<PAGE>


                       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, 2001

                                       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          (I.R.S. employer identification no.)
   incorporation or organization)


 45 Melville Park Road, Melville, New York                 11747
 -----------------------------------------        ---------------------
  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 the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 14,774,357.

<PAGE>

ITEM 1.


FINANCIAL STATEMENTS

                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                   March 31,      December 31,
                                                                                     2001             2000
                                                                                  ------------    ------------
                                                                                   (unaudited)      (audited)
                                     ASSETS
<S>                                                                               <C>             <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                    $  7,345,008    $  9,151,835
     Accounts receivable, net of allowance for doubtful accounts of $185,599
     and $186,121, respectively                                                      1,833,917       3,503,713
     Inventories, net                                                                6,530,977       6,285,038
     Prepaid expenses and other current assets                                         429,417         221,259
                                                                                  ------------    ------------
              Total current assets                                                  16,139,319      19,161,845

PROPERTY AND EQUIPMENT, net                                                          1,215,142       1,393,760
DEFERRED INCOME TAXES                                                                1,806,615       1,806,615
GOODWILL, NET                                                                       13,132,338      13,403,836
OTHER INTANGIBLE ASSETS, NET                                                         9,049,842       9,243,917
OTHER ASSETS, NET                                                                    2,434,061       2,262,893
                                                                                  ------------    ------------
              Total assets                                                        $ 43,777,317    $ 47,272,866
                                                                                  ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Trade accounts payable                                                       $  1,378,273    $  2,107,660
     Current portion of long-term debt                                                 683,064         676,046
     Other current liabilities                                                       1,165,259       1,343,088
                                                                                  ------------    ------------
              Total current liabilities                                              3,226,596       4,126,794
LONG-TERM DEBT                                                                         199,409         195,867
                                                                                  ------------    ------------
              Total liabilities                                                      3,426,005       4,322,661
                                                                                  ------------    ------------
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value;
   authorized: 1,000 shares, issued and outstanding: 348 and 500 shares,
   respectively; liquidation value:  $3,480,000 and $5,000,000, respectively         3,367,527       4,830,060
                                                                                  ------------    ------------
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value;
   authorized: 1,500 shares, issued and outstanding: 750 and 750,
   respectively shares; liquidation value: $7,500,000 and $7,500,000,
   respectively                                                                   $  7,340,924       7,332,665
                                                                                  ------------    ------------
SHAREHOLDERS' EQUITY:

     Preferred stock, $.01 par value; authorized: 4,997,500 shares; none issued
         and outstanding                                                                  --              --
     Common stock, $.50 par value; authorized: 35,000,000 shares; issued and
         outstanding: 14,759,357 and 13,897,572 shares, respectively                 7,379,678       6,948,786
     Additional paid-in capital                                                     47,828,870      46,711,609
     Accumulated deficit                                                           (25,565,687)    (22,872,915)
                                                                                  ------------    ------------
              Total shareholders' equity                                            29,642,861      30,787,480
                                                                                  ------------    ------------
              Total liabilities and shareholders' equity                          $ 43,777,317    $ 47,272,866
                                                                                  ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>



                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                             For the Three Months Ended
                                                                       March 31,
                                                             ----------------------------
                                                                 2001            2000
                                                             ------------    ------------
<S>                                                          <C>             <C>
NET SALES                                                    $  2,615,639    $  3,201,484

COST OF SALES                                                   1,919,354       2,399,175
                                                             ------------    ------------
              Gross profit                                        696,285         802,309

RESEARCH AND DEVELOPMENT EXPENSES                                 998,900       1,150,478

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES                    2,313,343       2,141,298
                                                             ------------    ------------
              Loss from operations                             (2,615,958)     (2,489,467)
                                                             ------------    ------------
OTHER INCOME (EXPENSE):
     Interest income                                               88,723         106,838
     Interest expense                                             (15,003)        (87,172)
     Miscellaneous expense                                         (4,249)        (14,820)
                                                             ------------    ------------
                                                                   69,471           4,846
                                                             ------------    ------------
LOSS BEFORE PROVISION FOR INCOME TAXES                         (2,546,487)     (2,484,621)

PROVISION FOR INCOME TAXES                                           --              --
                                                             ------------    ------------
              Net loss                                       $ (2,546,487)   $ (2,484,621)
                                                             ============    ============
PREFERRED STOCK DIVIDENDS                                         146,285          91,377
                                                             ------------    ------------
              Net loss attributable to common shareholders   $ (2,692,772)   $ (2,575,998)
                                                             ============    ============
PER SHARE INFORMATION:

Net Loss Per Share:
     Basic                                                   $       (.18)   $       (.19)
                                                             ============    ============
     Diluted                                                 $       (.18)   $       (.19)
                                                             ============    ============
Shares used in computing net loss per share:
     Basic                                                     14,624,788      13,363,509
                                                             ============    ============
     Diluted                                                   14,624,788      13,363,509
                                                             ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>



                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                      Additional                        Total
                                           Shares        Common         Paid-In      Accumulated     Shareholders'
                                         Outstanding      Stock         Capital        Deficit          Equity
                                        ------------   ------------   ------------   ------------    ------------
<S>                                     <C>            <C>            <C>            <C>             <C>
BALANCE, December 31, 2000                13,897,572   $  6,948,786   $ 46,711,609   $(22,872,915)   $ 30,787,480
   Conversion of Series B Redeemable
     Convertible Preferred Stock, net
     of related costs                        861,785        430,892      1,117,261           --         1,548,153
   Preferred stock dividends                    --             --             --         (146,285)       (146,285)
   Net loss                                     --             --             --       (2,546,487)     (2,546,487)
                                        ------------   ------------   ------------   ------------    ------------
BALANCE, March 31, 2001                   14,759,357   $  7,379,678   $ 47,828,870   $(25,565,687)   $ 29,642,861
                                        ============   ============   ============   ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>



                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       For the Three Months Ended
                                                                               March 31,
                                                                       --------------------------
                                                                          2001           2000
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                            $(2,546,487)   $(2,484,621)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
             Non-cash interest expense                                        --           23,259
             Depreciation and amortization                                 927,126        909,206
             (Increase) Decrease in:
               Accounts receivable, net                                  1,669,796         33,430
               Inventories                                                (245,939)        34,382
               Prepaid expenses and other current assets                  (438,242)      (197,462)
               Other assets                                               (194,317)         1,207
             Decrease in:
               Trade accounts payable                                     (729,387)      (471,195)
               Other current and long term liabilities                    (226,508)       (99,548)
                                                                       -----------    -----------
                  Net cash used in operating activities                 (1,783,958)    (2,251,342)
                                                                       -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                                     (22,869)      (127,726)
                                                                       -----------    -----------
                  Net cash used in investing activities                    (22,869)      (127,726)
                                                                       -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock upon exercise of stock
       options, net of related costs                                          --        1,319,234
                                                                       -----------    -----------
                  Net cash provided by financing activities                   --        1,319,234
                                                                       -----------    -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                               (1,806,827)    (1,059,834)
CASH AND CASH EQUIVALENTS, beginning of period                           9,151,835      9,153,148
                                                                       -----------    -----------
CASH AND CASH EQUIVALENTS, end of period                               $ 7,345,008    $ 8,093,314
                                                                       ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Non-cash investing and financing activities:
     Conversion of Series B Redeemable Convertible Preferred Stock
         and related accrued dividends into common stock               $ 1,548,153    $ 2,417,402
                                                                       ===========    ===========
</TABLE>
                 See Notes to Consolidated Financial Statements

<PAGE>




                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation - The accompanying consolidated 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.

     The consolidated financial statements have been prepared in accordance with
     generally accepted accounting principles for interim financial reporting.
     Accordingly, they do not include all of the information and footnotes
     required by generally accepted accounting principles for complete financial
     statements. 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 for any interim period are
     not necessarily indicative of the results to be expected for the fiscal
     year. For further information, refer to the consolidated financial
     statements and accompanying footnotes included in the Andrea's annual
     report on Form 10-K for the year ended December 31, 2000.

2.   Earnings Per Common Share - Basic net loss per common share is computed by
     dividing net loss by the weighted-average number of common shares
     outstanding. Diluted net loss per common share is computed by dividing net
     loss by the weighted-average number of common shares and dilutive common
     share equivalents and convertible securities then outstanding.


     The following chart provides a reconciliation of information used in
     calculating the per share amounts:

                                                  For the Three Months Ended
                                                            March 31,
                                                  ----------------------------
                                                       2001           2000
                                                  ------------    ------------
Numerator:
     Net loss                                     $ (2,546,487)   $ (2,484,621)
     Preferred stock dividends                         146,285          91,377
                                                  ------------    ------------
       Net loss attributable to common
         shareholders                             $ (2,692,772)   $ (2,575,998)
                                                  ============    ============
Denominator:
     Weighted-average common shares outstanding
      -- Basic and Diluted *                        14,624,788      13,363,509
                                                  ============    ============

Net loss per share- Basic and Diluted             $       (.18)   $       (.19)
                                                  ============    ============


*    The effect of dilutive securities (stock options, Redeemable Convertible
     Preferred Stock and warrants) have not been included herein as their
     inclusion would be anti-dilutive.

<PAGE>

3.   Comprehensive Income - Andrea follows the provisions of SFAS No. 130,
     "Reporting Comprehensive Income", which requires companies to report all
     changes in equity during a period, except those resulting from investment
     by owners and distribution to owners, in a financial statement for the
     period in which they are recognized. Comprehensive income is the total of
     net income (loss) and all other non-owner changes in equity (or other
     comprehensive income) such as unrealized gains/losses on securities
     available-for-sale, foreign currency translation adjustments and minimum
     pension liability adjustments. Comprehensive and other comprehensive income
     must be reported on the face of the annual financial statements or, in the
     case of interim reporting, in the footnotes to the financial statements.
     For the three months ended March 31, 2001 and 2000, Andrea's operations did
     not give rise to items includible in comprehensive income (loss), which
     were not already included in net income (loss). Accordingly, the Andrea's
     comprehensive loss is the same as its net loss for all periods presented.

4.   Derivative Instruments - In June 1998, the Financial Accounting Standards
     Board issued SFAS No. 133, "Accounting for Derivative Instruments and
     Hedging Activities". This statement establishes accounting and reporting
     standards for derivative instruments, including certain derivative
     instruments embedded in other contracts, and for hedging activities. SFAS
     No. 133 is effective for all fiscal years beginning after June 15, 1999
     (subsequently amended by SFAS No. 137, to be effective for all fiscal years
     beginning after June 15, 2000) and will not require retroactive restatement
     of prior period financial statements. This statement requires the
     recognition of all derivative instruments as either assets or liabilities
     in the balance sheet measured at fair value. Derivative instruments will be
     recognized as gains or losses in the period of change. If certain
     conditions are met where the derivative instrument has been designated as a
     fair value hedge, the hedge items may also be marked to market through
     earnings, thus creating an offset. If the derivative is designed and
     qualifies as a cash flow hedge, the changes in fair value of the derivative
     instrument may be recorded in comprehensive income. While Andrea operates
     in international markets, it does so presently without the use of
     derivative instruments.

5.   Procurement Agreement - Andrea has an agreement with International Business
     Machines and its subsidiaries ("IBM") to produce and procure certain
     products, as defined. The agreement continues in full force and effect
     unless terminated earlier for material breach by either party, as defined.
     For the three month period ending March 31, 2001, sales of the Andrea's
     products to IBM and certain of IBM's affiliates, distributors, licensees
     and integrators accounted for approximately 21% of the Andrea's total net
     sales.

<PAGE>

6.   Series B Redeemable Convertible Preferred Stock - On June 22, 1999, Andrea
     issued and sold in a private placement $7,500,000 of Series B Redeemable
     Convertible Preferred Stock (the "Series B Preferred Stock"), and a warrant
     covering 75,000 shares of Andrea's Common Stock. Each of the 750 shares of
     Series B Preferred Stock (par value $0.01 per share) has a stated value of
     $10,000 plus dividends of 4% per annum, which sum is convertible into
     Common Stock (par value $0.50 per share) at a conversion price equal to the
     lower of $8.775 (the "Maximum Conversion Price") and the average of the two
     lowest closing bid prices of the Common Stock during the 15 consecutive
     trading days immediately preceding a conversion date (the "Market Price"),
     subject to certain adjustments, including anti-dilution. The 4% dividends
     may, at the option of Andrea, be paid in cash. The warrant has an exercise
     price of $8.775 per share and expires on June 18, 2004.

     The Series B Preferred Stock becomes convertible into Andrea's Common Stock
     according to a vesting schedule, with 12.5% of the shares having become
     convertible on October 17, 1999, 12.5% of the shares having become
     convertible on November 17, 1999, 12.5% of the shares having become
     convertible on December 17, 1999, and an additional 12.5% becoming
     convertible at the end of next five succeeding 30-day periods. The vesting
     schedule will lapse for conversions occurring at the Maximum Conversion
     Price and upon the occurrence of certain extraordinary events, as defined.
     Any unconverted Series B Preferred Stock that remains outstanding on June
     18, 2004 will automatically convert into Andrea's Common Stock. Andrea has
     reserved 2,450,000 of Common Stock for issuance upon conversion of the
     shares of the Series B Preferred Stock.

     Upon the announcement of a major transaction, as defined, the investors
     have the right to require Andrea to redeem all or a portion of the
     investors' Preferred Shares at a redemption price equal to the greater of
     120% of the stated value plus any accrued dividends or the Market Price on
     the day of announcement. In addition, upon the occurrence of certain
     triggering events, as defined, and depending on Andrea's control over such
     events, the investors may have the right to require Andrea to i) redeem all
     or a portion of the Preferred Shares at a redemption price equal to the
     greater of 120% of the stated value plus any accrued dividends or the
     Market Price on the day of announcement, or ii) pay a penalty equal to 1%
     of the remaining principal amount outstanding for a period not to exceed 20
     days in any 365 day period, and adjust the Maximum Conversion Price, as
     defined.

     On January 11, 2001 and January 18, 2001, 100 shares and 52 shares of the
     Series B Preferred Stock, together with related accrued dividends, were
     converted into 566,824 and 294,961 shares, respectively, of Common Stock at
     a conversion price of $1.88, respectively. As of March 31, 2001, the Series
     B Preferred Stock is recorded net of the unaccreted present value of the
     warrants of $112,473. Due to the redemption features described above, the
     Series B Preferred Stock is presented outside of stockholders' equity in
     the accompanying consolidated balance sheet.

7.   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 the 750 shares of Series C Preferred Stock (par value $0.01 per
     share) has a stated value of $10,000 plus dividends of 5% per annum, which
     sum is convertible into Common Stock (par value $0.50 per share) at a
     conversion price initially equal to 110% of the average of the two lowest
     closing bid prices of the Common Stock during the 5 consecutive trading
     days immediately preceding the issuance date for the first nine months. The

<PAGE>

     conversion price will be reset every six months thereafter to the lesser of
     the then existing conversion price or the average of the two lowest
     closing bid prices of the Common Stock during the 5 consecutive trading
     days immediately preceding the six-month reset dates or, for the period
     beginning on the day two years after the initial issuance and ending on the
     maturity of the Series C Preferred Stock, the least of: (i) the then
     existing conversion price, (ii) the average of the two lowest closing bid
     prices of the Common Stock during the 15 consecutive trading days
     immediately preceding such two year date or (iii) the closing bid price on
     the day of conversion, subject in each case to certain adjustments. The 5%
     dividend amount may, at the option of Andrea, be paid in cash or in shares
     of Andrea's Common Stock. The Series C Preferred Stock is convertible or
     redeemable at maturity by Andrea, based upon certain circumstances at that
     time, and is redeemable by the holder upon certain events. Andrea has the
     right to require the conversion of the Series C Preferred Stock after one
     year upon the satisfaction of certain conditions. During the eighteen-month
     period beginning on October 10, 2000, the investors may exercise an option
     to purchase up to an additional $2.5 million of Andrea's Series C Preferred
     Stock, subject to the closing bid price of Andrea's Common Stock being no
     less than $7.0565 as of the date of such exercise. These additional
     Preferred Shares would be identical in all material respects to those
     purchased at Initial Issuance and, consequently, a contingent beneficial
     conversion feature exists which may result in the Investor obtaining a
     conversion price for such additional Preferred Shares which, at the time of
     the exercise of the option, could be less than the market price of the
     Common Stock at such date. In accordance with the provisions of Emerging
     Issues Task Force Issue No. 98-5, "Accounting for Convertible Securities
     with Beneficial Conversion Features or Contingently Adjustable Conversion
     Ratios", Andrea may be required to record, at the time of exercise for such
     additional Preferred Shares, a charge to accumulated deficit as a result of
     this beneficial conversion right.

     Upon the announcement of a major transaction or upon certain triggering
     events, as defined, the investors have the right to require Andrea to
     redeem all or a portion of the investors' Series C Preferred Shares at a
     redemption price equal to the greater of (i) 120% of the Liquidation Value,
     as defined, or (ii) the product of the applicable conversion rate in effect
     on the date of the major transaction or the triggering event and the
     closing bid price of the Common Stock of Andrea on the trading day
     immediately preceding the major transaction or triggering event or the
     closing bid price of Andrea's Common Stock on the date the holder's
     delivery to Andrea of notice. In addition, if Andrea is unable to effect
     such redemption (i) interest will accumulate on the value of the Series C
     Preferred Shares that Andrea is unable to redeem at the rate of 2% per
     month and (b) the holders of the Series C Preferred Stock are entitled to
     void their redemption notices and receive a reset of their applicable
     conversion price.

     As of March 31, 2001, the Series C Preferred Stock is recorded net of
     unaccreted costs of $159,076. Due to the redemption features described
     above, the Series C Preferred Stock is presented outside of stockholders'
     equity in the accompanying consolidated balance sheet.

     Furthermore, in accordance with EITF Issue 00-27, "Application of EITF
     Issue No. 98-5 to Certain Convertible Instruments", Andrea may be required
     to record a charge to accumulated deficit at the end of the reset period
     and each reset period thereafter, as defined, which will reduce income
     available to common shareholders and earnings per share at such times. The
     magnitude of this charge, which could be material, will depend, to an
     extent, on Andrea's stock price at the reset date.

8.   Acquisition Of Business -On May 5, 1998, Andrea acquired all of the
     outstanding shares of capital stock of Lamar (the "Acquisition"). The
     consideration paid by Andrea for the Acquisition was approximately
     1,800,000 shares of restricted common stock, $1,000,000 in cash and
     $2,000,000 in notes payable. The cash was recorded at stated value. Both
     the notes payable and the shares issued were discounted to reflect the
     appropriate value of the consideration paid taking into account the
     underlying restrictions, arriving at values of $1,615,000 and $23,129,532,
     respectively. Of the approximately 1,800,000 shares issued to the sellers,
     one-third became freely transferable on the first anniversary of the
     closing; an additional one-third became transferable on the second
     anniversary; and the last one-third on the third anniversary. Of the
     aggregate cash


<PAGE>

     consideration to be paid by Andrea, $1,500,000, $500,000 and $500,000 was
     paid during 1998, 1999 and 2000, respectively, and the remaining $500,000
     was paid on the thirty-six month anniversary of the closing (May 5, 2001).
     The Acquisition was accounted for under the purchase method of accounting
     and, accordingly, the operating results of Lamar have been included in the
     consolidating operating results since the date of acquisition. The
     purchase, for total aggregate consideration of $27.6 million, including
     costs associated with the acquisition of Lamar of $1.4 million, resulted in
     intangible assets of $27.3 million. The goodwill and other intangibles,
     together with their respective useful lives consist of the following as of
     March 31, 2001:

                                         Net Value at            Estimated
                                        March 31, 2001          Useful Life
                                     ----------------------     -----------

     Goodwill                             $13,132,338            15 years
                                          ===========

     Other Intangible Assets:
              Core Technology             $ 8,877,167            15 years
              Workforce in Place              172,675             7 years
                                          -----------

     Total Other Intangible Assets        $ 9,049,842
                                          ===========

9.   Segment Information - Andrea follows the provisions of SFAS No. 131,
     "Disclosures about Segments of an Enterprise and Related Information."
     Reportable operating segments are determined based on the Andrea's
     management approach. The management approach, as defined by SFAS No. 131,
     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 the Andrea's results of operations are primarily
     reviewed on a consolidated basis, the chief operating decision-maker also
     manages the enterprise in three segments: (i) Andrea Anti-Noise Products,
     (ii) Aircraft Communications Products, and (iii) Andrea DSP Microphone and
     Software Products. Our Andrea-Anti-Noise Products include our noise
     cancellation and active noise cancellation computer headset products and
     related computer peripheral products; our Aircraft Communication Products
     primarily include our military and commercial aircraft intercom
     communication systems; and our Andrea DSP Microphone and 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. The following
     represents selected consolidated financial information for the Andrea's
     segments for the three months ended March 31, 2001, and 2000:

<TABLE>
<CAPTION>
                                                                      Andrea DSP
                                        Andrea        Aircraft        Microphone
                                       Anti-Noise   Communications   and Software    March 31,
            Segment Data               Products       Products        Products         2001
            ------------              -----------   -----------     -----------    -----------
     <S>                              <C>           <C>             <C>            <C>
     Net sales                       $ 1,320,926    $ 1,026,916     $   267,797    $ 2,615,639
     Income (loss) from operations      (654,607)       302,317      (2,263,668)    (2,615,958)
     Depreciation                        104,297         24,390          72,800        201,487
</TABLE>



<PAGE>

<TABLE>
<CAPTION>
                                                                      Andrea DSP
                                        Andrea        Aircraft        Microphone
                                       Anti-Noise   Communications   and Software    March 31,
            Segment Data               Products       Products        Products         2000
            ------------              -----------   -----------     -----------    -----------
     <S>                              <C>           <C>             <C>            <C>
     Net sales                        $ 2,415,737   $   604,700     $   181,047    $ 3,201,484
     Income (loss) from operations        119,205      (152,823)     (2,455,849)    (2,489,467)
     Depreciation                         100,015        47,464          70,587        218,066


</TABLE>

     International revenues are based on the country in which the end-user is
     located. For the three months ended March 31, 2001 and 2000, sales and
     accounts receivable by geographic area are as follows:

        Geographic Data                     March 31, 2001     March 31, 2000
        ---------------                     --------------     --------------
     Sales:
            United States                      $2,005,384        $2,336,711
            Europe                                120,915           390,686
            Other foreign                         489,340           474,087
                                               $2,615,639        $3,201,484
     Accounts receivable:
            United States                      $1,482,011        $1,837,008
            Europe                                 88,129           560,163
            Other foreign                         263,777           340,102
                                               $1,833,917        $2,737,273

10.  Legal Proceedings - As previously reported in "Item 3. Legal Proceedings"
     in Andrea's Annual Report on Form 10-K for the year ended December 31,
     2000, on November 17, 1998 a complaint was filed against Andrea in the U.S.
     District Court for the Eastern District of New York by NCT Group, Inc.
     ("NCT"; formerly Noise Cancellation Technologies, Inc.) and NCT Hearing
     Products, Inc., one of NCT's subsidiaries. The complaint involves two of
     Andrea's patents relating to certain active noise reduction technology.
     Andrea does not currently derive significant sales or licensing revenue
     from this technology. The complaint requests a declaration that the two
     patents are invalid and unenforceable and that NCT's products do not
     infringe the patents. The complaint alleges that Andrea has engaged in
     unfair competition by misrepresenting the scope of the two patents,
     tortuously interfering with prospective contractual rights between NCT and
     its existing and potential customers, making false and disparaging
     statements about NCT and its products, and falsely advertising certain of
     Andrea's technology. The complaint seeks to enjoin Andrea from engaging in
     these alleged activities and seeks compensatory damages of not less than
     $5,000,000, punitive damages of not less than $50,000,000 and plaintiffs'
     costs and attorneys' fees. Andrea filed and served an answer to the NCT
     complaint, denying the allegations and asserting various affirmative
     defenses and counterclaims. Andrea's counterclaims allege that NCT has
     willfully infringed the two patents, and that NCT has engaged in trademark
     infringement, false designation of origin, and unfair competition with
     respect to Andrea's mark ANR READY. The counterclaims seek injunctive
     relief with respect to the allegations of patent infringement, trademark
     infringement, false designation of origin and unfair competition. Andrea
     also seeks exemplary and punitive damages, prejudgment interest on all
     damages, costs, reasonable attorneys' fees and expenses. Andrea believes
     that, based upon the

<PAGE>

     advice of outside legal counsel, NCT's allegations are without merit, and
     we intend to vigorously defend the claims described above.

     In March 1999, Andrea was notified about a claim filed by the owners of
     property adjoining Andrea's Long Island City facility with respect to
     certain environmental matters. In September 1999, a complaint was filed in
     the Supreme Court of the State of New York, County of Nassau seeking $1
     million in compensatory damages from Andrea. While no assurance can be
     given as to the ultimate outcome of this matter, Andrea believes, based on
     the advice of outside legal counsel, that the claim is without merit and is
     vigorously defending itself.In addition to the litigation described above,
     we are from time to time subject to routine litigation incidental to our
     business.

     In addition to the litigation noted above, Andrea is from time to time
     subject to routine litigation incidental to its business. While it is not
     feasible to predict or determine the final outcome of the claims against
     Andrea, management believes that the results of the above noted litigation
     and other pending legal proceedings will not have a material adverse effect
     on Andrea's financial condition, results of operations or liquidity.

11.  Reclassifications - Certain prior year amounts have been reclassified to
     conform to the current year presentation.

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


Overview

     Andrea Electronics designs, develops and manufacturers state-of-the-art
microphone technologies and equipment for enhancing speech-based applications
software and communications that require high performance and high quality voice
input.

     Andrea's products and technologies optimize the performance of speech-based
applications software in markets such as:

     .    voice communication over the Internet;

     .    speech recognition and dictation to desktop, laptop and hand-held
          computers;

     .    audio/video conferencing;

     .    computer-based automobile monitoring and control systems for use by
          drivers and passengers;

     .    electronic equipment for incorporation into home appliances and
          industrial and commercial office equipment that is activated and
          controlled by voice; and

     .    interactive games where one or more players participate over the
          Internet.

     Our patented Active Noise Cancellation microphone and Active Noise
Reduction earphone technologies help to ensure clear speech in personal computer
and telephone headset applications. Active

<PAGE>


Noise Cancellation microphone technology uses electronic circuits that
distinguish a speaker's voice from background noise in the speaker's environment
and then cancels the noise from the signal to be transmitted by the microphone.
Active Noise Reduction earphone technology uses electronic circuits that
distinguish the signal coming through an earphone from background noise in the
listener's environment and then reduces the noise heard by the listener.
Together with our lower-end noise cancelling headset products, these
technologies and related products comprise our Andrea Anti-Noise line of
business.

     Our patented and patent-pending Andrea Digital Super Directional Array and
Andrea Direction Finding and Tracking Array technologies enable the person
speaking to be several feet from the microphone, and frees the speaker from
having to hold the microphone (we refer to this capability as "far-field"
microphone use). Our DSDA and DFTA microphone products convert sound received by
the array of microphones in the product into digital signals that are then
processed to cancel background noise from the signal to be transmitted. These
two technologies represent the core technologies within our portfolio of
far-field technologies. We are initially targeting our far-field microphone
technologies at the market for personal computers designed for use in
automobiles, trucks and buses to control sound systems, mobile telephones,
satellite-based navigation systems, and other devices within vehicles. These
technologies and related products comprise our Andrea Digital Signal Processing
(DSP) Microphone and Software line of business.

     In May 1998, we acquired Lamar Signal Processing, Ltd., an Israeli
corporation engaged in the development of scalable, digital signal
processing-based directional, noise cancellation microphone technologies, which
included primarily DSDA and DFTA. The consideration paid by Andrea for Lamar was
approximately 1,800,000 shares of restricted common stock, $1,000,000 in cash
and $2,000,000 in notes payable. We recorded the cash at stated value. We
discounted the value of the notes payable to $1,615,000 to reflect Andrea's
borrowing rate as well as the time value of the payments on the notes, and we
discounted the value of the shares to $23,129,532 to reflect, among other
things, trading restrictions on the shares. We believe that the acquired
technologies, together with the research staff at Lamar, provide Andrea with
noise filtering capabilities and performance that is superior to other DSP-based
technologies in the marketplace, and unattainable in traditional
mechanical-based microphone solutions.

     We are incorporated under the laws of the State of New York and have been
engaged in the electronic communications industry since 1934. For several
decades prior to our entry into the voice-activated computing market in the
1990's, our primary business was selling intercom systems for military and
industrial use. We refer to this line of business as Aircraft Communications. We
are seeking to apply our knowledge of the military and industrial markets to
develop applications of our Andrea DSP Microphone and Software technologies.

     The interim results of operations of Andrea presented in this report are
not necessarily indicative of the actual sales or results of operations to be
realized for the full year.


Cautionary Statement Regarding Forward-Looking Statements

Certain information contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations for the three months ended
March 31, 2001 (the "2001 First Quarter") compared to the three months ended
March 31, 2000 (the "2000 First Quarter") are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipates," "believes," "estimates," "expects," "intends," "plans," "seeks,"
variations of such words, and similar expressions are intended to identify
forward-looking statements. We have based these forward-looking statements on
our current expectations, estimates and projections about our business and
industry, our beliefs and certain

<PAGE>

assumptions made by our management. Investors are cautioned that matters subject
to forward-looking statements involve risks and uncertainties including
economic, competitive, governmental, technological and other factors that may
affect our business and prospects. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. In order to obtain the benefits of these "safe harbor"
provisions for any such forward-looking statements, we wish to caution investors
and prospective investors about the following significant factors, which, among
others, have in some cases affected our actual results and are in the future
likely to affect our actual results and could cause them to differ materially
from those expressed in any such forward-looking statements. These factors
include:

Because 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 under our collaborative
          development arrangements;

     -    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 sales and gross profit, if any, that we
achieve in any particular fiscal period will not be significantly lower than in
other fiscal periods. Our revenues for the 2001 First Quarter were approximately
$2.6 million compared to approximately $3.2 million in the 2000 First Quarter.
For both the 2001 First Quarter and 2000 First Quarter, we had a net loss of
approximately $2.5 million. We continue to experience significant price pressure
on our Andrea Anti-Noise Products, as well as declines in unit sales of these
products to those of our customers who bundle them with their continuous
speech dictation products. In response, we are examining opportunities for cost-
reduction, production efficiencies and further diversification of our business.
But to remain competitive, we intend to continue incurring substantial research
and development, marketing and general and administrative expenses. We may not
be able to easily and quickly reduce these expenses if our sales revenue falls
below our expectations and, therefore, our net income or loss may be
disproportionately affected by any reduction in sales revenue. Furthermore, our
acquisition in 1998 of Lamar Signal Processing, Ltd. resulted in a substantial
amount of goodwill and other intangible assets. The amortization of these
intangible assets had, and will continue to have, a negative, non-cash impact on
our results of operations. As a result of these factors, we expect to continue
to accumulate losses and the market price of our common stock could decline.

<PAGE>


If we fail to obtain additional capital, we may be required to significantly
reduce, or refocus, our operations and our business, results of operations and
financial condition could be materially and adversely effected.

     From time to time during the past several years, we have raised additional
capital from external sources. We expect to continue to have to raise additional
capital from external sources. These sources may include private or public
financings through the issuance of debt, convertible debt or equity, or
collaborative arrangements. Additional capital may not be available on favorable
terms, if at all. Additionally, we may only be able to obtain funds through
arrangements that require us to relinquish rights to our products, technologies
or potential markets.

Shares Eligible For Future Sale May Have An Adverse Effect On Market Price; You
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 35,000,000 shares of common stock presently authorized,
14,774,357 were outstanding as of May 15, 2001. This does not include 5,288,125
shares of our common stock reserved for issuance upon exercise of outstanding
awards granted under our 1991 Performance Equity Plan and 1998 Stock Plan and
shares of our common stock reserved for further awards under the 1998 Stock Plan
and 6,411,140 shares of common stock reserved for issuance upon conversion of
the Series B and Series C convertible preferred stock and exercise of related
warrants. In addition, in May 1998, we issued 1,800,000 shares of common stock
as part of the consideration for our acquisition of Lamar Signal Processing,
Ltd. Trading restrictions on these 1,800,000 shares have expired and are subject
to demand and piggyback registration rights. To date, 902,880 of the 1,800,000
shares have been registered for sale under the Securities Act of 1933.
Additionally, we are seeking shareholder approval at the 2001 annual meeting to
increase the amount of authorized shares to 70,000,000 in order to provide the
Company with further flexibility for a capital raising transaction which may
involve the issuance of authorized but unissued common stock.

Conversions of our Series B convertible preferred stock and Series C convertible
preferred stock may result in substantial dilution to other holders of our
common stock.

     Currently, we have 348 shares of Series B convertible preferred stock and
750 shares of Series C convertible preferred stock outstanding. Both the Series
B convertible preferred stock and the Series C convertible preferred stock are
convertible into shares of common stock, subject to ownership limitations that
prohibit the holders of the preferred stock from owning more than 4.99% of the
outstanding shares of common stock at the time of conversion or 9.99% over any
sixty day period. These restrictions do not prevent purchasers from converting
and selling some of their holdings and then later converting the rest of their
holdings.

As the price of our common stock decreases, the number of shares of common stock
issuable upon conversion of our Series B convertible preferred stock and Series
C convertible preferred stock increases.

     The variable conversion price of the Series B convertible preferred stock
and any reset of the conversion price of the Series C convertible preferred
stock are functions of the market price of our common stock. If the price of our
common stock decreases over time, the number of shares of common stock issuable
upon conversion of each series will increase.

<PAGE>


     The following table illustrates the varying amounts of shares of common
stock issuable upon conversion of all 348 shares of Series B Convertible
Preferred Stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 4% additional amount is paid in
cash:

                                 Number of Shares          Percentage of
                             of Common Stock Issuable        Outstanding
          Conversion Price       Upon Conversion(1)         Common Stock(2)
          ----------------   ------------------------      ----------------
               $1.00                3,480,000                    19%
               $2.00                1,740,000                    11%
               $3.00                1,160,000                     7%
               $4.00                  870,000                     6%
               $5.00                  696,000                     5%
               $6.00                  580,000                     4%
               $7.00                  497,143                     3%
               $8.00                  435,000                     3%

(1)  The Series B Holder is prohibited from converting its holdings of the
     Series B Convertible Preferred Stock if after giving effect to such
     conversion it would beneficially own in excess of 4.99% or, over any sixty
     day period, 9.99% of the outstanding shares of our common stock following
     such conversion and, in the event that, on a cumulative basis, the shares
     of common stock issuable upon conversion of the Series B Convertible
     Preferred Stock would exceed 19.9% of our common stock outstanding on June
     18, 1999, approval of our shareholders would be required.

(2)  Based on 14,774,357 shares of common stock outstanding as of May 15, 2001.


     The following table illustrates, as of any reset date and assuming the
conversion price indicated is lower than the then applicable conversion price on
that date, the varying amounts of shares of common stock that would be issuable
upon conversion of all outstanding 750 shares of Series C convertible preferred
stock at the indicated conversion prices (without regard to any limitations on
conversion) and assuming that the 5% additional amount is paid in cash:

                                 Number of Shares          Percentage of
                             of Common Stock Issuable        Outstanding
          Conversion Price       Upon Conversion(1)         Common Stock(2)
          ----------------   ------------------------      ----------------
               $1.00                7,500,000                    34%
               $2.00                3,750,000                    20%
               $3.00                2,500,000                    14%
               $4.00                1,875,000                    11%
               $5.00                1,500,000                     9%
               $6.00                1,250,000                     8%
               $7.00                1,071,429                     7%

(1)  The Series C Holder is prohibited from converting its holdings of the
     Series C Convertible Preferred Stock if after giving effect to such
     conversion it would beneficially own in excess of 4.99% or, over any sixty
     day period, 9.99% of the outstanding shares of our common stock following
     such conversion and, in the event that, on a cumulative basis, the shares
     of common stock issuable upon conversion of the Series C Convertible
     Preferred Stock would exceed 19.9% of our common stock outstanding on
     October 10, 2000, approval of our shareholders would be required.

(2)  Based on 14,774,357 shares of common stock outstanding as of May 15, 2001.

<PAGE>

     The following table illustrates the varying amounts of shares of common
stock that would be issuable upon conversion of all 348 outstanding shares of
Series B convertible preferred stock and all 750 outstanding shares of Series C
convertible preferred stock at the indicated conversion prices (without regard
to any limitations on conversion) and assuming that all additional amounts are
paid in cash:

                                 Number of Shares          Percentage of
                             of Common Stock Issuable        Outstanding
        Conversion Price(1)       Upon Conversion(2)       Common Stock(3)
        -------------------  ------------------------      ----------------
              $1.00               10,980,000                    43%
              $2.00                5,490,000                    27%
              $3.00                3,660,000                    20%
              $4.00                2,745,000                    16%
              $5.00                2,196,000                    13%
              $6.00                1,830,000                    11%
              $7.00                1,568,572                    10%

(1)  The calculation assumes that the conversion price of the Series B and
     Series C convertible preferred stock are equal. This could occur at any
     reset date on which the conversion price for the Series C convertible
     preferred stock is adjusted down to the Series B convertible preferred
     stock conversion price. The conversion price of the Series B convertible
     preferred stock would be the prevailing market price.

(2)  The Series B and Series C holder is prohibited from converting the Series C
     or Series B convertible preferred stock, or from exercising the warrants
     issued in connection with the Series B convertible preferred stock, in some
     circumstances.

(3)  Based on 14,774,357 shares of common stock outstanding as of May 15, 2001.

Sales of an increased number of shares of common stock issued upon conversion of
the Series B convertible preferred stock and the Series C convertible preferred
stock resulting from a declining market price for our common stock can cause the
market price of our common stock to decline further.

     Disregarding the manner in which the shares of common stock issued upon
conversion of the Series B convertible preferred stock and the Series C
convertible preferred stock are sold as well as any other factors such as
reactions to our operating results and general market conditions which may be
operative in the market as such time, an increase in the number of shares of
common stock eligible for sale can cause a decrease in the market price of our
common stock. This decrease could reduce the conversion prices of the Series B
convertible preferred stock and the Series C convertible preferred stock,
leading to a further increase in the number of shares of common stock issuable
upon future conversions and a further decline in our stock price.

If we are unable to obtain shareholder approval for issuances of common stock
upon conversions of our Series B convertible preferred stock and Series C
convertible preferred stock that exceed 19.99% of our outstanding common stock,
we may have to pay substantial penalties.

     Because there is no floor on the conversion prices of the Series B
convertible preferred stock and Series C convertible preferred stock, we may
ultimately be required to issue an amount of common stock exceeding 19.99% of
our outstanding common stock upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock. We cannot, however,
issue shares of common stock that would exceed 19.99% of our outstanding common
stock unless we obtain the approval of our shareholders. If we are required to
obtain this approval of our shareholders and we are unable to do so, we will be
forced to pay the holder of the Series B convertible preferred stock and the
Series C convertible preferred stock substantial penalties until we obtain this
approval. In addition, if shareholder approval is not obtained by a required
date, then the holder of the Series B convertible preferred stock and Series C
convertible preferred stock may force us to redeem all or a portion of the
preferred shares (the 19.99% test for each of the Series B convertible preferred
stock and the Series C convertible preferred stock is calculated based on the
number of shares of common stock outstanding on the date of such issuances).

<PAGE>

Short sales of our common stock may be attracted by or accompany conversions of
Series B convertible preferred stock and Series C convertible preferred stock,
which sales may cause downward pressure upon the price of our common stock

     Short sales of our common stock may be attracted by or accompany the sale
of converted common stock, which in the aggregate could cause downward pressure
upon the price of the common stock, regardless of our operating results, thereby
attracting additional short sales of the common stock. The result of conversions
of the Series B and Series C convertible preferred stock at declining conversion
prices would be increasing and substantial dilution of the interests of the
other holders of common stock.

If we fail to market and commercialize our Andrea Digital Signal Processing
Microphone and Software products, our revenues may not increase at a high enough
rate to improve our results of operations or at all.

     Our business, results of operations and financial condition depend on
successful commercialization of our Andrea DSP Microphone and Software products
and technologies. Since we began sales of the initial Andrea Anti-Noise products
in 1995, we have been expanding the number of products in this line. We
introduced our first Andrea Digital Super Directional Array products in 1998 and
we are initially targeting these and our other Andrea DSP Microphone and
Software products at the market for computer-based automobile monitoring and
control systems for use by drivers and passengers. This market is commonly
referred to as the automobile telematics market. The success of these products
is subject to the risks frequently encountered by companies in an early stage of
product commercialization, particularly companies in the computing and
communications industries.

If we are unable to obtain market acceptance of our voice interface and Internet
communications products and technologies or if market acceptance of these
products and technologies occurs at a slow rate, then our business, results of
operations and financial condition will be materially and adversely affected.

     We and our competitors are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications.
These products and technologies have been rapidly evolving and the number of our
competitors has grown, but the markets for these products and technologies are
subject to a high level of uncertainty and have been developing slowly. We,
alone or together with our industry, may be unsuccessful in obtaining market
acceptance of these products and technologies.

If we fail to develop and successfully introduce new products and technologies
in response to competition and evolving technology, we may not be able to
attract new customers or retain current customers.

     The markets in which we sell our Andrea Anti-Noise, Andrea DSP Microphone
and Software products and our Aircraft Communications products are highly
competitive. We may not compete successfully with any of our competitors. Most
of our current and potential competitors have significantly greater financial,
technology development, marketing, technical support and other resources than we
do. Consequently, these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or devote greater
resources to the development, marketing, and sale of their products than we can.
One or more of these competitors may independently develop technologies that are
substantially equivalent or superior to our technology. The introduction of
products incorporating new technologies could render our products obsolete and
unmarketable and could exert price pressures on existing products.

<PAGE>

     We are currently engaged in the development of digital signal processing
products and technologies for the voice, speech and natural language interface
markets. We may not succeed in developing these new digital signal processing
products and technologies, and any of these new digital signal processing
products or technologies may not gain market acceptance.

     In the markets for our Aircraft Communications products, we often compete
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying products and technologies for specific
military initiatives.

     Further, the markets for our products and technologies are characterized by
evolving industry standards and specifications that may require us to devote
substantial time and expense to adapt our products and technologies. We may not
successfully anticipate and adapt our products and technologies in a cost
effective and timely manner to changes in technology and industry standards or
to introductions of new products and technologies by others that render our then
existing products and technologies obsolete.

If our marketing collaborators do not effectively market those of their products
with which our products are included or incorporated, our sales growth could be
adversely affected.

     We have entered into several collaborative and distribution arrangements
with software publishers and computer hardware manufacturers relating to the
marketing and sale of Andrea Anti-Noise products and Andrea DSP Microphone and
Software products through inclusion or incorporation with the products of our
collaborators. Our success will therefore be dependent to a substantial degree
on the efforts of these collaborators to market those of their products with
which our products are included or incorporated. Our collaborators may not
successfully market these products. In addition, our collaborators generally are
not contractually obligated to any minimum level of sales of our products or
technologies, and we have no control over their marketing efforts. Furthermore,
our collaborators may develop their own microphone, earphone or headset products
that may replace our products or technologies or to which they may give higher
priority.

If we fail to maintain sales of Andrea Anti-Noise products and Andrea DSP
Microphone and Software products to IBM, we would experience a material adverse
effect on our business, results of operations and financial condition.

     We are substantially dependent on our product procurement relationship with
IBM. During the 2001 First Quarter, IBM and certain of IBM's affiliates,
distributors, licensees and integrators accounted for 21% of our net sales.
While we are a party to a procurement agreement with IBM covering the purchase
by IBM of certain of our Andrea Anti-Noise microphone and earphone products for
inclusion with certain of IBM's personal computer products, IBM is not obligated
to purchase these products and is free to purchase microphone and earphone
products and technologies from our competitors. Our failure to maintain sales of
Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products to
IBM would have a material adverse effect on our business, results of operations
and financial condition.

Shortages of, or interruptions in, the supply of more specialized components for
our Andrea Anti-Noise products and Andrea DSP Microphone products could have a
material adverse effect on our sales of these products.

     We conduct assembly operations at our facilities in New York and Israel and
through subcontractors using purchased components. Some specialized components
for the Andrea Anti-Noise

<PAGE>

and Andrea DSP Microphone products, such as microphones and digital signal
processing boards, are available from a limited number of suppliers and subject
to long lead times. We may not be able to continue to obtain sufficient supplies
of these more specialized components, particularly if our sales of Andrea Anti-
Noise and Andrea DSP microphone products increase substantially or market demand
for these components otherwise increases.

If our subcontractor fails to meet our production and shipment schedules, our
business, results of operations and financial condition would be materially and
adversely affected.

     We conduct assembly operations at our facilities in New York and Israel and
through subcontracting. During initial production runs of Andrea Anti-Noise and
Andrea DSP Microphone products, we perform assembly operations at our New York
facility from purchased components. As sales of any particular product increase,
assembly operations are primarily transferred to a subcontractor in Asia.

Our ability to compete may be limited by our failure to adequately protect our
intellectual property or by patents granted to third parties.

     We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees, licensees
and potential licensees, limited access to and dissemination of our proprietary
information, and other measures to protect our intellectual property and
proprietary rights. However, the steps that we have taken to protect our
intellectual property may not prevent its misappropriation or circumvention. In
addition, numerous patents have been granted to other parties in the fields of
noise cancellation, noise reduction, computer voice recognition, digital signal
processing and related subject matter. We expect that products in these fields
will increasingly be subject to claims under these patents as the numbers of
products and competitors in these fields grow and the functionality of products
overlap. Claims of this type could have an adverse effect on our ability to
manufacture and market our products or to develop new products and technologies,
because the parties holding these patents may refuse to grant licenses or only
grant licenses with onerous royalty requirements. Moreover, the laws of other
countries do not protect our proprietary rights to our technologies to the same
extent as the laws of the United States.

An unfavorable ruling in any current litigation proceeding or future proceeding
may adversely affect our business, results of operations and financial
condition.

     From time to time we are subject to litigation incidental to our business.
For example, we are subject to the risk of adverse claims, interference
proceedings before the U.S. Patent and Trademark Office, oppositions to patent
applications outside the United States, and litigation alleging infringement of
the proprietary rights of others. Litigation to establish the validity of
patents, to assert infringement claims against others, and to defend against
patent infringement claims can be expensive and time-consuming, even if the
outcome is in our favor.

     On November 17, 1998 a complaint was filed against us in the U.S. District
Court for the Eastern District of New York by NCT Group, Inc. and NCT Hearing
Products, Inc., one of NCT's subsidiaries, requesting a declaration that two of
our patents, which relate to active noise reduction technology applicable to
aircraft passenger headphones, are invalid and unenforceable and that these
patents are not being infringed by NCT's products. The complaint also seeks to
enjoin us from engaging in certain alleged activities and seeks compensatory
damages of not less than $5 million, punitive damages of not less than $50
million and plaintiffs' costs and attorneys' fees.

<PAGE>

     On December 30, 1998, we filed and served an answer to the NCT complaint,
denying the allegations and asserting affirmative defenses and counterclaims.
The counterclaims seek injunctive relief for patent infringement, trademark
infringement, false designation of origin and unfair competition. We are also
seeking exemplary and punitive damages, prejudgment interest on all damages,
costs, reasonable attorneys' fees and expenses. During the second half of 1999,
both NCT and Andrea submitted briefs to the court on whether to have an early
hearing on the meaning of the claims in the two Andrea patents. This type of
hearing is called a "Markman Hearing." We are unable to anticipate when the
court will issue a decision on this question. We and NCT are proceeding with
discovery, including document production and depositions. If this suit is
ultimately resolved in favor of NCT, we could be materially adversely effected.
We believe, however, that NCT's allegations are without merit and we intend to
vigorously defend ourselves and to assert against NCT the claims described
above.

     On March 11, 1999, we were notified about a claim filed with the New
York State Environmental Protection and Spill Compensation Fund by the owners
(Mark J. Mergler and Ann Mergler) of property adjoining our former Long Island
City facility. This claim alleges property damages arising from petroleum
migrating from our former facility and was purportedly detected in the basement
of the claimants' property. In their claim to the fund, the claimants alleged
that their property has been damaged and that they have incurred remedial costs.
In the event the fund honors this claim in whole or in part, we may be liable to
reimburse the fund. The New York State Department of Environmental Conservation
has asserted a demand that we investigate and remediate the discharge of
petroleum from a fuel oil storage tank at our former Long Island City facility,
and determine whether the petroleum discharge has migrated to the claimants'
adjoining property.

     We engaged environmental consultants to investigate the discharge from the
fuel oil storage tank and we are currently funding remediation work. We denied,
however, the allegations that any petroleum discharge has migrated to the
claimant's property and objected to the claim made by the claimant to the fund.
On September 2, 1999, a civil action related to this matter was commenced in the
Nassau County Supreme Court by Mark J. Mergler and Ann Mergler. The plaintiffs
allege that the fuel oil released from the heating system of our former facility
has migrated beneath and onto the neighboring property causing in excess of
$1,000,000 in direct and consequential damages. The plaintiffs' allegations
against us include, negligence, nuisance and strict liability under the New York
State Navigation Law. We have submitted an answer denying the allegations and
all liability relating to the alleged property damage. This lawsuit is at an
early stage and we are unable to evaluate the likelihood of an unfavorable
outcome or estimate the amount or range of potential loss, if any.

Changes in economic and political conditions outside the United States could
adversely affect our business, results of operations and financial condition.

     We have been seeking to increase our sales to regions outside the United
States, particularly in Europe and areas in the Americas and Asia. For the three
months ended March 31, 2001, sales to customers outside the United States
accounted for approximately 23% of our net sales. International sales and
operations are subject to a number of risks, including:

 .    trade restrictions in the form of license requirements;

 .    restrictions on exports and imports and other government controls;

 .    changes in tariffs and taxes;

 .    difficulties in staffing and managing international operations;

 .    problems in establishing and managing distributor relationships;

<PAGE>

 .    general economic conditions; and

 .    political and economic instability or conflict.

     To date, we have invoiced our international sales in U.S. dollars, and have
not engaged in any foreign exchange or hedging transactions. We may not continue
to be able to invoice all our sales in U.S. dollars and to avoid engaging in
foreign exchange or hedging transactions. If we are required to invoice any
material amount of international sales in non-U.S. currencies, fluctuations in
the value of non-U.S. currencies relative to the U.S. dollar may adversely
affect our business, results of operations and financial condition or require us
to incur hedging costs to counter such fluctuations.

If we are unable to attract and retain the necessary managerial, technical and
other personnel necessary for our business, then our business, results of
operations and financial condition will be harmed.

     Our performance is substantially dependent on the performance of our
executive officers and key employees. The loss of the services of any of these
executive officers or key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future success
depends on our continuing ability to attract and retain additional highly
qualified managers and technical personnel. Competition for qualified personnel
is intense and we may not be able to attract, assimilate or retain qualified
personnel in the future.

Results Of Operations

  Quarter Ended March 31, 2001 Compared to the Quarter Ended March 31, 2000

Sales
-----

Sales for the 2001 First Quarter were $2,615,639, a decrease of 18% from sales
of $3,201,484 for the 2000 First Quarter. The decrease in sales for the 2001
First Quarter reflects an approximate 45% decrease in sales of Andrea Anti-Noise
Products to $1,320,926, or 51% of total sales, offset by an approximate 70%
increase in sales of our Aircraft Communications Products, to $1,026,916, or 39%
of total sales and an approximate 48% increase of Andrea DSP Microphone and
Software Products to $267,797, or 10% of total sales. The decreases in sales of
Andrea Anti-Noise Products is due to lower volume sales of PC headsets to the
Company's original equipment manufacturer (OEM) customers. The increase in sales
of our Aircraft Communications Products is a result of increased sales and
marketing effort focused on military intercom communication systems during the
second half of 2000 and during the 2001 First Quarter. The increase in Andrea
DSP Microphone and Software Products is primarily a result of initial shipments
of Andrea's automotive far-field microphones for hands-free communications. For
the 2001 First Quarter, sales of our computer headsets to IBM and certain of its
affiliates, distributors, licensees and integrators accounted for approximately
21% of our total sales. For the 2001 First Quarter, sales of our aircraft
communications products to the U.S. government accounted for approximately 22%
of our total sales.

Cost of Sales
-------------

Cost of sales as a percentage of sales for the 2001 First Quarter decreased to
73% from 75% for the 2000 First Quarter. This slight increase is primarily due
to the improved product mix of revenues over the 2000 First Quarter,
specifically, the increase in high margin aircraft communication revenues in the
2001 First Quarter, coupled with the elimination of certain fixed costs as a
result of cost reduction efforts implemented during the 2001 First Quarter.

Research and Development
------------------------

Research and development expenses for the 2001 First Quarter decreased 13% to
$998,900 from $1,150,478 for the 2000 First Quarter. This decrease is due
primarily to a reduction in expenses

<PAGE>

associated with research efforts which management determined were not integral
to the Andrea's core portfolio of digital microphone software and hardware
technologies. Notwithstanding this decrease, the relatively significant amount
of research and development spending when compared to total sales is comprised
primarily of Andrea's continuing efforts to develop and commercialize digital
microphone software and hardware technologies and products, which, in turn
management anticipates will yield future revenue streams from higher growth
markets. Specifically, DSP Microphone and Software Technology efforts were
$794,905, or 80% of total research and development expenses, Aircraft
Communications technology efforts were $74,891, or 7% of total research and
development expenses and Andrea Anti-Noise Product efforts were $129,104, or 13%
of total research and development expenses. With respect to DSP Microphone and
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 the Company's digital super directional array microphone
technology ("DSDA") and certain other related technologies obtained through the
acquisition of Lamar in May 1998. The Company believes that the acquisition of
Lamar significantly reinforces its position in digital signal processing by
extending the Company's marketing programs to other high-growth industries,
including automotive telematics, mobile device markets, the business
videoconferencing market and Internet telephony, among others. Specifically, the
core technology acquired produces noise filtering capabilities that management
believes is superior to other known DSP-based technologies in the marketplace,
and is unattainable in products using traditional mechanical solutions. In
addition, the nature of a DSP-based solution, together with the people acquired
supporting our technology, offers a solution that is highly scalable and
embeddable, and therefore enables the technology to be integrated into many
different applications and form factors. We believe that continued research and
development spending will provide the Company with a significant competitive
advantage. During the remainder of 2001, management expects total research and
development spending to continue at levels consistent with that of the 2001
First Quarter.


General, Administrative and Selling Expenses
--------------------------------------------

General, administrative and selling expenses increased approximately 8% to
$2,313,343 for the 2001 First Quarter from $2,141,298 for the 2000 First
Quarter. This increase is due primarily to the continuing high levels of sales
and marketing costs associated with Andrea's efforts in developing alliances in
the automotive telematics market space, coupled with the increase in sales and
marketing salaries associated with the reengineering of Andrea's sales and
marketing team during the 2000 Fourth Quarter.

The Company implemented a cost reduction plan aimed at cutting costs that are
not integral to the execution of the Company's overall strategy, and to ensure
conservative spending during the current period of economic uncertainty.
Included in the Company's cost reduction initiatives was a reduction in
workforce which was implemented during February of 2001, representing a
reduction of approximately 25% of the Company's then total workforce. As a
result of the cost reduction initiatives, general, administrative and selling
expenses decreased approximately 11% over the 2000 Fourth Quarter.


Miscellaneous Income (Expense)
------------------------------

Miscellaneous income for the 2001 First Quarter was $69,471 compared to other
expense of $4,846 for the 2000 First Quarter. This change is primarily due to
the lower levels of interest bearing debt in the 2001 First Quarter.

Provision for Income Taxes
--------------------------

The Company did not record income tax expense for the 2001 First Quarter in
light of the net loss recorded for the period. Furthermore, the realization of a
portion of the Company's reserved deferred tax assets, if and when realized,
will not result in a tax benefit in the consolidated statement of operations,
but will result in an increase in additional paid in capital as they are related
to tax benefits associated with the exercise of stock options. The Company will
be continually re-assessing its reserves on deferred income tax assets in future
periods on a quarterly basis. The determination as to the realization of
additional reserves is, and will be, based on Andrea's expectations of future
earnings. To the extent Andrea's management believes that, more likely than not,
previously reserved deferred tax assets will be realized, Andrea will reduce the
reserve accordingly.

Net Loss
--------

Net loss for the 2001 First Quarter was $2,546,487 compared to a net loss of
$2,484,621 for the 2000 First Quarter. The net loss for the 2001 First Quarter
principally reflects the factors described above.


<PAGE>

Liquidity And Capital Resources

The Company's principal sources of funds have historically been, and are
expected to continue to be, gross cash flows from operations and proceeds from
the sale of convertible notes and redeemable convertible preferred stock to
certain financial institutions. At March 31, 2001, we had cash and cash
equivalents of $7,345,008 compared with $9,151,835 at December 31, 2000. The
balance of cash and cash equivalents at March 31, 2001 is primarily a result of
the Company's issuance and sale in a private placement of $7,500,000 of its
Series C Redeemable Convertible Preferred Stock on October 10, 2000 (the "Series
C Preferred Stock"). The Company is using the net proceeds from the issuance of
the Series C Preferred Stock primarily for costs associated with:

     1)   research and development,

     2)   creating and maintaining strategic alliances, which includes, among
          other things, sales and marketing salaries, substantial travel costs
          to market our products and technologies, product fulfillment costs and
          technical assistance, and other general support costs for existing and
          potential partners,

     3)   payment of certain debt obligations,

     4)   professional fees, and

     5)   general working capital requirements.

In connection with the acquisition of Lamar, of the aggregate cash consideration
to be paid by the Company, $1,000,000 was paid on May 5, 1998, the closing date,
and $500,000 was paid on each of the six, twelve, twenty-four and thirty-six
month anniversaries of the closing date. The final payment, which is recorded as
current portion of long-term debt in the accompanying consolidated balance
sheet, was paid on May 5, 2001.

Working capital at March 31, 2001, was $12,912,723 compared to $15,035,051 at
December 31, 2000. The decrease in working capital reflects decreases in total
current assets and total current liabilities of $3,022,526 and $900,198,
respectively. The decrease in total current assets reflects a decrease in cash
of $1,806,827, a decrease in accounts receivable of $1,669,796, partially offset
by increase in inventory of $245,939 and an increase in prepaid expenses and
other current assets of $208,158. The decrease in current liabilities reflects a
decrease in trade accounts payable of $729,387 and a $177,829 decrease in other
current liabilities, offset, in part, by an increase in the current portion of
long term debt of $7,018.

The decrease in cash from December 31, 2000 to the period ending March 31, 2001
of $1,806,827 reflects $1,783,958 of net cash used in operating activities and
$22,869 of net cash used in investing activities.

The cash used in operating activities, excluding non-cash charges, is primarily
attributable to the $2,546,487 net loss for the 2001 First Quarter, a $245,939
increase in inventory, a $438,242 increase in prepaid and other current assets,
a $194,317 increase in other assets, a $729,387 decrease in accounts payable and
a $226,508 decrease in other current and long term liabilities, partially offset
by a $1,669,796 decrease in accounts receivable. The increase in prepaid
expenses and other current assets primarily includes the recognition of
increased premiums for prepaid property taxes and insurance, as well as
increases in other service costs related to the remainder of 2001. The decrease
in accounts payable and other current and long term liabilities as well as the
increase in inventory primarily reflect differences in the timing related to
both the payments for and the acquisition of raw materials as well as for other
services in connection with ongoing efforts related to the Andrea's various
product lines.

<PAGE>

The cash used in investing activities is primarily attributable to investments
in the Company's existing information systems, as well as, to a lesser extent,
capital expenditures consisting of the ongoing upgrade of manufacturing dies and
molds for Andrea Anti-Noise Products.

     Demand for the Company's products and technologies has required the Company
to raise additional working capital to support operations. In addition, the
acquisition of Lamar will require the Company to continue to provide working
capital to support Lamar's operations and to repay notes to the sellers of
Lamar. In December 1995, April 1996, August 1996 and June 1998, the Company
raised working capital through the issuance of convertible subordinated
debentures. In June 1999, the Company raised $7.5 million through the issuance
and sale of Series B Preferred Stock. In October 2000, the Company raised $7.5
million through the issuance and sale of Series C Preferred Stock. We believe
that our current levels of cash, anticipated gross cash flows from operations,
as well as our access to financing sources, provide sufficient liquidity and
capital resources to fund working capital requirements for at least twelve to
eighteen months. Notwithstanding the significance of sales of Andrea Anti-Noise
Products as a percentage of our total sales during 2000, we cannot assure that
demand will continue for these products or any of our other products, including
future products related to our Andrea Digital Signal Processing Microphone and
Software Technologies, or, that if such demand does exist, that we will be able
to obtain the necessary working capital to increase production and marketing
resources to meet such demand on favorable terms, or at all.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our principal source of financing activities is the issuance of convertible debt
with financial institutions. We are affected by market risk exposure primarily
through any amounts payable in stock, or cash by us under convertible
securities. A significant rise in interest rates could materially adversely
affect our financial condition and results of operations. We do not utilize
derivative financial instruments to hedge against changes in interest rates or
for any other purpose. In addition, substantially all transactions by us are
denominated in U.S. dollars. As such, we have shifted foreign currency exposure
onto our foreign customers. As a result, if exchange rates move against foreign
customers, we could experience difficulty collecting unsecured accounts
receivable, the cancellation of existing orders or the loss of future orders.
The foregoing could materially adversely affect our business, financial
condition and results of operations.

                          PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Cautionary Statement Regarding Forward-
Looking Statements--An unfavorable ruling in any current litigation proceeding
or future proceeding may adversely affect our business, results of operations
and financial condition" and Note 10 to the unaudited financial statements in
this quarterly report for a discussion of the legal proceedings of the Company.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

         None.

ITEM 5.  OTHER INFORMATION.

         None.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         None.

(b)      Reports on Form 8-K

On March 1, 2001, the Company filed a Current Report on Form 8-K reporting the
release of its earnings for the quarter and year ended December 31, 2000. The
press release announcing the Company's earnings was attached as an exhibit to
the Form 8-K.

<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


ANDREA ELECTRONICS CORPORATION

<TABLE>
<S>                                    <C>                                         <C>
/s/ Christopher P. Sauvigne            Co-Chairman and Co-Chief                    May 15, 2001
------------------------------           Executive Officer
    Christopher P. Sauvigne


/s/ Richard A. Maue                    Senior Vice President, Chief                May 15, 2001
------------------------------           Financial Officer, and Secretary
    Richard A. Maue
</TABLE>