                                      | 396,807
|Total Andrea
DSP Microphone and Audio Software Products revenues     |  |  |  |                                      | 474,593
|Total
Revenues                                                       |  |  |  | $                                    | 999,013



(a)

This increase of approximately $24,000 represents increased product sales to our educational
customers for use with their distance learning products as compared to the three months ended March 31, 2010. We believe that this increase in product
sales relates to the timing of the customers purchases.

(b)

The decrease of approximately $104,000 in all other Andrea Anti-noise product revenues is
related to decreased demand from corporate distance learning customers. Approximately $30,000 of this decrease relates to a decrease in sales as a result
of one of our customers changing to distance learning utilizing telephones instead of VoIP. The remaining decrease of approximately $74,000 relates to
decreased demand when compared to the same period in 2010.

(c)

The approximate $153,000 decrease in sales of automotive array microphone products is
primarily the result of decreased product sales to integrators of public safety vehicle solutions. The decrease is related to our fulfillment of a
contract in 2010.

(d)

The approximate $26,000 increase in all other Andrea DSP Microphone and Audio product
revenues is related to timing of shipments to some of our OEM customers.

(e)

The 8% decrease in license revenues is a result of decreased royalties reported for the three
months ended March 31, 2011 as compared to the same period last year. We believe this decrease is related to timing of revenues reported of PC models
which feature our technology.



Cost of Revenues



Cost of revenues as a percentage of net revenues for the three months ended March 31, 2011 decreased to 33% from
36% for the three months ended March 31, 2010. The cost of revenues as a percentage of net revenues for the three months ended March 31, 2011 for Andrea
Anti-Noise Products was 59% compared to 56% for the three months ended March 31, 2010. The cost of revenues as a percentage of net revenues for the three
months ended March 31, 2011 for the Andrea DSP Microphone and Audio Software Products was 5% compared to 17% for the three months ended March 31, 2010.
 The increase in cost of revenues as a percentage of sales for the Andrea Anti-Noise Products for the three months ended March 31, 2011 was a result of a
decrease in revenues related to this segment. The decrease in cost of revenues as a percentage of sales for Andrea DSP Microphone and Audio Software
Products for the three months ended March 31, 2011 was a result of the decreased revenues of automotive array products.





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Research and Development



Research and development expenses for the three months ended March 31, 2011 increased 21% to $208,312 from
$171,655 for the three months ended March 31, 2010. For the three months ended March 31, 2011, the increase in research and development expenses reflects
a 29% increase in our Andrea DSP Microphone and Audio Software Technology efforts to $122,090, or 59% of total research and development expenses, and a 12%
increase in our Andrea Anti-Noise Headset Product efforts to $86,222, or 41% of total research and development expenses. These increases are related to
ongoing development of new products. With respect to DSP Microphone and Audio Software technologies, research efforts are primarily focused on the pursuit
of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces,
incorporating Andreas digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo
acoustic echo cancellation. We believe that continued research and development spending should provide Andrea with a competitive advantage.



General, Administrative and Selling Expenses



General, administrative and selling expenses decreased approximately 7% to $591,522 for the three months ended
March 31, 2011 from $638,265 for the three months ended March 31, 2010. For the three months ended March 31, 2011, the decrease reflects a 5% decrease in
our Andrea DSP Microphone and Audio Software Technology efforts to $267,370, or 45% of total general, administrative and selling expenses and a 10% decrease in
our Andrea Anti-Noise Headset Product efforts to $324,152, or 55% of total general, administrative and selling expenses. These decreases are the result of
decreased professional and legal expenses during the three months ended March 31, 2011 as compared to same period in 2010.



Interest Income, net



Interest income, net for the three months ended March 31, 2011 was $1,701 compared to $1,806 for the three months
ended March 31, 2010. The year to date decrease in interest income, net was the result of less net interest income.



Provision for Income Taxes



The provision for income taxes for the three months ended March 31, 2011 was $5,336 compared to a provision for
income taxes of $8,285 for the three months ended March 31, 2010. The decrease was a result of decreased estimated taxable income.



Net loss



Net loss for the three months ended March 31, 2011 was $137,623 compared to net loss of $21,143 for the three
months ended March 31, 2010. The net loss for the three months ended March 31, 2011 and March 31, 2010 principally reflects the factors described above.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future
effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.



Liquidity And Capital Resources



Andreas principal sources of funds are and are expected to continue to be gross cash flows from operations.
 At March 31, 2011, we had cash of $1,978,681 compared with $2,220,994 at December 31, 2010. The decrease in our cash balance at March 31, 2011 was
primarily a result of our cash used in operations.



Our working capital balance at March 31, 2011 was $3,059,600 compared to working capital of $3,039,308 at December
31, 2010. The increase in working capital reflects a decrease in total current assets of $197,358 and a decrease in total current liabilities of $217,650.
The decrease in total current assets reflects a decrease in cash of $242,313, an increase in accounts receivable of $132,479, a decrease in inventory of
$85,819, a decrease in deferred income tax assets of $5,291, and an increase in prepaid expenses of $3,586. The decrease in total current liabilities
reflects a decrease in trade accounts payable of $164,580, an increase in the current portion in long-term debt of $714, and a decrease of $53,784 in other
current liabilities.



The decrease in cash of $242,313 reflects $216,317 of net cash used in operating activities, $19,802
of net cash used in investing activities and $6,194 of cash used in financing activities.



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The cash used in operating activities of $216,317, excluding non-cash charges for the three months
ended March 31, 2011, was attributable to a $133,172 increase in accounts receivable, a $97,655 decrease in inventories, a $3,586 increase in prepaid expenses
and other current assets, a $164,580 decrease in accounts payable, and a $53,784 decrease in other current liabilities. The changes in receivables,
inventory, prepaid expenses and accounts payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory
as well as for other services in connection with ongoing efforts related to Andreas various product lines.



The cash used in investing activities of $19,802 reflects purchases of property and equipment of
$9,780 and an increase in patents and trademarks of $10,022. The increase in property and equipment reflects capital expenditures associated with
information technology purchases including and, to a lesser extent, molds associated with our Andrea Anti-Noise Headset Products. The increase in patents
and trademarks reflects capital expenditures associated with our intellectual property.



The cash used in financing activities of $6,194, reflects repayments on our loan from HSBC. We obtained this
loan to finance a significant upgrade to our information technologies systems.



We plan to improve our cash flows in 2011 by aggressively pursuing additional licensing opportunities related to
our Andrea DSP Audio Software and increasing the sales of our Andrea Anti-Noise Headset Products through the introduction of new products as well as the
increased efforts we are putting into our sales and marketing efforts. However, there can be no assurance that we will be able to successfully execute the
aforementioned plans. As of May 11, 2011, Andrea has approximately $2,200,000 of cash deposits. We believe that we have sufficient liquidity
available to continue in operation through at least March 2012. To the extent that we do not generate sufficient cash flows from our operations in the
next twelve months, additional financing might be required. Although we have improved cash flows by reducing overall expenses, if our revenues decline,
these reductions may impede our ability to be cash flow positive and our net income or loss may be disproportionately affected. We have no commitment for
additional financing and may experience difficulty in obtaining additional financing on favorable terms, if at all. Any financing we obtain may contain
covenants that restrict our freedom to operate our business or may have rights, preferences or privileges senior to our common stock and may dilute our current
shareholders ownership interest in Andrea. We cannot assure that demand will continue for any of our products, including future products related to our
Andrea DSP Microphone and Audio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to
increase production and provide marketing resources to meet such demand on favorable terms, or at all.



ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Andreas management, including its principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Andreas disclosure controls and
procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that it files or submits under the Exchange
Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and (2) is accumulated and communicated to Andreas management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that all control issues and instances of fraud, if any, within a company have been detected. Andreas disclosure controls and
procedures are designed to provide reasonable assurance of achieving its objectives.

There have been no changes in the Companys internal controls over financial
reporting that have materially affected, or are reasonable likely to materially affect the Companys internal controls over financial reporting during the
period covered by this Quarterly Report.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Andrea is involved in routine litigation incidental to the normal course of business.
While it is not feasible to predict or determine the final outcome of the claims, Andrea believes any resolution of these matters will not have a material
adverse effect on Andreas consolidated financial position, results of operations or liquidity.

In addition, in December 2010, Audrey Edwards, Executrix of the Estate of Leon Leroy
Edwards, filed a law suit in the Superior Court of Providence County, Rhode Island, against 3M Company and over 90 other defendants, including the Company,
alleging



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that the Company processed, manufactured, designed, tested, packaged, distributed,
marketed or sold asbestos containing products that contributed to the death of Leon Leroy Edwards. The Company received service of process in April 2011.
 The Company has retained legal counsel and has filed a response to the compliant. The Company believes the lawsuit is without merit.
 Accordingly, the Company does not believe the lawsuit will have a material adverse effect on the Companys financial position or results of
operations.

ITEM 1A.

RISK FACTORS

Not applicable.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

a)

Exhibits

Exhibit 31  Rule 13a-14(a)/15d-14(a) Certifications*

Exhibit 32  Section 1350 Certifications*

* Filed herewith



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SIGNATURES

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

ANDREA ELECTRONICS CORPORATIONBy:/s/   DOUGLAS J. ANDREAName:Douglas J. AndreaTitle:Chairman of the Board, President, Chief
Executive Officer and Corporate Secretary




|                        |                                             |             
|----------------------- | ------------------------------------------- | ------------
|Date: May 13, 2011      |                                             |             
|                        |                                             |             
|/s/   DOUGLAS J. ANDREA | Chairman of the Board, President, Chief     | May 13, 2011
|Douglas J. Andrea       | Executive Officer and Corporate Secretary   |             
|                        |                                             |             
|/s/   CORISA L. GUIFFRE | Vice President, Chief Financial Officer and | May 13, 2011
|Corisa L. Guiffre       | Assistant Corporate Secretary               |             
|                        |                                             |             













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