UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM
10-Q




(Mark
One)




(X)
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For the quarterly period ended June 30,
  2009




OR




(   )
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For
      the transition period from ____________ to
    ____________




Commission
file number 1-4324









ANDREA
ELECTRONICS CORPORATION





(Exact
name of registrant as specified in its charter)




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




Indicate
by check mark whether the registrant (1) has filed all reports required to by
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈     No
 ̈




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




Large
      Accelerated Filer o
                                                                                                                              
                                                                                                                              Accelerated
      Filer                   oNon-Accelerated
      Filer   o
                                                                                                                              
                                                                                                                              Smaller
      Reporting Company x(Do
      not check if a smaller reporting company)


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈  No x




Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  As of August 11, 2009,
there were 63,355,023 common shares outstanding.









PART
I. FINANCIAL
INFORMATION




ITEM
1. FINANCIAL
STATEMENTS




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30,
                          
                          
                          December
      31,2009
                          
                          
                          2008ASSETS
                          
                          (unaudited)Current
      assets:Cash
                          
                          $
                          1,764,606
                          
                          
                          $
                          1,006,951Accounts
      receivable, net of allowance for doubtful accounts of $6,565 and $7,815,
      respectively
                          
                          
                          633,993
                          
                          
                          
                          804,433Inventories,
      net
                          
                          
                          561,202
                          
                          
                          
                          868,213Short
      term customer deposit
                          
                          
                          130,854
                          
                          
                          
                          -Prepaid
      expenses and other current assets
                          
                          
                          123,001
                          
                          
                          
                          124,695Total
      current assets
                          
                          
                          3,213,656
                          
                          
                          
                          2,804,292Property
      and equipment, net
                          
                          
                          69,163
                          
                          
                          
                          60,904Intangible
      assets, net
                          
                          
                          2,329,157
                          
                          
                          
                          2,543,781Other
      assets, net
                          
                          
                          12,864
                          
                          
                          
                          12,864Total
      assets
                          
                          $
                          5,624,840
                          
                          
                          $
                          5,421,841LIABILITIESANDSHAREHOLDERS’
      EQUITYCurrent
      liabilities:Trade
      accounts payable
                          
                          $
                          524,049
                          
                          
                          $
                          272,439Accrued
      Series C Preferred Stock Dividends
                          
                          
                          149,912
                          
                          
                          
                          149,912Short-term
      deferred revenue
                          
                          
                          170,854
                          
                          
                          
                          40,000Other
      current liabilities
                          
                          
                          148,700
                          
                          
                          
                          145,252Total
      current liabilities
                          
                          
                          993,515
                          
                          
                          
                          607,603Series
      B Redeemable Convertible Preferred Stock, $.01 par value; authorized:
      1,000 shares; issued and outstanding: 0 sharesCommitments
      and contingenciesShareholders’
      equity:Preferred
      stock, $.01 par value; authorized: 2,497,500 shares; none issued and
      outstanding
                          
                          
                          -
                          
                          
                          
                          -Series
      C Convertible Preferred Stock, net, $.01 par value; authorized: 1,500
      shares; issued and outstanding: 89.7 shares; liquidation value:
      $897,015
                          
                          
                          1
                          
                          
                          
                          1Series
      D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000
      shares; issued and outstanding: 1,050,001 shares; liquidation value:
      $1,050,001
                          
                          
                          10,500
                          
                          
                          
                          10,500Common
      stock, $.01 par value; authorized: 200,000,000 shares; issued and
      outstanding: 60,978,373 shares
                          
                          
                          609,784
                          
                          
                          
                          609,784Additional
      paid-in capital
                          
                          
                          76,932,912
                          
                          
                          
                          76,814,249Accumulated
      deficit
                          
                          
                          (72,921,872
                          )
                          
                          
                          (72,620,296
                          )Total
      shareholders’ equity
                          
                          
                          4,631,325
                          
                          
                          
                          4,814,238Total
      liabilities and shareholders’ equity
                          
                          $
                          5,624,840
                          
                          
                          $
                          5,421,841










See Notes
to Condensed Consolidated Financial Statements.




2




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30,
                    2009
                
                
                June
      30,
                    2008
                
                
                June
      30,
                    2009
                
                
                June
      30,
                    2008RevenuesNet
      product revenues
                
                $
                915,554
                
                
                $
                817,136
                
                
                $
                1,538,293
                
                
                $
                1,613,558License
      revenues
                
                
                282,007
                
                
                
                390,115
                
                
                
                480,848
                
                
                
                520,333Revenues
                
                
                1,197,561
                
                
                
                1,207,251
                
                
                
                2,019,141
                
                
                
                2,133,891Cost
      of revenues
                
                
                535,898
                
                
                
                474,582
                
                
                
                858,643
                
                
                
                959,717Gross
      margin
                
                
                661,663
                
                
                
                732,669
                
                
                
                1,160,498
                
                
                
                1,174,174Research
      and development expenses
                
                
                142,853
                
                
                
                185,341
                
                
                
                292,366
                
                
                
                378,745General,
      administrative and selling expenses
                
                
                538,658
                
                
                
                556,273
                
                
                
                1,173,079
                
                
                
                1,166,447Loss
      from operations
                
                
                (19,848
                )
                
                
                (8,945
                )
                
                
                (304,947
                )
                
                
                (371,018
                )Interest
      income, net
                
                
                2,444
                
                
                
                1,697
                
                
                
                4,936
                
                
                
                4,571Loss
      before provision for income taxes
                
                
                (17,404
                )
                
                
                (7,248
                )
                
                
                (300,011
                )
                
                
                (366,447
                )Provision
      for income taxes
                
                
                308
                
                
                
                1,643
                
                
                
                1,565
                
                
                
                3,716Net
      loss
                
                $
                (17,712
                )
                
                $
                (8,891
                )
                
                $
                (301,576
                )
                
                $
                (370,163
                )Basic
      and diluted weighted average shares
                
                
                60,978,373
                
                
                
                59,861,193
                
                
                
                60,978,373
                
                
                
                59,861,193Basic
      and diluted net loss per share
                
                $
                (.00
                )
                
                $
                (.00
                )
                
                $
                (.00
                )
                
                $
                (.01
                )










See Notes
to Condensed Consolidated Financial Statements.




3




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


FOR THE
SIX MONTHS ENDED JUNE 30, 2009


(UNAUDITED)





Series
      C Convertible Preferred Stock Outstanding
                  
                  
                  Series
      C Convertible Preferred Stock
                  
                  
                  Series
      D Convertible Preferred Stock Outstanding
                  
                  
                  Series
      D Convertible Preferred Stock
                  
                  
                  Common
                      Stock
                      Shares
                      Outstanding
                  
                  
                  Common
                      Stock
                  
                  
                  Additional
                      Paid-In
                      Capital
                  
                  
                  Accumulated
                      Deficit
                  
                  
                  Total
                      Shareholders’
                      EquityBalance,
      January 1, 2009
                  
                  
                  89.701477
                  
                  
                  $
                  1
                  
                  
                  
                  1,050,001
                  
                  
                  $
                  10,500
                  
                  
                  
                  60,978,373
                  
                  
                  $
                  609,784
                  
                  
                  $
                  76,814,249
                  
                  
                  $
                  (72,620,296
                  )
                  
                  $
                  4,814,238Stock-based
      Compensation Expense related to Stock Grants to Outside
      Directors
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,001
                  
                  
                  
                  -
                  
                  
                  
                  10,001Stock-based
      Compensation Expense related to Stock Option Grants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  108,662
                  
                  
                  
                  -
                  
                  
                  
                  108,662Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (301,576
                  )
                  
                  
                  (301,576
                  )Balance,
      June 30, 2009
                  
                  
                  89.701477
                  
                  
                  $
                  1
                  
                  
                  
                  1,050,001
                  
                  
                  $
                  10,500
                  
                  
                  
                  60,978,373
                  
                  
                  $
                  609,784
                  
                  
                  $
                  76,932,912
                  
                  
                  $
                  (72,921,872
                  )
                  
                  $
                  4,631,325









See Notes
to Condensed Consolidated Financial Statements.




4




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





For
      the Six Months EndedJune
      30, 2009
                  
                  
                  June
      30, 2008Cash
      flows from operating activities:Net loss
                  
                  $
                  (301,576
                  )
                  
                  $
                  (370,163
                  )Adjustments to reconcile net loss
      to net cash provided by operating activities:Depreciation and
      amortization
                  
                  
                  257,303
                  
                  
                  
                  251,655Stock-based compensation
      expense
                  
                  
                  118,663
                  
                  
                  
                  116,639Provision for bad
      debt
                  
                  
                  -
                  
                  
                  
                  -Inventory reserve
                  
                  
                  (45,324
                  )
                  
                  
                  22,979Change in:Accounts
    receivable
                  
                  
                  170,440
                  
                  
                  
                  460,776Inventories
                  
                  
                  352,335
                  
                  
                  
                  (79,084
                  )Short term customer
      deposit
                  
                  
                  (130,854
                  )
                  
                  
                  -Prepaid expenses and other
      current assets
                  
                  
                  1,694
                  
                  
                  
                  348Trade accounts
      payable
                  
                  
                  251,610
                  
                  
                  
                  (148,978
                  )Short-term deferred
      revenue
                  
                  
                  130,854
                  
                  
                  
                  -Other current
      liabilities
                  
                  
                  3,448
                  
                  
                  
                  3,890Net cash provided by operating
      activities
                  
                  
                  808,593
                  
                  
                  
                  258,062Cash
      flows from investing activities:Purchases of property and
      equipment
                  
                  
                  (27,649
                  )
                  
                  
                  (19,042
                  )Purchases of patents and
      trademarks
                  
                  
                  (23,289
                  )
                  
                  
                  (34,714
                  )Net cash used in investing
      activities
                  
                  
                  (50,938
                  )
                  
                  
                  (53,756
                  )Net
      increase in cash and cash equivalents
                  
                  
                  757,655
                  
                  
                  
                  204,306Cash,
      beginning of period
                  
                  
                  1,006,951
                  
                  
                  
                  811,403Cash,
      end of period
                  
                  $
                  1,764,606
                  
                  
                  $
                  1,015,709Supplemental
      disclosures of cash flow information:Cash
      paid for:Income Taxes
                  
                  $
                  6,327
                  
                  
                  $
                  12,796








See Notes
to Condensed Consolidated Financial Statements.




5




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




Note
1. Basis
of Presentation and Management’s Liquidity Plans





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





These
unaudited, condensed consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the
instructions to Form 10-Q.  Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements.  In addition, the December 31, 2008 balance sheet data was
derived from the audited consolidated financial statements, but does not include
all disclosures required by GAAP.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations of any interim
period are not necessarily indicative of the results of operations to be
expected for any other interim period or for the fiscal year.





These
unaudited condensed consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended December 31, 2008 included in the Company's Form 10-K
for the fiscal year ended December 31, 2008, filed on March 31,
2009.  The accounting policies used in preparing these unaudited
condensed consolidated interim financial statements are consistent with those
described in the December 31, 2008 audited consolidated financial
statements.





Management's Liquidity
Plans - As of June 30, 2009, Andrea had working capital of $2,220,141 and
cash on hand of $1,764,606.  Andrea’s loss from operations was $19,848
for the three months ended June 30, 2009.  Andrea incurred a loss from
operations of $304,947 for the six months ended June 30, 2009.  Andrea
plans to continue to improve its cash flows during 2009 by aggressively pursuing
additional licensing opportunities related to Andrea DSP Audio Software and
increasing its Andrea Anti-Noise Headset Products sales through sales of a
refreshed product line, which the Company introduced in September 2008, as well
as the increased efforts the Company is dedicating to its sales and marketing
efforts.  However, there can be no assurance that Andrea will be able
to successfully execute the aforementioned plans.





As of
August 11, 2009, Andrea has approximately $1,800,000 of cash. Management
projects that Andrea has sufficient liquidity available to operate through at
least June 2010.  While Andrea explores opportunities to increase
revenues in new business areas, the Company also continues to examine additional
opportunities for cost reduction and further diversification of its
business.  Since the third quarter of 2006, Andrea has generated cash
flows from operations.  If Andrea fails to develop additional revenues
from sales of its products and licensing of its technology or to generate
adequate funding from operations, or if Andrea fails to obtain additional
financing through a capital transaction or other type of financing, Andrea will
be required to continue to significantly reduce its operating expenses and/or
operations or Andrea may have to relinquish its products, technologies or
markets which could have a materially adverse effect on revenue and operations.
Andrea has no commitment for additional financing and may experience difficulty
in obtaining additional financing on favorable terms, if at all.





Note
2. Summary
of Significant Accounting Policies





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





For
      the Three and Six Months EndedJune
      30, 2009
                    
                    
                    June
      30, 2008Total
      potential common shares as of:Options
      to purchase common stock (Note 7)
                    
                    
                    14,526,820
                    
                    
                    
                    9,691,820Series
      C Convertible Preferred Stock and related accrued dividends (Note
      3)
                    
                    
                    4,103,984
                    
                    
                    
                    4,149,736Series
      D Convertible Preferred Stock (Note 4)
                    
                    
                    4,200,004
                    
                    
                    
                    9,929,776Total
      potential common shares
                    
                    
                    22,830,808
                    
                    
                    
                    23,771,332





Cash - Cash includes
cash and highly liquid investments with original maturities of three months or
less.  At times during the periods ended June 30, 2009 and December
31, 2008, the Company had cash deposits in excess of the maximum amounts insured
by the Federal Deposit Insurance Corporation insurance limits.  At
June 30, 2009, the Company’s cash is held at three financial
institutions.




6




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




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





For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30,
                    2009
                
                
                June
      30,
                    2008
                
                
                June
      30,
                    2009
                
                
                June
      30,
                    2008Customer
      A
                
                
                17
                %
                
                
                *
                
                
                
                12
                %
                
                
                *Customer
      B
                
                
                *
                
                
                
                14
                %
                
                
                *
                
                
                
                16
                %Customer
      C
                
                
                19
                %
                
                
                24
                %
                
                
                19
                %
                
                
                13
                %


_________________


* Amounts
are less than 10%





Customer A
accounted for approximately 32% of total accounts receivable at June 30,
2009.  Customer C and Customer B accounted for approximately 61% and
13%, respectively, of total accounts receivable at December 31,
2008.





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





For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30,
                    2009
                
                
                June
      30,
                    2008
                
                
                June
      30,
                    2009
                
                
                June
      30,
                    2008Supplier
      A
                
                
                100
                %
                
                
                44
                %
                
                
                84
                %
                
                
                25
                %Supplier
      B
                
                
                *
                
                
                
                34
                %
                
                
                *
                
                
                
                54
                %Supplier
      C
                
                
                *
                
                
                
                *
                
                
                
                *
                
                
                
                10
                %Supplier
      D
                
                
                *
                
                
                
                *
                
                
                
                16
                %
                
                
                *


_________________


* Amounts
are less than 10%





At June
30, 2009, Supplier A accounted for approximately $393,379, or 75% of accounts
payable.  At December 31, 2008, Supplier A accounted for approximately
$137,000 or 50% of accounts payable.





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





Inventories -
Inventories are stated at the lower of cost (on a first-in, first-out) or market
basis.  The cost elements of inventories include materials, labor and
overhead.  Andrea reviews its inventory reserve for obsolescence on a
quarterly basis and establishes reserves on inventories when the cost of the
inventory is not expected to be recovered.  Andrea’s policy is to
reserve for inventory that shows slow movement over the preceding six
consecutive quarters.  Andrea records charges in inventory reserves as
part of its cost of revenues.





June
      30, 2009
                  
                  
                  December
      31, 2008Raw
      materials
                  
                  $
                  31,394
                  
                  
                  $
                  31,550Work
      in Process
                  
                  
                  -
                  
                  
                  
                  36,291Finished
      goods
                  
                  
                  1,186,305
                  
                  
                  
                  1,502,1931,217,699
                  
                  
                  
                  1,570,034Less:
      reserve for obsolescence
                  
                  
                  (656,497
                  )
                  
                  
                  (701,821
                  )$
                  561,202
                  
                  
                  $
                  868,213




7




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




Intangible and Long-Lived
Assets - Andrea accounts for its long-lived assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” for purposes of determining and
measuring impairment of its long-lived assets (primarily intangible assets)
other than goodwill. Andrea’s policy is to periodically review the value
assigned to its long-lived assets to determine if they have been permanently
impaired by adverse conditions which may affect Andrea. If Andrea identifies a
permanent impairment such that the carrying amount of Andrea’s long lived assets
are not recoverable using the sum of an undiscounted cash flow projection (gross
margin dollars from product revenues), a new cost basis for the impaired asset
will be established. If required, an impairment charge is recorded based on an
estimate of future discounted cash flows.  This new cost basis will be
net of any recorded impairment.  At June 30, 2009 and December 31,
2008, Andrea concluded that the Andrea DSP Microphone and Audio Software
Products business segment was not required to be tested for
recoverability.





Andrea
amortizes its core technology, patents and trademarks on a straight-line basis
over the estimated useful lives of its intangible assets that range from 15 to
17 years.  For the three-month periods ended June 30, 2009 and 2008,
amortization expense was $119,024 and $119,177, respectively.  For the
six-month periods ended June 30, 2009 and 2008, amortization expense was
$237,913 and $237,491, respectively.





Revenue Recognition –
Non-software related revenue, which is generally comprised of microphones and
microphone connectivity product revenues, is recognized when title and risk of
loss pass to the customer, which is generally upon shipment.  With
respect to licensing revenues, Andrea recognizes revenue in accordance with
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended,
and Staff Accounting Bulletin Topic 13 “Revenue Recognition in Financial
Statements.”  License revenue is recognized based on the terms and
conditions of individual contracts (see Note 5).  In addition, fee
based services, which are short-term in nature, are generally performed on a
time-and-material basis under separate service arrangements and the
corresponding revenue is generally recognized as the services are
performed.





Income Taxes - The
provision for income taxes is a result of certain licensing revenues that are
subject to withholding of income tax as mandated by the foreign jurisdiction in
which the revenues are earned.  For all other income taxes, Andrea
accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes” and Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”).  SFAS No. 109 requires an asset and
liability approach for financial accounting and reporting for income
taxes.  FIN 48 establishes for all entities a minimum threshold for
financial statement recognition of the benefit of tax positions, and requires
certain expanded disclosures.  Using both of the guidelines set forth
in these statements, the provision for income taxes is based upon income or loss
after adjustment for those permanent items that are not considered in the
determination of taxable income. Deferred income taxes represent the tax effects
of differences between the financial reporting and tax bases of the Company’s
assets and liabilities at the enacted tax rates in effect for the years in which
the differences are expected to reverse.  The Company evaluates the
recoverability of deferred tax assets and establishes a valuation allowance when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.  Since cumulative losses weigh heavily in the
overall assessment, Andrea provides a full valuation allowance on future tax
benefits until it can sustain a level of profitability that demonstrates its
ability to utilize the assets, or other significant positive evidence arises
that suggests Andrea’s ability to utilize such assets.  If it becomes
more likely than not that a tax asset will be used, the related valuation
allowance on such assets would be reversed.  Management makes
judgments as to the interpretation of the tax laws that might be challenged upon
an audit and cause changes to previous estimates of tax liability.  In
management’s opinion, adequate provisions for income taxes have been made for
all years.  If actual taxable income by tax jurisdiction varies from
estimates, additional allowances or reversals of reserves may be
necessary.  Income tax expense consists of the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.  The Company has identified its federal tax return and
its state tax return in New York as "major" tax jurisdictions, as defined in FIN
48.  Based on the Company's evaluation, it has been concluded that
there are no significant uncertain tax positions requiring recognition in the
Company's financial statements.  The Company's evaluation was
performed for tax years ended 2003 through 2008.  The Company believes
that its income tax positions and deductions will be sustained on audit and does
not anticipate any adjustments that will result in a material change to its
financial position.





Stock-Based
Compensation - At June 30, 2009, Andrea had three stock-based employee
compensation plans, which are described more fully in Note 7.  Andrea
accounts for stock based compensation in accordance with SFAS No. 123R,
“Share-Based Payment.”  SFAS No. 123R establishes accounting for
stock-based awards exchanged for employee services.  Under the
provisions of SFAS No. 123R, share-based compensation cost is measured at the
grant date, based on the fair value of the award, and is recognized as expense
over the employee’s requisite service period (generally the vesting period of
the equity grant).  The fair value of the Company’s common stock
options are estimated using the Black Scholes option-pricing model with the
following assumptions:  expected volatility, dividend rate, risk free
interest rate and the expected life.  The Company expenses stock-based
compensation by using the straight-line method.  In accordance with
SFAS No. 123R, excess tax benefits realized from the exercise of stock-based
awards are classified in cash flows from financing activities.  The
future realization of the reserved deferred tax assets related to these tax
benefits associated with the exercise of stock options will result in a credit
to additional paid in capital if the related tax deduction reduces taxes
payable.  The Company has elected the “with and without approach”
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce taxes payable in the current year.   Under
this approach the windfall tax benefit would be recognized in additional
paid-in-capital only if an incremental tax benefit is realized after considering
all other benefits presently available.




8




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable to the Company for fiscal 2009. SFAS
141R would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement. The adoption of this pronouncement did not
have any material effects on the Company’s consolidated financial position,
results of operations or cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any noncontrolling
interests as a separate component of stockholders’ equity.  The
Company would also be required to present any net income allocable to
noncontrolling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of operations. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the noncontrolling
interests of any non wholly-owned businesses acquired in the future. The
adoption of this pronouncement did not have any material effects on the
Company’s consolidated financial position, results of operations or cash
flows.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133”, which amends and
expands the disclosure requirements of SFAS 133 to require qualitative
disclosure about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. This statement was effective for the Company beginning on
January 1, 2009. The adoption of this statement did not impact the Company’s
current disclosures.





In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not
permitted.  The adoption of this statement did not have an effect on
the Company’s consolidated financial position, liquidity, or results of
operations.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.”  This
Statement sets forth: 1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; 2)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This Statement is effective for interim
and annual periods ending after June 15, 2009. The Company adopted this
Statement in the quarter ended June 30, 2009. This Statement did not impact the
Company’s consolidated financial position and results of
operations.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”).  SFAS 167 eliminates Interpretation 46(R)’s
exceptions to consolidating qualifying special-purpose entities, contains new
criteria for determining the primary beneficiary, and increases the frequency of
required reassessments to determine whether a company is the primary beneficiary
of a variable interest entity.  SFAS 167 also contains a new
requirement that any term, transaction, or arrangement that does not have a
substantive effect on an entity’s status as a variable interest entity, a
company’s power over a variable interest entity, or a company’s obligation to
absorb losses or its right to receive benefits of an entity must be disregarded
in applying Interpretation 46(R)’s provisions.  The elimination of the
qualifying special-purpose entity concept and its consolidation exceptions means
more entities will be subject to consolidation assessments and
reassessments.  SFAS 167 will be effective January 1,
2010.  We do not expect the adoption of SFAS 167 to have any impact on
our financial statements or results of operations.




9




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


In July
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (“SFAS 168”).  SFAS 168 establishes the FASB
Accounting Standards Codification to become the source of authoritative U.S.
GAAP recognized by the FASB to be applied by non-governmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants.  On the effective
date of this Statement, the Codification will supercede all then-existing
non-SEC accounting and reporting standards.  All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative.  SFAS 168, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. We do not expect the adoption of SFAS 168 to
materially impact our financial statements or results of
operations.





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





Use of Estimates -
The preparation of financial statements in conformity with GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.





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





Subsequent Events –
The Company has evaluated events that occurred subsequent to June 30, 2009
through August 14, 2009, the date on which the financial statements for the
period ended June 30, 2009 were issued.  Except as disclosed in Note
3, 4 6 and 7 to these financial statements, management concluded that no other
events required disclosure in these financial statements.





Note
3. Series
C Redeemable Convertible Preferred Stock





On October
10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C
Redeemable Convertible Preferred Stock (the “Series C Preferred
Stock”).  Each of these shares of Series C Preferred Stock had a
stated value of $10,000 plus a $1,671 increase in the stated value, which sum is
convertible into Common Stock at a conversion price of $0.2551.  On
February 17, 2004, Andrea announced that it had entered into an Exchange and
Termination Agreement and an Acknowledgment and Waiver Agreement, which
eliminated the dividend of 5% per annum on the stated value.  The
additional amount of $1,671 represents the 5% per annum from October 10, 2000
through February 17, 2004.  The shares of Series C Preferred Stock are
subject to antidilution provisions, which are triggered in the event of certain
stock splits, recapitalizations, or other dilutive transactions.  In
addition, issuances of common stock at a price below the conversion price then
in effect (currently $0.2551), or the issuance of warrants, options, rights, or
convertible securities which have an exercise price or conversion price less
than that conversion price, other than for certain previously outstanding
securities and certain “excluded securities” (as defined in the certificate of
amendment), require the adjustment of the conversion price to that lower price
at which shares of common stock have been issued or may be
acquired.  In the event that Andrea issues securities in the future
which have a conversion price or exercise price which varies with the market
price and the terms of such variable price are more favorable than the
conversion price in the Series C Preferred Stock, the purchasers may elect to
substitute the more favorable variable price when making conversions of the
Series C Preferred Stock.





In
accordance with EITF 07-5, Andrea evaluated the Series C Preferred Stock and
concluded that it is not indexed to the Company’s stock because of the
conversion price adjustment feature described above.  Accordingly,
under the provisions of SFAS 133, Andrea evaluated the Series C Preferred Stock
embedded conversion feature.  The Company has concluded that the
embedded conversion feature would be classified in stockholders’ equity if it
were a freestanding instrument as the Series C Preferred Stock is more akin to
equity and as such it should not be bifurcated from the Series C instrument and
accounted for separately.




10


ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


As of June
30, 2009, there were 89.701477 shares of Series C Preferred Stock outstanding,
which were convertible into 4,103,984 shares of Common Stock and remaining
accrued dividends of $149,912.





On July
17, 2009, 37.47 shares of Series C Preferred Stock, together with related
accrued dividends, were converted into 1,714,314 shares of Common Stock at a
conversion price of $0.2551.





Note
4. Series
D Redeemable Convertible Preferred Stock





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





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





The shares
of Series D Preferred Stock are also subject to antidilution provisions, which
are triggered in the event of certain stock splits, recapitalizations, or other
dilutive transactions. In addition, issuances of common stock at a price below
the conversion price then in effect (currently $0.25), or the issuance of
warrants, options, rights, or convertible securities which have an exercise
price or conversion price less than that conversion price, other than for
certain previously outstanding securities and certain “excluded securities” (as
defined in the certificate of amendment), require the adjustment of the
conversion price to that lower price at which shares of common stock have been
issued or may be acquired. In the event that Andrea issues securities in the
future which have a conversion price or exercise price which varies with the
market price and the terms of such variable price are more favorable than the
conversion price in the Series D Preferred Stock, the purchasers may elect to
substitute the more favorable variable price when making conversions of the
Series D Preferred Stock.  The Company is required to maintain an
effective registration statement from the time of issuance until the earlier of
(i) the date as of which the investors may sell all of the securities for the
common stock issuable under the Series D Preferred Stock covered by the
registration statement without restriction under SEC rules or (ii) the date on
which the investors shall have sold all the securities covered by the
registration statement.  In addition, the Company is required to use
its best efforts to secure the inclusion for quotation on the Over the Counter
Bulletin Board for the common stock issuable under the Series D Preferred Stock
and to arrange for at least two market makers to register with the National
Association of Securities Dealers, Inc. In the event that the holder of the
Series D Preferred Stock and related warrants is unable to convert these
securities into Andrea Common Stock the Company shall pay to each such holder of
such registrable securities a Registration Delay Payment.  This
payment is to be paid in cash and is equal to the product of (i) the stated
value of such Preferred Shares multiplied by (ii) the product of (1) .0005
multiplied by (2) the number of days that sales cannot be made pursuant to the
Registration Statement (excluding any days during that may be considered grace
periods as defined by the Registration Rights Agreement).





In
accordance with EITF 07-5, Andrea evaluated the Series D Preferred Stock and
concluded that it is not considered to be indexed to the Company’s stock because
of the conversion price adjustment feature described
above.  Accordingly, under the provisions of SFAS 133, Andrea
evaluated the Series D Preferred Stock embedded conversion
feature.  The Company has concluded that the embedded conversion
feature would be classified in stockholders’ equity if it were a freestanding
instrument as the Series D Preferred Stock is more akin to equity and as such it
should not be bifurcated from the Series D instrument and accounted for
separately.





Additionally,
Andrea reviewed the Series D Preferred Stock warrants and concluded that they
are considered to be indexed to the Company’s stock within the provisions of
EITF 07-5 and were properly classified.





Through
June 30, 2009, 281,250 shares of common stock have been issued as a result of
exercises of the Series D Preferred Stock Warrants.  There were no
Series D Preferred Stock conversions or related Warrant exercises during the six
months ended June 30, 2009.





As of June
30, 2009, there were 1,050,001 shares of Series D Preferred Stock outstanding
which are convertible into 4,200,004 shares of Common Stock.




11




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




On July
17, 2009, 142,857 shares of Series D Preferred Stock were converted into 571,428
shares of Common Stock at a conversion price of $0.25.





Note
5. Licensing
Agreements





The
Company has entered into various licensing, production and distribution
agreements with manufacturers of PC and related components.  These
agreements provide for revenues based on the terms of each individual
agreement.  The Company's two largest licensing customers accounted
for $230,376 and $48,410 of revenues for the three months ended June 30, 2009
and $284,288 and $91,621 of revenues for the three months ended June 30,
2008.  The Company's two largest licensing customers accounted for
$386,429 and $48,410 of revenues for the six months ended June 30, 2009 and
$285,674 and 193,997 of revenues for the six months ended June 30,
2008.





Note
6. Commitments
And Contingencies





Leases





Andrea
leases its corporate headquarters located in Bohemia, New York.  The
lease (from an unrelated party), which currently expires in April 2015, is for
approximately 11,000 square feet and houses Andrea’s warehousing, sales and
executive offices.  Rent expense under this operating lease was
$21,715 and $42,798 for the three and six-month periods ended June 30, 2009,
respectively.  Rent expense under this operating lease was 21,083 and
$41,552 for the three and six-month periods ended June 30, 2008,
respectively.





As of June
30, 2009, the future minimum annual lease payments under this lease and all
non-cancelable operating leases are as follows:





2009
      (July to December 31)
                  
                  $
                  53,7272010
                  
                  
                  106,5342011
                  
                  
                  108,9742012
                  
                  
                  105,7282013
                  
                  
                  96,814Thereafter
                  
                  
                  133,283Total
                  
                  $
                  605,060





Employment
Agreements





In
November 2008, the Company entered into an employment agreement with the
Chairman of the Board, Douglas J Andrea.  The effective date of the
employment agreement is August 1, 2008 and expires July 31, 2010 and is subject
to renewal as approved by the Compensation Committee of the Board of
Directors.  Pursuant to his employment agreement, Mr. Andrea will
receive an annual base salary of $312,500 through July 31, 2009, and for the
period of August 1, 2009 through July 31, 2010, Mr. Andrea will receive an
annual base salary of $325,000.  The employment agreement provides for
quarterly bonuses equal to 25% of the Company’s pre-bonus net after tax
quarterly earnings in excess of $25,000 for a total quarterly bonus amount not
to exceed $12,500; and annual bonuses equal to 10% of the Company’s annual
pre-bonus net after tax earnings in excess of $300,000.  All bonuses
shall be payable as soon as the Company's cash flow permits.  All
bonus determinations or any additional bonus in excess of the above will be made
in the sole discretion of the Compensation Committee. On August 8, 2008, the
Board of Directors granted Mr. Andrea 2,000,000 stock options and 1,000,000
stock options with an aggregate fair value of $120,000 (fair value was estimated
using the Black-Scholes option-pricing model).  The 2,000,000 grant
vests in three equal annual installments over a three year period commencing
August 1, 2009.  The 1,000,000 grant vests in three equal annual
installments over a three year period commencing August 1,
2010.  These 3,000,000 stock options granted have an exercise price of
$0.04 per share, which was the fair market value of the Company’s common stock
at the date of grant, and a term of 10 years.  Pursuant to the
employment agreement,  on July 24, 2009, the Board of Directors
granted Mr. Andrea 1,000,000 stock options with an aggregate fair value of
$110,000 (fair value was estimated using the Black-Scholes option-pricing
model).  The 1,000,000 grant vests in three equal annual installments
over a three year period commencing August 1, 2010.  These 1,000,000
stock options have an exercise price of $0.11 per share, which was the fair
market value of the Company’s common stock at the date of grant, and a term of
10 years.  Mr. Andrea is also entitled to a change in control payment
equal to two times his salary with continuation of health and medical benefits
for two years in the event of a change in control, as defined in the
agreement.  At June 30, 2009, the future minimum cash commitments
under this agreement aggregate $351,042.




12




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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





Legal
Proceedings





From time
to time, Andrea is involved in routine litigation incidental to the normal
course of business.  While it is not feasible to predict or determine
the final outcome of any known claims, Andrea believes the resolution of any of
these types of matters will not have a material adverse effect on Andrea’s
financial position, results of operations or liquidity.  Currently
there are no known outstanding  matters.





Note
7. Stock
Plans and Stock Based Compensation





In 1991,
the Board of Directors of Andrea adopted the 1991 Performance Equity Plan (“1991
Plan”), which was approved subsequently by the shareholders. The 1991 Plan, as
amended, authorizes the granting of awards, the exercise of which would allow up
to an aggregate of 4,000,000 shares of Andrea’s Common Stock to be acquired by
the holders of those awards.  Stock options granted to employees and
directors under the 1991 Plan were granted for terms of up to 10 years at an
exercise price equal to the market value at the date of grant.  No
further awards will be granted under the 1991 Plan.





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





In October
2006, the Board of Directors adopted the Andrea Electronics Corporation 2006
Equity Compensation Plan (“2006 Plan”), which was subsequently approved by the
shareholders.  The 2006 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 10,000,000 shares of
Andrea’s Common Stock to be acquired by the holders of those
awards.  On July 24, 2009, shareholders approved an amendment to the
2006 Plan to increase the number of shares issuable
thereunder.  Effective July 24, 2009, the 2006 Plan authorizes the
granting of awards, the exercise of which would allow up to an aggregate of
18,000,000 shares of Andrea’s Common Stock to be acquired by the holders of
those awards.  The awards can take the form of stock options, stock
appreciation rights, restricted stock or other stock-based awards. Awards may be
granted to key employees, officers, directors and consultants.  At
June 30, 2009, there were 101,345 shares available for further issuance under
the 2006 Plan.





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





The fair
values of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the weighted-average assumptions
noted in the following table.  Expected volatilities are based on
implied volatilities from historical volatility of the Company’s
stock.  The expected term of options granted represents the period of
time that options granted are expected to be outstanding.  The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant.





There were
no options granted during the three and six months ended June 30, 2009 or
2008.





Option
activity during 2009 is summarized as follows:





Options
      Outstanding
                          
                          Options
      ExercisableOptions
                            Outstanding
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted
                            Average
                            Fair
                            Value
                          
                          Weighted
                            Average
      Remaining Contractual
                            Life
                          
                          Options
                            Exercisable
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Weighted
                            Average
                            Fair
                            Value
                          
                          Weighted
      Average Remaining Contractual
                            LifeAt
      January 1, 2009
                          
                          
                          14,661,820
                          
                          
                          $
                          0.32
                          
                          
                          $
                          0.24
                          
                          7.89 years
                          
                          
                          6,973,385
                          
                          
                          $
                          0.60
                          
                          
                          $
                          0.45
                          
                          6.45 yearsCancelled
                          
                          
                          (135,000
                          )
                          
                          $
                          6.34
                          
                          
                          $
                          4.48At
      June 30, 2009
                          
                          
                          14,526,820
                          
                          
                          $
                          0.26
                          
                          
                          $
                          0.21
                          
                          7.47 years
                          
                          
                          7,007,235
                          
                          
                          $
                          0.48
                          
                          
                          $
                          0.36
                          
                          6.15
  years




13




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




During the
three months ended June 30, 2009, 66,600 options vested with a weighted average
exercise price of $0.05 and a weighted average fair value of $0.05 per
option.  During the six months ended June 30, 2009, 168,850 options
vested with a weighted average exercise price of $0.06 and a weighted average
fair value of $0.05 per option.  Based on the June 30, 2009 fair
market value of the Company’s common stock of $0.04, there is no aggregate
intrinsic value for the 14,526,820 options outstanding and 7,007,235 shares
exercisable.





Total
compensation expense recognized related to stock option awards was $53,773 and
$52,821 for the three months ended June 30, 2009 and 2008,
respectively.  In the accompanying consolidated statement of
operations for the three months ended June 30, 2009, $43,162 of expense is
included in general, administrative and selling expenses, $10,389 is included in
research and development expenses and $222 is included in cost of
revenues.  In the accompanying consolidated statement of operations
for the three months ending June 30, 2008, $40,890 of expense is included in
general, administrative and selling expenses, $11,550 is included in research
and development expenses and $381 is included in cost of
revenues.  Total compensation expense recognized related to all stock
option awards was $108,662 and $106,637 for the six months ended June 30, 2009
and 2008, respectively.  In the accompanying consolidated statement of
operations for the six months ending June 30, 2009, $87,440 of expense is
included in general, administrative and selling expenses, $20,778 is included in
research and development expenses and $444 is included in cost of
revenues.  In the accompanying consolidated statement of operations
for the six months ending June 30, 2008, $82,775 of expense is included in
general, administrative and selling expenses, $23,100 is included in research
and development expenses and $762 is included in cost of revenues.





As of June
30, 2009, there was $127,952 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the 1998 and 2006
Plans.  This unrecognized compensation cost is expected to be
recognized over the next 3 years ($57,975 in 2009, $57,056 in 2010 and $12,921
in 2011).





Pursuant
to Andrea’s compensation policy for outside directors, on August 8, 2008 and
September 12, 2007, Andrea granted 500,000 shares of Common Stock with a fair
market value of $0.04 and 400,000 shares of Common Stock with a fair market
value of $0.05, respectively.  These stock grants were fully vested on
the date of grant.  Compensation expense related to these awards was
$5,000 and $5,001 for the three months ended June 30, 2009 and 2008,
respectively.   Compensation expense related to these awards was
$10,001and $10,002 for the six months ended June 30, 2009 and 2008,
respectively.





On July
24, 2009, pursuant to Andrea’s compensation policy for outside directors, Andrea
granted 90,908 shares of Common Stock with a fair market value of $0.11 and
granted 45,455 stock options to the chairperson on the Audit Committee and
18,182 stock options to each of the other three outside
directors.  The stock grants were fully vested on the date of grant
and stock option grants provide for an eighteen-month vesting period, an
exercise price of $0.11 per share, which was the fair market value of the
Company’s common stock at the date of grant, and a term of 10
years.  The fair value of these 100,001 stock options was $11,000
(fair value was estimated on the date of grant using the Black-Scholes
option-pricing model).





Also, on
July 24, 2009, the Board granted 1,000,000 stock options to the President and
Chief Executive Officer, 200,000 stock options to the Vice President and Chief
Financial Officer, and 430,000 stock options to employees of the
Company.  Each option grant provides for vesting periods of up to
three years, an exercise price of $0.11 per share, which was the fair market
value of the Company’s common stock at the date of grant, and a term of 10
years.  The fair value of these 1,630,000 stock options was $179,300
(fair value was estimated on the date of grant using the Black-Scholes
option-pricing model).





Note
8. 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 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 Andrea’s results of operations are
primarily reviewed on a consolidated basis, the chief operating decision-maker
also manages the enterprise in two segments: (i) Andrea DSP Microphone and Audio
Software Products and (ii) Andrea Anti-Noise Products.  Andrea DSP
Microphone and Audio Software Products primarily include products based on the
use of some, or all, of the following technologies: Andrea Digital Super
Directional Array microphone technology (DSDA), Andrea Direction Finding and
Tracking Array microphone technology (DFTA), Andrea PureAudio noise filtering
technology, and Andrea EchoStop, an advanced acoustic echo cancellation
technology.  Andrea Anti-Noise Products include noise cancellation and
active noise cancellation computer headset products and related computer
peripheral products.




14




ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




The
following represents selected condensed consolidated financial information for
Andrea’s segments for the three-month periods ended June 30, 2009 and
2008.





2009
      Three Month Segment Data
                
                Andrea
      DSP Microphone and Audio Software Products
                
                
                Andrea
      Anti-
                    Noise
      Products
                
                
                Total
      2009 Three Month Segment DataNet
      revenues from external customers
                
                $
                111,507
                
                
                $
                804,047
                
                
                $
                915,554License
      Revenues
                
                
                282,007
                
                
                
                -
                
                
                
                282,007Loss
      from operations
                
                
                6,114
                
                
                
                13,734
                
                
                
                19,848Depreciation
      and amortization
                
                
                117,900
                
                
                
                11,762
                
                
                
                129,662Purchases
      of property and equipments
                
                
                6,030
                
                
                
                -
                
                
                
                6,030Purchases
      of patents and trademarks
                
                
                1,391
                
                
                
                8,321
                
                
                
                9,712Assets
                
                
                3,643,039
                
                
                
                1,981,801
                
                
                
                5,624,840Total
      long lived assets
                
                
                2,169,151
                
                
                
                242,033
                
                
                
                2,411,1842008
      Three Month Segment Data
                
                Andrea
      DSP Microphone and Audio Software Products
                
                
                Andrea
      Anti-
                    Noise
      Products
                
                
                Total
      2008 Three Month Segment DataNet
      revenues from external customers
                
                $
                196,666
                
                
                $
                620,470
                
                
                $
                817,136License
      Revenues
                
                
                390,115
                
                
                
                -
                
                
                
                390,115Income
      (loss) from operations
                
                
                45,047
                
                
                
                (53,992
                )
                
                
                8,945Depreciation
      and amortization
                
                
                117,545
                
                
                
                9,086
                
                
                
                126,631Purchases
      of property and equipments
                
                
                2,531
                
                
                
                9,581
                
                
                
                12,112Purchases
      of patents and trademarks
                
                
                -
                
                
                
                23,569
                
                
                
                23,569Assets
                
                
                3,681,633
                
                
                
                1,577,761
                
                
                
                5,259,394Total
      long lived assets
                
                
                2,624,235
                
                
                
                226,154
                
                
                
                2,850,389





The
following represents selected condensed consolidated financial information for
Andrea’s segments for the six-month periods ended June 30, 2009 and
2008:





2009
      Six Month Segment Data
                
                Andrea
      DSP Microphone and Audio Software Products
                
                
                Andrea
      Anti-
                    Noise
      Products
                
                
                Total
      2009 Six Month Segment DataNet
      revenues from external customers
                
                $
                186,918
                
                
                $
                1,351,375
                
                
                $
                1,538,293License
      Revenues
                
                
                480,848
                
                
                
                -
                
                
                
                480,848Loss
      from operations
                
                
                198,263
                
                
                
                106,684
                
                
                
                304,947Depreciation
      and amortization
                
                
                235,554
                
                
                
                21,749
                
                
                
                257,303Purchases
      of property and equipments
                
                
                2,560
                
                
                
                25,089
                
                
                
                27,649Purchases
      of patents and trademarks
                
                
                8,423
                
                
                
                14,866
                
                
                
                23,2892008
      Six Month Segment Data
                
                Andrea
      DSP Microphone and Audio Software Products
                
                
                Andrea
      Anti-
                    Noise
      Products
                
                
                Total
      2008 Six Month Segment DataNet
      revenues from external customers
                
                $
                462,209
                
                
                $
                1,151,349
                
                
                $
                1,613,558License
      Revenues
                
                
                520,333
                
                
                
                -
                
                
                
                520,333Loss
      from operations
                
                
                192,456
                
                
                
                178,562
                
                
                
                371,018Depreciation
      and amortization
                
                
                234,888
                
                
                
                16,767
                
                
                
                251,655Purchases
      of property and equipments
                
                
                5,995
                
                
                
                13,047
                
                
                
                19,042Purchases
      of patents and trademarks
                
                
                6,155
                
                
                
                28,559
                
                
                
                34,714





15





ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




The
following represents selected condensed consolidated financial information for
Andrea’s segments as of December 31, 2008.





2008
      Year End Segment Data
              
              Andrea
      DSP Microphone and Audio Software Products
              
              
              Andrea
      Anti-
                  Noise
      Products
              
              
              Total
      2008Assets
              
              
              3,583,439
              
              
              
              1,838,402
              
              
              
              5,421,841Total
      long lived assets
              
              
              2,393,721
              
              
              
              223,828
              
              
              
              2,617,549





Management
assesses non-operating income statement data on a consolidated basis
only.  International revenues are based on the country in which the
end-user is located.  For the three-month periods ended June 30, 2009
and 2008, and as of each respective period-end, net revenues and accounts
receivable by geographic area are as follows:





Geographic
      Data
                
                June
      30, 2009
                
                
                June
      30, 2008Net
      revenues:United States
                
                $
                1,131,135
                
                
                $
                1,036,123Foreign(1)
                
                
                66,426
                
                
                
                171,128$
                1,197,561
                
                
                $
                1,207,251




(1)
            Net
      revenues to any one foreign country did not exceed 10% of total net
      revenues for the three months ended June 30, 2009 and June 30,
      2008.




For the
six-month periods ended June 30, 2009 and 2008, by geographic area, net revenues
are as follows:





Geographic
      Data
                
                June
      30, 2009
                
                
                June
      30, 2008Net
      revenues:United States
                
                $
                1,866,974
                
                
                $
                1,758,771Foreign(2)
                
                
                152,167
                
                
                
                375,120$
                2,019,141
                
                
                $
                2,133,891




(2)
            Net
      revenues to any one foreign country did not exceed 10% of total net
      revenues for the six months ended June 30, 2009 and June 30,
      2008.




As of June
30, 2009 and December 31, 2008, accounts receivable by geographic area is as
follows:





Geographic
      Data
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008Accounts
      receivable:United States
                  
                  $
                  633,847
                  
                  
                  $
                  804,433Foreign
                  
                  
                  146
                  
                  
                  
                  -$
                  633,993
                  
                  
                  $
                  804,443







16




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





Overview





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





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





We
outsource to Asia high volume assembly for most of our products from purchased
components.  We assemble some low volume Andrea DSP Microphone and
Audio Software Products from purchased components. As sales of any particular
Andrea DSP Microphone and Audio Software Product increases, assembly operations
are transferred to a subcontractor in Asia.





Our
Critical Accounting Policies





Our
unaudited condensed consolidated financial statements and the notes to our
unaudited condensed consolidated financial statements contain information that
is pertinent to management's discussion and analysis.  The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities.  Management bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.  On a continual
basis, management reviews its estimates utilizing currently available
information, changes in facts and circumstances, historical experience and
reasonable assumptions.  After such reviews, and if deemed
appropriate, those estimates are adjusted accordingly.  Actual results
may vary from these estimates and assumptions under different and/or future
circumstances.  Our significant accounting policies are described in
Note 2 of the Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.  A
discussion of our critical accounting policies and estimates are included in
Management’s Discussion and Analysis or Plan of Operation in our Annual Report
on Form 10-K for the year ended December 31, 2008. Management has discussed the
development and selection of these policies with the Audit Committee of the
Company’s Board of Directors, and the Audit Committee of the Board of Directors
has reviewed the Company’s disclosures of these policies.  There have
been no material changes to the critical accounting policies or estimates
reported in the Management’s Discussion and Analysis section of the 10K for the
year ended December 31, 2008 as filed with the Securities and Exchange
Commission.





Cautionary
Statement Regarding Forward-Looking Statements





This
report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of the
Company.  These forward-looking statements are generally identified by
use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”,
“project” or similar expressions.  The Company’s ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in
economic, competitive, governmental, technological and other factors that may
affect our business and prospects.  Additional factors are discussed
below under “Risk Factors” and in Part I, “Item 1A – Risk Factors”in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008.  These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.  Except as
required by applicable law or regulation, the Company does not undertake, and
specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.




17




Risk
Factors





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





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





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




–
            the
      cost of development of our
products;




–
            the
      mix of products we sell;




–
            the
      mix of distribution channels we
use;




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




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




–
            general
      economic conditions.





We cannot
assure that the level of revenues and gross profit, if any, that we achieve in
any particular fiscal period will not be significantly lower than in other
fiscal periods.  Our net revenues for the three months ended June 30,
2009 were $1,197,561 compared to $1,207,251 for the three months ended June 30,
2008.  Net loss for the three months ended June 30, 2009 was $17,712,
or $0.00 loss per share on a basic and diluted basis, and $8,891, or $0.00 per
share on a basic and diluted basis for the three months ended June 30,
2008.  Our revenues for the six months ended June 30, 2009 were
$2,109,141 compared to $2,133,891 for the six months ended June 30,
2008.  Net loss for the six months ended June 30, 2009 was $301,576 or
$.00 loss per share on a basic and diluted basis, compared to net loss of
$370,163, or $.01 loss per share on a basic and diluted basis for the six months
ended June 30, 2008. We continue to explore opportunities to grow sales in other
business areas; we are also examining additional opportunities for cost
reduction, production efficiencies and further diversification of our
business.  Although we have improved cash flows by reducing overall
expenses, if our revenues continue to decline we may not continue to generate
positive cash flows and our net income or loss may be affected.





If
we fail to obtain additional capital or maintain access to funds sufficient to
meet our operating needs, we may be required to significantly reduce, sell, or
refocus our operations and our business, results of operations and financial
condition could be materially and adversely effected.





In order
to be a viable entity we need to maintain and increase profitable
operations.  To continue to achieve profitable operations we need to
maintain or increase current net revenues and continue to look for ways to
control expenses.  We might also need to sell additional assets or
raise capital as a means of funding continued operations.  In recent
years, we have sustained significant operating losses.  We may 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.  Such additional
capital and funding may not be available on favorable terms, if at
all.  Additionally, we may only be able to obtain additional capital
or funds through arrangements that require us to relinquish rights to our
products, technologies or potential markets, in whole or in part, or result in
our sale.  As a result of the past few years of performance, we
believe that we have sufficient liquidity to continue our operations at least
through June 2010, provided our net revenues do not materially decline and our
operating expenses do not materially increase.  Although we have
revised our business strategies to reduce our expenses and capital expenditures,
we cannot assure you that we will be successful in generating positive cash
flows or obtaining access to additional sources of funding in amounts necessary
to continue our operations.  Failure to maintain sufficient access to
funding may also result in our inability to continue operations.





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





Sales of a
substantial number of shares of our common stock in the public market could have
the effect of depressing the prevailing market price of our common
stock.  Of the 200,000,000 shares of common stock presently
authorized, 63,355,023 were outstanding as of August 11, 2009. The number of
shares outstanding does not include an aggregate of 28,505,503 shares of common
stock that are issuable.  This number of issuable common shares is
equal to approximately 45% of the 63,355,023 outstanding
shares.  These issuable common shares are comprised of:  a)
16,206,821 shares of our common stock reserved for issuance upon exercise of
outstanding awards granted under our 1991 Performance Equity Plan, 1998 Stock
Plan and 2006 Stock Plan; b) 6,280,436 shares reserved for future grants under
our 2006 Stock Plan; c) 2,389,670 shares of common stock that are issuable upon
conversion of the Series C Preferred Stock; and d) 3,628,576 shares of common
stock issuable upon conversion of the Series D Preferred Stock.




18




In
addition to the risk factors set forth above and the other information set forth
in this report, you should carefully consider the factors discussed in Part I,
“Item 1A – Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, which could materially affect our business, financial
condition or future results. The risks described in this report and in our
Annual Report on Form 10-K are not the only risks that we face. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.





Results
Of Operations





Quarter
and Six Months ended June 30, 2009 compared to Quarter and Six Months ended June
30, 2008





Net
Revenues




For
      the Three Months
                                                                                                                          Ended
      June 30
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        For
      the Six Months
                                                                                                                          Ended
      June 302009
                                                                                                                        
                                                                                                                        
                                                                                                                        2008
                                                                                                                        
                                                                                                                        
                                                                                                                        %
                                                                                                                          Change
                                                                                                                        
                                                                                                                        
                                                                                                                        2009
                                                                                                                        
                                                                                                                        
                                                                                                                        2008
                                                                                                                        
                                                                                                                        
                                                                                                                        %
                                                                                                                          ChangeAndrea
      Anti-Noise Products net Product revenuesSales
      of products to an OEM customer for use with speech recognition
      software
                                                                                                                        
                                                                                                                        $
                                                                                                                        204,353
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        98,310
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        108
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        232,877
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        123,100
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        89
                                                                                                                        
                                                                                                                        (a)Revenues
      related to LED headphone products
                                                                                                                        
                                                                                                                        
                                                                                                                        137,957
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        7,325
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,783
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        155,277
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        18,013
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        762
                                                                                                                        
                                                                                                                        (b)All
      other Andrea Anti-Noise net product revenues
                                                                                                                        
                                                                                                                        
                                                                                                                        461,737
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        514,835
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (10
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        963,221
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,010,236
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (5
                                                                                                                        )Total
      Andrea Anti-Noise Products net Product revenues
                                                                                                                        
                                                                                                                        $
                                                                                                                        804,047
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        620,470
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        30
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,351,375
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,151,349
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        16Andrea
      DSP Microphone and Audio Software Products revenuesSales
      of array microphone products to an OEM
                                                                                                                          customer
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        9,800
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (100
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        107,800
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (100
                                                                                                                        )
                                                                                                                        (c)Consulting
      revenue to an OEM Customer
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        75,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (100
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        150,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (100
                                                                                                                        )
                                                                                                                        (d)All
      other Andrea DSP Microphone and Audio product revenues
                                                                                                                        
                                                                                                                        
                                                                                                                        111,507
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        111,866
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        186,918
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        204,409
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (9
                                                                                                                        )License
      revenues
                                                                                                                        
                                                                                                                        
                                                                                                                        282,007
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        390,115
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (28
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        480,848
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        520,333
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (8
                                                                                                                        )
                                                                                                                        (e)Total
      Andrea DSP Microphone and Audio Software Products revenues
                                                                                                                        
                                                                                                                        
                                                                                                                        393,514
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        586,781
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (33
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        667,766
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        982,542
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (32
                                                                                                                        )Total
      Revenues
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,197,561
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,207,251
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (1
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        2,019,141
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        2,133,891
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (5
                                                                                                                        )




(a)
            The
      increase of sales of Andrea Anti-Noise Products is directly related to
      increased purchases by an OEM customer for use with speech recognition
      software during the three and six months ended June 30, 2009 as compared
      to the same periods in 2008.


(b)
            The
      increases of revenues related to blinking LED earbud products are
      primarily associated with the initial sales of a custom retail product for
      an OEM customer.


(c)
            The
      significant decreases of revenues of microphone array products to an OEM
      customer relates to the decreased demand from the OEM
      customer.  We believe that this decrease is the result of the
      OEM deciding not to continue bundling a microphone array with all
      applicable product models.  We do not expect any revenues from
      the OEM for this product in 2009.


(d)
            The
      decrease in consulting revenue relates to an OEM customer selling the
      business line for which the consulting revenue
  related.


(e)
            The
      majority of the decreases in licensing revenues for the three and six
      months ended June 30, 2009is
      a result of one of our OEM licensing partner’s initial launch of our
      licensed products in their product line during  the three and
      six months ended June 30, 2008 as compared to the regularly expected
      licensing revenues for the three and six months ended June 30,
      2009.  In addition, these decreases are effected by another one
      of our OEM licensing partners selling the business line which featured our
      licensed products.  Although we have entered into a new license
      agreement with this second partner’s successor, we do not expect the
      revenues to remain at the level of the
  predecessor.




Cost of
Revenues





Cost of
revenues as a percentage of net revenues for the three months ended June 30,
2009 increased to 45% from 39% for the three months ended June 30,
2008.  The cost of revenues as a percentage of net revenues for the
three months ended June 30, 2009 for Andrea Anti-Noise Products is 59% compared
to 63% for the three months ended June 30, 2008.  The cost of revenues
as a percentage of net revenues for the three months ended June 30, 2009 and
June 30, 2008 for Andrea DSP Microphone and Audio Software Products is
15%.  Cost of revenues as a percentage of net revenues for the six
months ended June 30, 2009 decreased to 43% from 45% for the six months ended
June 30, 2008.  The cost of revenues as a percentage of net revenues
for the six months ended June 30, 2009 for Andrea Anti-Noise Products is 56%
compared to 63% for the six months ended June 30, 2008.  The cost of
revenues as a percentage of net revenues for the six months ended June 30, 2009
for Andrea DSP Microphone and Audio Software Products is 15% compared to 24% for
the six months ended June 30, 2008. The decreases for the Andrea Anti-Noise
Products are a result of a decrease in factory overhead expenses.  The
decrease for Andrea DSP Microphone and Audio Software Products for the six
months ending June 30, 2009 is a result of the decreased sales of array
microphone products to an OEM customer.




19




Research and
Development





Research
and development expenses for the three months ended June 30, 2009 decreased
23% to $142,853 from $185,341 for the three months ended June 30,
2008.  For the three months ended June 30, 2009, the decrease in
research and development expenses reflects a 36% decrease in our Andrea DSP
Microphone and Audio Software Technology efforts to $80,858, or 57% of total
research and development expenses offset in part by a 4% increase in our Andrea
Anti-Noise Headset Product efforts to $61,995, or 43% of total research and
development expenses.  Research and development expenses for the six
months ended June 30, 2009 decreased 23% to $292,366 from $378,745 for the
six months ended June 30, 2008.  These decreases primarily relate to
decreases in employee compensation and related benefit costs.  For the
six months ended June 30, 2009, the decrease in research and development
expenses reflects a 58% decrease in our Andrea DSP Microphone and Audio Software
Technology efforts to $163,347, or 56% of total research and development
expenses offset in part by a 7% increase in our Andrea Anti-Noise Headset
Product efforts to $129,019, or 44% of total research and development
expenses.  With respect to DSP Microphone and Audio Software
technologies, research efforts are primarily focused on the pursuit of
commercializing a natural language-driven human/machine interface by developing
optimal far-field microphone solutions for various voice-driven interfaces,
incorporating Andrea’s digital super directional array microphone technology,
and certain other related technologies such as noise suppression and stereo
acoustic echo cancellation.  We believe that continued research and
development spending should provide Andrea with a competitive
advantage.





General, Administrative and
Selling Expenses





General,
administrative and selling expenses decreased approximately 3% to $538,658 for
the three months ended June 30, 2009 from $556,273 for the three months ended
June 30, 2008.  For the three months ended June 30, 2009, the decrease
reflects a 22% decrease in our Andrea DSP Microphone and Audio Software
Technology efforts to $259,647, or 48% of total general, administrative and
selling expenses and a 24% increase in our Andrea Anti-Noise Headset Product
efforts to $279,011, or 52% of total general, administrative and selling
expenses.  General, administrative and selling expenses remained
relative flat, increasing approximately 1% to $1,173,079 for the six months
ended June 30, 2009 from $1,166,447 for the six months ended June 30,
2008.  For the six months ended June 30, 2009, the increase reflects a
14% decrease in our Andrea DSP Microphone and Audio Software Technology efforts
to $600,411, or 51% of total general, administrative and selling expenses and a
15% increase in our Andrea Anti-Noise Headset Product efforts to $572,668, or
49% of total general, administrative and selling expenses.





Interest Income,
net





Interest
income, net for the three months ended June 30, 2009 was $2,444 compared to
$1,697 for the three months ended June 30, 2008. Interest income, net for the
six months ended June 30, 2009 was $4,936 compared to $4,571 for the six months
ended June 30, 2008.  The year to date increase in other income is the
result of interest earned on higher cash balances in 2009.





Provision for Income
Taxes





The
provision for income taxes the three months ended June 30, 2009 was $308
compared to a provision for income taxes of $1,643 for the three months ended
June 30, 2008.  The provision for income taxes the six months ended
June 30, 2009 was $1,565 compared to a provision for income taxes of $3,716 for
the six months ended June 30, 2008.  The decrease is a result of a
decrease of certain licensing revenues that are subject to withholding of income
tax as mandated by the foreign jurisdiction in which the revenues are
earned.





Net Loss





Net loss
for the three months ended June 30, 2009 was $17,712 compared to a net loss of
$8,891 for the three months ended June 30, 2008. Net loss for the six
months ended June 30, 2009 was $301,576 compared to a net loss of $370,163 for
the six months ended June 30, 2008.  The net loss for the three and
six month periods ended June 30, 2009 and the net loss for the three months and
six months ended June 30, 2008 principally reflects the factors described
above.




20




Off-Balance Sheet
Arrangements





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





Liquidity
And Capital Resources





Andrea’s
principal sources of funds are and are expected to be gross cash flows from
operations.  At June 30, 2009, we had cash of $1,764,606 compared with
$1,006,951 at December 31, 2008.  The cash balance at June 30, 2009 is
primarily a result of our cash provided from operations.





Our
working capital balance at June 30, 2009 was $2,220,141 compared to a working
capital balance of $2,196,689 at December 31, 2008.  The increase in
working capital reflects an increase in total current assets of $409,364 coupled
with an increase in total current liabilities of $385,912.  The
increase in total current assets reflects an increase in cash of $757,655, a
decrease in accounts receivable of $170,440, a decrease in inventory of
$307,011, an increase in short term customer deposit of $130,854 and a decrease
in prepaid expenses and other current assets of $1,694.  The decrease
in accounts receivable is a result of timing of revenues and subsequent
collection.  The increase in short term customer deposit and short
term deferred revenue is related to a deposit for a product for one of our
customers.  The increase in total current liabilities reflects an
increase in trade accounts payable of $251,610, an increase in short-term
deferred revenue of $130,854 and an increase of $3,448 in other current
liabilities. The increase in cash of $757,655 reflects $808,593 of net cash
provided by operating activities, and $50,938 of net cash used in investing
activities.





The cash
provided by operating activities of $808,593, excluding non-cash charges for the
six months ended June 30, 2009, is attributable to a $170,440 decrease in
accounts receivable, a $352,335 decrease in inventory, a $130,854 increase in
short term customer deposit, a $1,694 decrease in prepaid expenses and other
current assets, a $251,610 increase in accounts payable, a $130,854 increase in
short-term deferred revenue and a $3,448 increase in other current and long-term
liabilities.  The changes in receivables, inventory, prepaid expenses
and accounts payable primarily reflect differences in the timing related to both
the payments for and the acquisition of inventory as well as for other services
in connection with ongoing efforts related to Andrea’s various product
lines.





The cash
used in investing activities of $50,938 reflects $27,649 in purchases of
property and equipment and $23,289 of payments related to patents and
trademarks.  The increase in property and equipment reflects capital
expenditures associated with information technology purchases as well as molds
associated with our Andrea Anti-Noise Headset Products.  The increase
in patents and trademarks reflects capital expenditures associated with our
intellectual property.





We plan to
continue to improve our cash flows in 2009 by aggressively pursuing additional
licensing opportunities related to our Andrea DSP Audio Software and increasing
the sales of our Andrea Anti-Noise Headset Products through the introduction of
a refreshed product line introduced in the latter part of 2008 as well as the
increased efforts we are putting into our sales and marketing
efforts.  However, there can be no assurance that we will be able to
successfully execute the aforementioned plans.  As of August 11, 2009,
Andrea has approximately $1,800,000 of cash deposits.  We believe that
we have sufficient liquidity available to continue in operation through at least
June 2010.  To the extent that we do not generate sufficient cash
flows from our operations in the next twelve months, additional financing might
be required.  Although we have improved cash flows by reducing overall
expenses, if our revenues decline, these reductions may impede our ability to be
cash flow positive and our net income or loss may be disproportionately
affected.  We have no commitment for additional financing and may
experience difficulty in obtaining additional financing on favorable terms, if
at all.  Any financing we obtain may contain covenants that restrict
our freedom to operate our business or may have rights, preferences or
privileges senior to our common stock and may dilute our current shareholders’
ownership interest in Andrea. We cannot assure that demand will continue for any
of our products, including future products related to our Andrea DSP Microphone
and Audio Software technologies, or, that if such demand does exist, that we
will be able to obtain the necessary working capital to increase production and
provide marketing resources to meet such demand on favorable terms, or at
all.




Recently
Issued Accounting Pronouncements




For a
discussion of the impact of recent accounting pronouncements, see Note 2 of the
accompanying condensed consolidated financial statements.





ITEM
3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
Applicable.




21





ITEM
4. CONTROLS
AND PROCEDURES




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




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




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




PART
II             OTHER
INFORMATION




ITEM
1.   LEGAL
PROCEEDINGS




None.




ITEM
1A. RISK
FACTORS




Not
Applicable.





ITEM
2.   UNREGISTERED SALES
OF EQUITY SECURITY AND USE OF PROCEEDS




None.




ITEM
3.   DEFAULTS UPON
SENIOR SECURITIES




None.




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




On July
24, 2009, at the Annual Meeting of Shareholders of the Company, the shareholders
elected as directors of the Company for terms of one year, the following
individuals:  Douglas J. Andrea (40,485,913 shares for, 9,126,043
shares withheld); Gary A. Jones (27,231,245 shares for, 22,380,711 shares
withheld); Louis Libin (27,215,170 shares for, 22,396,786 shares withheld);
Joseph J. Migliozzi (27,178,886 shares for, 22,433,070 shares withheld);
Jonathan D. Spaet (27,190,942 shares for, 22,421,014 shares
withheld).  The  shareholders approved the amendment to the
Andrea Electronics Corporation 2006 Equity Compensation Plan to increase the
number of shares of Company common stock issuable thereunder (11,454,872 shares
for, 7,325,108 shares against, 147,380 shares abstained and 30,684,596 broker
non-votes).  In addition, the shareholders ratified the selection of
Marcum LLP as the Company's independent accountants for the year ended December
31, 2009 (46,697,264 shares for, 2,594,184 shares against, and 320,508 shares
abstained).  Lastly, the shareholder proposal presented at the
meeting, having not received the affirmative vote of at least a majority of the
votes cast by shareholders, was not approved by shareholders (8,179,792 shares
for, 10,376,683 shares against, 370,705 shares abstained and 30,684,596 broker
non-votes).




ITEM
5.  OTHER
INFORMATION




None.




ITEM
6.  EXHIBITS




a)
            Exhibits




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


Exhibit 32
– Section 1350 Certifications*




* Filed
herewith




22





SIGNATURES




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




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









Date:
      August 14, 2009/s/    DOUGLAS
      J. ANDREA
                    Chairman
      of the Board, President, Chief
                    August
      14, 2009Douglas
      J. Andrea
                    Executive
      Officer and Corporate Secretary/s/    CORISA L.
      GUIFFRE
                    Vice
      President, Chief Financial Officer and
                    August
      14, 2009Corisa
      L. Guiffre
                    Assistant
      Corporate Secretary


23