**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C.  20549**







**FORM
      10-QSB**




(Mark
      One)




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




For
      the
      quarterly period ended September 30, 2007




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 small business issuer 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)Issuer’s
                telephone number:
            
            631-719-1800




Check
      whether the issuer (1) filed all reports required to by filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 checkmark 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 November 9, 2007,
      there are 59,861,193 common shares outstanding.




Transitional
      Small Business Disclosure format (check one) Yes ___ No
      _*X*_










**PART
      I.                           FINANCIAL
      INFORMATION**




**ITEM
      1.                           FINANCIAL
      STATEMENTS**




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


CONDENSED
      CONSOLIDATED BALANCE SHEETS




September
                  30,
                2007
            
            
            December
                  31,
                2006ASSETS
            
            (unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            854,015
            
            
            $
            303,678Accounts
                receivable, net of allowance for doubtful accounts of $16,591 and
                $16,704,
                respectively
            
            
            681,675
            
            
            
            839,599Inventories,
                net
            
            
            735,885
            
            
            
            1,088,778Prepaid
                expenses and other current assets
            
            
            100,961
            
            
            
            367,421Total
                current assets
            
            
            2,372,536
            
            
            
            2,599,476Property
                and equipment, net
            
            
            27,870
            
            
            
            39,243Intangible
                assets, net
            
            
            3,091,035
            
            
            
            3,437,432Other
                assets, net
            
            
            12,864
            
            
            
            12,864Total
                assets
            
            $
            5,504,305
            
            
            $
            6,089,015LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Trade
                accounts payable
            
            $
            332,842
            
            
            $
            619,159Short-term
                portion of capital lease
            
            
            763
            
            
            
            5,068Other
                current liabilities
            
            
            271,927
            
            
            
            413,166Total
                liabilities
            
            
            605,532
            
            
            
            1,037,393Series
                B Redeemable Convertible Preferred Stock, $.01 par value; authorized:
                1,000 shares; none issued and outstanding
            
            
            -
            
            
            
            -Commitments
                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: 90.7 and 100.7 shares, respectively;
                liquidation value: $907,015 and 1,007,015, respectively
            
            
            1
            
            
            
            1Series
                D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000
                shares; issued and outstanding:  1,192,858 and 1,242,858 shares,
                respectively; liquidation value:  $1,192,858 and $1,242,858,
                respectively
            
            
            11,929
            
            
            
            12,429Common
                stock, $.01 par value; authorized:  200,000,000 shares; issued
                and outstanding: 59,861,193 and 59,021,857 shares,
                respectively
            
            
            598,612
            
            
            
            590,219Additional
                paid-in capital
            
            
            76,504,879
            
            
            
            76,352,407Accumulated
                deficit
            
            
            (72,216,648
            )
            
            
            (71,903,434
            )Total
                shareholders’ equity
            
            
            4,898,773
            
            
            
            5,051,622Total
                liabilities and shareholders’ equity
            
            $
            5,504,305
            
            
            $
            6,089,015


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 Nine Months EndedSeptember
                  30,
                2007
            
            
            September
                  30,
                2006
            
            
            September
                  30,
                2007
            
            
            September
                  30,
                2006RevenuesNet
                Product revenues
            
            $
            959,963
            
            
            $
            1,486,680
            
            
            $
            3,127,078
            
            
            $
            3,653,022License
                revenues
            
            
            89,952
            
            
            
            205,771
            
            
            
            497,853
            
            
            
            477,330Revenues
            
            
            1,049,915
            
            
            
            1,692,451
            
            
            
            3,624,931
            
            
            
            4,130,352Cost
                of revenues
            
            
            565,167
            
            
            
            961,591
            
            
            
            1,822,086
            
            
            
            2,237,344Gross
                margin
            
            
            484,748
            
            
            
            730,860
            
            
            
            1,802,845
            
            
            
            1,893,008Research
                and development expenses
            
            
            173,895
            
            
            
            145,783
            
            
            
            502,755
            
            
            
            414,176General,
                administrative and selling expenses
            
            
            507,503
            
            
            
            516,625
            
            
            
            1,587,335
            
            
            
            1,453,597(Loss)
                income from operations
            
            
            (196,650
            )
            
            
            68,452
            
            
            
            (287,245
            )
            
            
            25,235Interest
                income (expense), net
            
            
            3,967
            
            
            
            (1,129
            )
            
            
            4,371
            
            
            
            (1,439
            )(Loss)
                income before provision for income taxes
            
            
            (192,683
            )
            
            
            67,323
            
            
            
            (282,874
            )
            
            
            23,796Provision
                for income taxes
            
            
            1,886
            
            
            
            20,446
            
            
            
            30,340
            
            
            
            40,942Net
                (loss) income
            
            $
            (194,569
            )
            
            $
            46,877
            
            
            $
            (313,214
            )
            
            $
            (17,146
            )Basic
                weighted average shares
            
            
            59,714,946
            
            
            
            58,512,333
            
            
            
            59,457,994
            
            
            
            58,391,669Diluted
                weighted average shares
            
            
            59,714,946
            
            
            
            59,385,460
            
            
            
            59,457,994
            
            
            
            58,391,669Basic
                and diluted net (loss) income per share
            
            $
            (.00
            )
            
            $
            .00
            
            
            $
            (.01
            )
            
            $
            (.00
            )





See
      Notes
      to Condensed Consolidated Financial Statements.




3




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**





CONDENSEDCONSOLIDATED
      STATEMENTS OF
      SHAREHOLDERS’ EQUITY


FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2007


(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, 2007
            100.701477
            
            
            $
            1
            
            
            
            1,242,858
            
            
            $
            12,429
            
            
            
            59,021,857
            
            
            $
            590,219
            
            
            $
            76,352,407
            
            
            $
            (71,903,434
            )
            
            $
            5,051,622Conversions
                of Series D Convertible Preferred Stock
            -
            
            
            
            -
            
            
            
            (50,000
            )
            
            
            (500
            )
            
            
            200,000
            
            
            
            2,000
            
            
            
            (1,500
            )
            
            
            -
            
            
            
            -Conversions
                of Series C Convertible Preferred Stock
            (10.000000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            457,516
            
            
            
            4,575
            
            
            
            12,137
            
            
            
            -
            
            
            
            16,712Expense
                of Stock Grant to Outside Directors
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            181,820
            
            
            
            1,818
            
            
            
            14,016
            
            
            
            -
            
            
            
            15,834Expense
                of Stock Option Grants
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            127,819
            
            
            
            -
            
            
            
            127,819Net
                loss
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (313,214
            )
            
            
            (313,214
            )Balance,
                September 30, 2007
            
            90.701477
            
            
            $
            1
            
            
            
            1,192,858
            
            
            $
            11,929
            
            
            
            59,861,193
            
            
            $
            598,612
            
            
            $
            76,504,879
            
            
            $
            (72,216,648
            )
            
            $
            4,898,773




See
      Notes
      to Condensed Consolidated Financial Statements.




4




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




For
                the Nine Months EndedSeptember
                  30,
                2007
            
            
            September
                  30,
                2006Cash
                flows from operating activities:Net
                loss
            
            $
            (313,214
            )
            
            $
            (17,146
            )Adjustments
                to reconcile net loss
                to net cash provided by (used in) operating activities:Depreciation
                and
                amortization
            
            
            365,500
            
            
            
            366,028Stock
                compensation
                expense
            
            
            143,653
            
            
            
            21,947Provision
                for bad
                debt
            
            
            (113
            )
            
            
            (1,788
            )Inventory
                reserve
            
            
            222
            
            
            
            (43,354
            )Changes
                in operating assets and
                liabilities:Accounts
                receivable
            
            
            158,037
            
            
            
            (685,165
            )Inventories
            
            
            352,671
            
            
            
            (218,564
            )Prepaid
                expenses and other
                current assets
            
            
            266,460
            
            
            
            131,218Trade
                accounts
                payable
            
            
            (286,317
            )
            
            
            132,087Other
                current
                liabilities
            
            
            (124,527
            )
            
            
            95,865Net
                cash provided by (used in)
                operating activities
            
            
            562,372
            
            
            
            (218,872
            )Cash
                flows from investing activities:Purchases
                of property and
                equipment
            
            
            -
            
            
            
            (9,370
            )Purchases
                of patents and
                trademarks
            
            
            (7,730
            )
            
            
            (13,998
            )Net
                cash used in investing
                activities
            
            
            (7,730
            )
            
            
            (23,368
            )Cash
                flows from financing activities:Payments
                under capital
                lease
            
            
            (4,305
            )
            
            
            (9,144
            )Net
                cash used in financing
                activities
            
            
            (4,305
            )
            
            
            (9,144
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            550,337
            
            
            
            (251,384
            )Cash
                and cash equivalents, beginning of period
            
            
            303,678
            
            
            
            418,597Cash
                and cash equivalents, end of period
            
            $
            854,015
            
            
            $
            167,213Supplemental
                disclosures of cash flow information:Non-cash
                investing and financing
                activities:Conversion
                of Series C
                Convertible Preferred Stock and related accrued dividends into common
                stock
            
            $
            16,712
            
            
            $
            8,356Cash
                paid for:Interest
            
            $
            2,038
            
            
            $
            1,935Income
                Taxes
            
            $
            76,420
            
            
            $
            17,336





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 for interim financial information and with the
      instructions to Form 10-QSB. Accordingly, they do not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States of America (“GAAP”) for complete financial
      statements.  In addition, the December 31, 2006 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, 2006 included in the Company's Form
      10-KSB for the fiscal year ended December 31, 2006, filed on March 28,
      2007.  The accounting policies used in preparing these unaudited
      condensed consolidated interim financial statements are consistent with those
      described in the December 31, 2006 audited consolidated financial statements
      except for the adoption of Financial Accounting Standards Board ("FASB")
      Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109" ("FIN 48"), which is discussed in
      Note
      9.





Management's
      Liquidity Plans - As of September 30, 2007, Andrea had working capital of
      $1,767,004 and cash on hand of $854,015.  Andrea’s loss from
      operations was $196,650 and $287,245 for the quarter and nine months ended
      September 30, 2007, respectively.  Andrea plans to continue to improve
      its cash flows during 2007and future periods by placing heightened emphasis
      on
      its sales and marketing efforts.





As
      of
      November 9, 2007, Andrea has approximately $900,000 of
      cash.  Management believes that Andrea has sufficient liquidity
      available to operate through at least September 2008.  While Andrea
      continues to explore opportunities to increase sales in new business areas,
      the
      Company is also examining additional opportunities for cost reduction,
      production efficiencies and further diversification of its
      business.  In 2005, Andrea made significant changes in its facilities
      to control overall cash expenditures.  In 2006, Andrea increased
      sales, reached profitability and became cash flow positive.  Although
      these steps are encouraging, if Andrea fails to develop additional revenues
      from
      sales of its products 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)
      earnings Per Share - Basic (loss) earnings per share is computed by dividing
      the net (loss) income by the weighted average number of common shares
      outstanding during the period.  Diluted (loss) earnings per share
      adjusts basic (loss) earnings per share for the effects of convertible
      securities, stock options and other potentially dilutive financial instruments,
      only in the periods in which such effect is dilutive.  Securities that
      could potentially dilute basic (loss) earnings per share (“EPS”) in the future
      that were not included in the computation of the diluted EPS because to do
      so
      would have been anti-dilutive for the periods presented, consist of the
      following for each of the three months and nine months end September 30, 2007
      and 2006:





Total
                potential common shares as of:
            
            September
                  30,
                2007
            
            
            September
                  30,
                2006Options
                to purchase common stock (Note 7)
            
            
            9,686,820
            
            
            
            2,090,000Series
                C Convertible Preferred Stock and related accrued dividends (Note
                3)
            
            
            4,149,736
            
            
            
            4,607,252Series
                D Convertible Preferred Stock and related warrants (Note
                4)
            
            
            9,929,776
            
            
            
            10,472,632Total
                potential common shares
            
            
            23,766,332
            
            
            
            17,169,884




6




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




The
      following table sets forth the components used in the computation of basic
      and
      diluted earnings per share for the quarter ended September 30,
      2006:





Numerator:Net
                income
            
            $
            46,877Denominator:Weighted
                average shares
            
            
            58,512,333Effect
                of dilutive securities:Employee
                stock options
            
            
            873,127Denominator
                for diluted earnings per share-adjusted weighted average shares after
                assumed conversions
            
            
            59,385,460





The
      above
      computation was not necessary for the three months ended September 30, 2007
      or
      the nine months ended September 30, 2007 and 2006 as the periods had a net
      loss.





Cash
      and Cash Equivalents - Cash and cash equivalents include cash and highly
      liquid investments with original maturities of three months or
      less.  Andrea has cash deposits in excess of the maximum amounts
      insured by FDIC at September 30, 2007 and December, 31 2006.  The
      Company mitigates its risk by investing in or through major financial
      institutions.





Concentration
      of Credit Risk - Andrea is a manufacturer of audio communications equipment
      for several industries.  Revenues of superbeam array microphone
      products were significant to one customer and its affiliates, accounting for
      approximately 34% and 44% of the total net revenues for the three months ended
      September 30, 2007 and 2006, respectively and accounted for 53% and 24% of
      total
      accounts receivable at September 30, 2007 and December 31, 2006,
      respectively.  Revenues of superbeam array microphone products were
      significant to one customer and its affiliates, accounting for approximately
      20%
      and 25% of the total net revenues for the nine months ended September 30, 2007
      and 2006, respectively.  Revenues of noise canceling and active noise
      canceling products were significant to one customer and its affiliates,
      accounting for approximately 1% and 8% of the total net revenues for the three
      months ended September 30 2007 and 2006, respectively, and accounted for 1%
      and
      3% of total accounts receivable at September 30, 2007 and December 31, 2006,
      respectively.  Revenues of noise canceling and active noise canceling
      products were significant to one customer and its affiliates, accounting for
      approximately 4% and 11% of the total net revenues for the nine months ended
      September 30 2007 and 2006, respectively.  Licensing revenues and
      other revenues of noise canceling and active noise canceling products were
      significant to one customer and its affiliates, accounting for approximately
      1%
      and 10% of the total net revenues for the three months ended September 30,
      2007
      and 2006, respectively, and accounted for 11% and 41% of total accounts
      receivable at September 30, 2007 and December 31, 2006,
      respectively.  Licensing revenues and other revenues of noise
      canceling and active noise canceling products were significant to one customer
      and its affiliates, accounting for approximately 12% and 11% of the total net
      revenues for the nine months ended September 30, 2007 and 2006,
      respectively.  Licensing revenues and other service related revenues
      to one customer were approximately 13% and 5% of the total net revenues for
      the
      three months ended September 30, 2007 and 2006, respectively and accounted
      for
      12% and 8% of total accounts receivable at September 30, 2007 and December
      31,
      2006, respectively.  Licensing revenues and other service related
      revenues to one customer were approximately 12% and 7% of the total net revenues
      for the nine months ended September 30, 2007 and 2006,
      respectively.





Andrea
      purchases a substantial portion of its finished goods from two
      suppliers.  Purchases from these two suppliers amounted to 43% and 48%
      of total purchases for the three months ended September 30, 2007 and 79% and
      0%
      for the three months ended September 30, 2006.  Purchases from these
      two suppliers amounted to 66% and 22% of total purchases for the nine months
      ended September 30, 2007 and 77% and 0% for the nine months ended September
      30,
      2006.  At September 30, 2007, the amounts due to these suppliers in
      accounts payable was $0 and 168,660, respectively. At December 31, 2006, the
      amounts due to these suppliers in accounts payable were 377,019 and $0,
      respectively.





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




7




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


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 nine consecutive quarters.  Andrea
      records changes in inventory reserves as part of cost of revenues.





September
                  30,
                2007
            
            
            December
                  31,
                2006Raw
                materials
            
            $
            29,405
            
            
            $
            40,237Finished
                goods
            
            
            1,298,682
            
            
            
            1,640,5211,328,087
            
            
            
            1,680,758Less:
                reserve for obsolescence
            
            
            (592,202
            )
            
            
            (591,980
            )$
            735,885
            
            
            $
            1,088,778





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 sales), a new cost
      basis
      for the impaired asset will be established. This new cost basis will be net
      of
      any recorded impairment.





At
      September 30, 2007, management compared the sum of Andrea’s undiscounted cash
      flow projections (gross margin dollars from product sales) of the Andrea DSP
      Microphone and Audio Software core technology to the carrying value of that
      technology.  The results of this test indicated that there was no
      impairment.  However, this process utilized probability weighted
      undiscounted cash flow projections which include a significant amount of
      management’s judgment and estimates as to future revenue.  If these
      probability weighted projections do not come to fruition, the Company could
      be
      required to record an impairment charge in the near term and such impairment
      could be material.





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 September 30, 2007 and
      2006, amortization expense was $118,130 and $117,923,
      respectively.  For the nine-month periods ended September 30, 2007 and
      2006, amortization expense was $354,127 and $353,289, 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 Statement.”  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.” SFAS No. 109 requires an asset and liability
      approach for financial accounting and reporting for income taxes.  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.  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.  Effective January 1, 2007, the
      Company adopted the provisions of FIN 48.  FIN 48 establishes for all
      entities a minimum threshold for financial statement recognition of the benefit
      of tax positions, and requires certain expanded disclosures.  FIN 48
      is effective for fiscal years beginning after December 15, 2006, and is to
      be
      applied to all open tax years as of the date of effectiveness.  The
      adoption of FASB Interpretation No. 48 did not have a material effect on the
      Company’s condensed consolidated financial position or results of operations or
      cash flows (Note 9).




8




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


Stock-Based
      Compensation - At September 30, 2007, Andrea had three stock-based employee
      compensation plans, which are described more fully in Note
      7.  Effective, January 1, 2006, the Company adopted the provisions of
      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 Company
      amortizes stock-based compensation by using the straight-line
      method.




Recently
        Issued Accounting Pronouncements




Effective
      January 1, 2007, the Company adopted Emerging Issues Task Force (“EITF”) Issue
      No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant
      to FASB Statement No. 43, Accounting for Compensated Absences” (“EITF Issue No.
      06-2”). EITF Issue No. 06-2 requires that compensation expense associated with a
      sabbatical leave, or other similar benefit arrangements, be accrued over the
      requisite service period during which an employee earns the benefit. The
      adoption of EITF Issue No. 06-2 did not have a material impact on our condensed
      consolidated financial position, results of operations or cash
      flows.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“Statement No. 157”) which defines fair value, establishes a framework for
      measuring fair value, and expands disclosures about fair value measurements.
      Statement No. 157 applies to other accounting pronouncements that require or
      permit fair value measurements and accordingly, does not require any new fair
      value measurements. Statement No. 157 is effective for fiscal years beginning
      after November 15, 2007, and should be applied prospectively, except for the
      provisions for certain financial instruments that should be applied
      retrospectively as of the beginning of the year of adoption. The transition
      adjustment of the difference between the carrying amounts and the fair values
      of
      those financial instruments should be recognized as a cumulative-effect
      adjustment to retained earnings as of the beginning of the year of adoption.
      The
      Company is currently evaluating the impact of adopting the provisions of
      Statement No. 157.





In
      November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”).  EITF 06-6 addresses the modification of a convertible
      debt instrument that changes the fair value of an embedded conversion option
      and
      the subsequent recognition of interest expense for the associated debt
      instrument when the modification does not result in a debt extinguishment
      pursuant to EITF 96-19 , “Debtor’s Accounting for a Modification or Exchange of
      Debt Instruments,”. The consensus should be applied to modifications or
      exchanges of debt instruments occurring in interim or annual periods beginning
      after November 29, 2006.  The adoption of EITF 06-6 did not have a
      material impact on the Company’s condensed consolidated financial position,
      results of operations or cash flows.





In
      November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no longer
      meet the conditions for separate accounting as a derivative instrument, such
      as
      when the bifurcated instrument meets the conditions of Issue 00-19 to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded conversion option
      to
      no longer require bifurcation under FAS 133 and the amount of the liability
      for
      the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in FAS 133 in interim
      or annual periods beginning after December 15, 2006, regardless of whether
      the
      debt instrument was entered into prior or subsequent to the effective date
      of
      EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
      financial statements have not yet been issued. The adoption of EITF 06-7 did
      not
      have a material impact on the Company’s condensed consolidated financial
      position, results of operations or cash flows.





In
      December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”) which
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement should be
      separately recognized and measured in accordance with SFAS No. 5, “Accounting
      for Contingencies.”    Adoption of FSP EITF 00-19-02 is
      required for fiscal years beginning after December 15, 2006. The adoption of
      FSP
      EITF 00-19-02 did not have a material impact on the Company’s condensed
      consolidated financial position, results of operations or cash
      flows.




9




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


In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities – Including an amendment of FASB Statement No.
      115” (“SFAS No. 159”), which permits entities to choose to measure many
      financial instruments and certain other items at fair value.  The fair
      value option established by this Statement permits all entities to choose to
      measure eligible items at fair value at specified election dates. A business
      entity shall report unrealized gains and losses on items for which the fair
      value option has been elected in earnings at each subsequent reporting
      date.  Adoption is required for fiscal years beginning after November
      15, 2007.  Early adoption is permitted as of the beginning of a fiscal
      year that begins on or before November 15, 2007, provided the entity also elects
      to apply the provisions of SFAS No. 159.  The Company is currently
      evaluating the expected effect of SFAS 159 on its condensed consolidated
      financial statements and is currently not yet in a position to determine such
      effects.





Use
      of
      Estimates - The preparation of financial statements in conformity with
      accounting principles generally accepted in the United States of America,
      requires management to make estimates and assumptions that affect the reported
      amounts of assets, liabilities and disclosures of contingent assets and
      liabilities at the date of the 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 our 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.





**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 $671.23 increase in the stated value, which sum
      is
      convertible into Common Stock at a conversion price of $0.2551.  Prior
      to an amendment of the terms there was a dividend of 5% per annum on the stated
      value.  The Series C Preferred Stock currently has no
      dividends.  The additional amount of $671.23 represents the 5% per
      annum from October 10, 2000 through the amendment.





On
      April
      11, 2007, 10 shares of Series C Preferred Stock, together with related accrued
      dividends of $16,712, were converted into 457,516 shares of Common Stock at
      a
      conversion price of  $0.2551.





As
      of
      September 30, 2007, there were 90.701477 shares of Series C Preferred Stock
      outstanding, which were convertible into 4,149,736  shares of Common
      Stock and remaining accrued dividends of $151,583, which is included in other
      current liabilities in the accompany unaudited condensed consolidated balance
      sheet.





**Note
      4.                 Series
      D Redeemable Convertible Preferred Stock**





On
      February 17, 2004, Andrea entered into a Securities Purchase 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.  The warrants are
      exercisable at any time after August 17, 2004 and before February 23, 2009
      at an
      exercise price of $0.38 per share.





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.





Knightsbridge
      Capital served as a financial advisor to Andrea in connection with the
      aforementioned transactions and the initial issuance of the Series D Preferred
      Stock and related warrants.  In connection with these transactions,
      Andrea agreed to pay Knightsbridge Capital $300,000 in cash and to issue
      warrants exercisable for an aggregate of 377,094 shares of Common Stock. The
      warrants are exercisable at any time after August 17, 2004 and before February
      23, 2009 at an exercise price of $0.38 per share.





From
      the
      time of issuance through June 4, 2009, the Company is required to maintain
      effective registration statements.  Prior to 2007, there were 281,250
      exercises of Series D Preferred Stock Warrants.  On March 16, 2007,
      25,000 shares of Series D Preferred Stock were converted into 100,000 shares
      of
      Common Stock at a conversion price of $0.25.  On April 11, 2007,
      25,000 shares of Series D Preferred Stock were converted into 100,000 shares
      of
      Common Stock at a conversion price of $0.25. As of September 30, 2007, there
      are
      1,192,858 shares of Series D Preferred Stock and 5,158,344 related warrants
      outstanding, which are convertible and exercisable into 9,929,776 shares of
      Common Stock.  There were no Series D Preferred Stock Warrant
      exercises during the quarter or nine months ended September 30,
      2007.





10




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




**Note
      5.                 Licensing
      Agreements**





*Analog*


In
      November 2004, Andrea entered into a license agreement with Analog to integrate
      its EchoStop technology with certain Analog products for one of Analog’s
      customers (“EchoStop Licensed Products”).  As consideration of this
      license, Analog will pay Andrea a royalty for each EchoStop Licensed Product
      shipped.  During the first year of the agreement, Analog will pay
      Andrea a minimum of $100,000 in royalty payments, payable in payments of $25,000
      per quarter.  During the three months ended September 30, 2006 Andrea
      received the final $25,000 of the minimum royalty payment due under this
      agreement.  Andrea will continue to receive royalty payments based on
      the number of EchoStop Licensed Products shipped until either party terminates
      the agreement per the terms of the agreement.  During the three months
      ended September 30, 2007 and September 30, 2006, Andrea has recognized $25,514
      and $0, respectively of licensing revenues related to this
      agreement.  During the nine months ended September 30, 2007 and
      September 30, 2006, Andrea has recognized $93,513 and $25,000, respectively
      of
      licensing revenues related to this agreement.





In
      January
      2006, Andrea entered into a license agreement with Analog to integrate its
      DSDA
      and EchoStop technologies with certain of Analog products for specific Analog
      PC
      Original Equipment Manufacturer (“OEM”) customers (“DSDA/EchoStop Licensed
      Product”).  In consideration of this license, Analog will pay Andrea a
      royalty for each DSDA/EchoStop Licensed Product shipped.  During the
      three months ended September 30, 2007 and September 30, 2006, Andrea has
      recognized $38,922 and $12,500, respectively, of revenues under this
      agreement.  During the nine months ended September 30, 2007 and
      September 30, 2006, Andrea has recognized $102,867 and $25,000, respectively,
      of
      revenues under this agreement.  When the royalties paid to Andrea from
      DSDA/EchoStop Licensed Products amount to $500,000, no further payments will
      be
      required under this agreement.





*Marconi*


In
      December 2002, Andrea entered into a license agreement with  Marconi
      Communications to provide and integrate a number of its proprietary audio
      software technologies into the Marconi ViPr Virtual Presence System (“ViPr”TM).
      The ViPr conference system is a new network appliance developed by Marconi
      that
      enables secure, high resolution, real-time, multimedia communications between
      people in geographically dispersed locations. The addition of our hands-free
      audio system includes an advanced stereo version of Andrea’s patented EchoStop,
      as well as its patented Digital Super Directional Array (“DSDAâ”) and PureAudio
      noise canceling algorithms, among others. The implementation of Andrea’s
      microphone array, which is embedded in the monitor of the ViPr system allows
      users to carry on discussions at normal conversation levels, even in a noisy
      environment.  In 2006, Ericsson Inc. purchased certain assets and
      liabilities of Marconi Communication Inc. In conjunction with this purchase,
      Andrea, Marconi Communications Inc. and Ericsson Inc. executed a Novation
      Agreement in which the 2002 license agreement is now between Ericsson and
      Andrea.  During the three months ended September 30, 2007 and 2006
      $4,960 and $4,840, respectively, of license revenues were recognized in the
      accompanying unaudited condensed consolidated statements of
      operations.  During the nine months ended September 30, 2007 and 2006
      $14,040 and $28,360, respectively, of licensing revenues were recognized related
      to this agreement.





*Creative*


In
      October
      2004 Andrea entered into a Production and Distribution Agreement with Creative
      Technology Ltd. (“Creative”).  This agreement was modified in January
      2005 to incorporate additional license rights.  This agreement grants
      Creative a non-exclusive license to VoiceCenter, PureAudio and DSDA as well
      as
      the right to purchase and resell certain of its other
      products.  VoiceCenter will be distributed with Creative’s Sound
      Blaster Live! ADVANCED MB, a simple online upgrade allowing PC users with
      motherboard audio produced by Dell to upgrade to Sound Blaster audio quality.
      The Sound Blaster Live! ADVANCED MB audio solution is available for PCs equipped
      with this configuration.  The features of PureAudio and DSDA will be
      distributed in certain of Creative’s other products to enable optimized
      far-field voice input.  In consideration of this agreement, Creative
      pays Andrea a royalty for each VoiceCenter license shipped with the Soundblaster
      Live and each webcam shipped with Andrea’s licensed
      technologies.  During the three months ended September 30, 2007 and
      2006, Andrea recorded $13,327 and $172,126, respectively of licensing revenues
      related to this agreement.  During the nine months ended September 30,
      2007 and 2006, Andrea recorded $251,956 and $376,479, respectively of licensing
      revenues related to this agreement.





*Samsung*


In
      October
      2005, Andrea entered into a license agreement with Samsung Electronics Co.,
      LTD
      (“Samsung”) to integrate our DSDA and EchoStop technologies with certain
      notebook/laptop PC products incorporating directional microphone and speaker
      phone functions for use in conjunction with PC software voice driven
      applications.  During the three months ended September 30, 2007 and
      2006, Andrea recorded $6,712 and $15,726 of licensing revenue related to this
      agreement, respectively.  During the nine months ended September 30,
      2007 and 2006, Andrea recorded $34,203 and $19,595 of licensing revenue related
      to this agreement, respectively.




11




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


**Note
      6.                 Commitments
      And Contingencies**





Leases





In
      March
      2005, Andrea entered into a lease for its corporate headquarters located in
      Bohemia, New York, where Andrea leases space for warehousing, sales and
      executive offices from an unrelated party.  The lease is for
      approximately 11,000 square feet and expires in October 2008.  Rent
      expense under this operating lease was $22,958 and $63,473 for the three and
      nine-month periods ended September 30, 2007, respectively.  Rent
      expense under this operating lease was $19,873 and $59,039 for the three and
      nine-month periods ended September 30, 2006.





As
      of
      September 30, 2007, the future minimum annual lease payments under this lease
      and all non-cancelable operating leases are as follows:





2007
                (October to December 31)
            
            $
            26,0522008
            
            
            102,3262009
            
            
            93,5412010
            
            
            29,171Total
            
            $
            251,090





Employment
      Agreements





In
      June
      2004, the Company entered into a one-year employment contract with the Chairman
      of the Board, Douglas J. Andrea, which automatically renewed for one additional
      one-year term and expired June 2006.  Pursuant to this employment
      agreement, Mr. Andrea received an annual base salary of $225,000 per annum,
      a
      minimum annual prorated bonus of $50,000.  Mr. Andrea was also
      entitled to a change in control payment equal to one time his base salary with
      continuation of health and medical benefits for one year in the event of a
      change in control and subsequent termination of employment other than for
      cause.  In accordance with Amendment 1 of Mr. Andrea’s employment
      agreement, Mr. Andrea did not receive a $50,000 bonus for the periods ended
      December 31, 2005 and 2004, and instead was entitled to a $100,000 bonus when
      the Company had positive cash flows.  This bonus was paid during the
      three-month period ended June 30, 2007.  At December 31, 2006, the
      future minimum cash commitments under this agreement aggregate was $100,000,
      (including the unpaid portion of Mr. Andrea’s 2005 and 2004 bonuses), and is
      included in other liabilities in the Company’s accompanying condensed balance
      sheet.





In
      November 2006, the Company entered into a new employment agreement with Mr.
      Andrea.  The employment agreement expires July 31, 2008 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 $300,000 per annum.  In addition,
      upon execution of the employment agreement, Mr. Andrea was entitled to a salary
      adjustment from August 1, 2006 through the date of the employment
      agreement.   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 November 2, 2006, in accordance with
      his employment agreement, Mr. Andrea was granted 1,000,000 stock options. This
      grant provides for a three year vesting period, an exercise price of $0.12 per
      share, which was fair market value at the date of grant, and a term of 10
      years.  On November 16, 2006, in accordance with his employment
      agreement, Mr. Andrea was granted an additional 1,000,000 stock options. This
      grant provides for a three year vesting period, an exercise price of $0.12
      per
      share, which was fair market value 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.  At September 30,
      2007, the future minimum cash commitments under this agreement aggregate
      $250,000.  At December 31, 2006, the future minimum cash commitments
      under this agreement aggregate $481,349, of which $6,349 is included in other
      liabilities at December 31, 2006.





Legal
      Proceedings





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





**Note
      7.                 Stock
      Plans and Stock Based Compensation**





In
      1991,
      the Board of Directors of Andrea (the “Board”) adopted the 1991 Performance
      Equity Plan (“1991 Plan”), which was approved 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.




12




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


In
      1998,
      the Board adopted the 1998 Stock Option Plan (“1998 Plan”), which was
      subsequently approved by the shareholders. The 1998 Plan, as amended, authorizes
      the granting of awards, the exercise of which would allow up to an aggregate
      of
      6,375,000 shares of Andrea’s Common Stock to be acquired by the holders of those
      awards.  The awards can take the form of stock options, stock
      appreciation rights, restricted stock, deferred stock, stock reload options
      or
      other stock-based awards. Awards may be granted to key employees, officers,
      directors and consultants.  At September 30, 2007, there were 14,984
      shares available for further issuance under the 1998 Plan.





In
      October
      2006, the Board adopted the Andrea Electronics Corporation 2006 Equity
      Compensation Plan (“2006 Plan”), which was subsequently approved by the
      shareholders.  The 2006 Plan authorizes the granting of awards, the
      exercise of which would allow up to an aggregate of 10,000,000 shares of
      Andrea’s Common Stock to be acquired by the holders of those
      awards.  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
      September 30, 2007, there were 5,636,361 shares available for further issuance
      under the 2006 Plan.





On
      August
      4, 2005, in accordance with his employment agreement, Mr. Andrea was granted
      250,000 stock options. This grant provides for a nine month vesting period,
      an
      exercise price of $0.04 per share, which was fair market value at the date
      of
      grant, and a term of 10 years.  There was no compensation expense
      related to the award for the three and nine-month periods ended September 30,
      2007.  The compensation expense related to the award was $0 and $1,333
      for the three and nine-month periods ended September 30, 2006,
      respectively.





On
      November 1, 2005, the Board granted 40,000 stock options to each chairperson
      on
      the Nominating and Audit Committees.  The grants provide for a
      nine-month vesting period, an exercise price of $0.05 per share, which was
      fair
      market value at the date of grant, and a term of 10 years.  There was
      no compensation expense related to the award for the three and nine-month
      periods ended September 30, 2007.  Compensation expense related to
      these awards was $667 and $2,667 for the three and nine-month period ended
      September 30, 2006, respectively.





In
      November 2006, in accordance with his employment agreement, Mr. Andrea was
      granted 2,000,000 stock options. These grants provide for three year vesting,
      an
      exercise price of $0.12 per share, which was fair market value at the date
      of
      grant, and a term of 10 years.  Compensation expense related to these
      awards was $19,440 and $70,340 for the three and nine-month period ended
      September 30, 2007, respectively.  There was no compensation expense
      related to the award for the three and nine-month periods ended September 30,
      2006.





During
      2006, the Board granted 400,000 stock options to the Vice President and Chief
      Financial Officer and 755,000 stock options to employees of the
      Company.  Each option grant provides for vesting periods of up to
      three years, a weighted average exercise price of $0.12 per share, the exercise
      price of each option grant was equal to the fair market value at the date of
      grant, and a term of 10 years.  Compensation expense related to these
      awards was $16,797 and $47,646 for the three and nine-month period ended
      September 30, 2007, respectively.  Compensation expense related to
      these awards was $2,202 and $2,944 for the three and nine-month period ended
      September 30, 2006, respectively.





On
      November 16, 2006, the Board granted 16,667 stock options to each chairperson
      on
      the Nominating and Compensation Committees and 41,667 stock options to the
      chairperson on the Audit Committee.  The grants provide for an
      eighteen-month vesting period, an exercise price of $0.12 per share, which
      was
      fair market value at the date of grant, and a term of 10
      years.  Compensation expense related to these awards was $1,041 and
      $4,487 for the three and nine-month period ended September 30, 2007,
      respectively. There was no compensation expense related to the award for the
      three and nine-month periods ended September 30, 2006.





On
      September 12, 2007, the Board granted 1,000,000 stock options to the President
      and Chief Executive Officer, 350,000 stock options to the Vice President and
      Chief Financial Officer, 60,000 stock options to the Board of Directors and
      760,000 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, the exercise price of each option grant was equal to the fair market
      value at the date of grant, and a term of 10 years.  Compensation
      expense related to these awards was $4,971 for the three and nine-month periods
      ended September 30, 2007.  There was no compensation expense related
      to the award for the three and nine-month periods ended September 30,
      2006.





On
      September 12, 2007, the Board granted 18,182 stock options to each chairperson
      on the Nominating and Compensation Committees and 45,455 stock options to the
      chairperson on the Audit Committee.  The grants provide for an
      eighteen-month vesting period, an exercise price of $0.11 per share, which
      was
      fair market value at the date of grant, and a term of 10
      years.  Compensation expense related to these awards was $375 for the
      three and nine-month periods ended September 30, 2007. There was no compensation
      expense related to the award for the three and nine-month periods ended
      September 30, 2006.




13




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


Total
      compensation expense recognized related to stock option awards was $42,624
      and
      $127,819 for the three and nine-month periods ended September 30, 2007,
      respectively.  For the three month period ended September 30, 2007,
      $32,593 is included in general, administrative and selling expenses, $9,616
      is
      included in research and development expenses and $415 is included in cost
      of
      revenues in the accompanying condensed consolidated statement of
      operations.  For the nine month period ended September 30, 2007,
      $101,839 is included in general, administrative and selling expenses, $24,940
      is
      included in research and development expenses and $1,040 is included in cost
      of
      revenues in the accompanying condensed consolidated statement of
      operations.  Total compensation expense recognized related to stock
      option awards was $2,202 and $6,944 for the three and nine-month periods ended
      September 30, 2006, respectively.  These 2006 expenses are included in
      general, administrative and selling expenses in the accompanying condensed
      consolidated statement of operations.





The
      fair
      values of the stock options granted were estimated on the date of grant using
      the Black-Scholes option-pricing model that uses the following weighted-average
      assumptions for the three and nine-month periods ended September 30,
      2007:





Three
                  months ended September 30, 2007
            
            
            Nine
                  months ended September 30, 2007Expected
                life in years
            
            
            5.98
            
            
            
            5.98Risk-free
                interest rates
            
            
            4.17
            %
            
            
            4.17
            %Volatility
            
            
            100.63
            %
            
            
            100.63
            %Dividend
                yield
            
            
            0
            %
            
            
            0
            %





There
      were
      no stock options granted during the three month period ended September 30,
      2006.  The fair values of the stock options granted were estimated on
      the date of grant using the Black-Scholes option-pricing model that uses the
      following weighted-average assumptions for the nine month periods ended
      September 30, 2006:





Nine
                  months ended September 30, 2006Expected
                life in years
            
            
            7Risk-free
                interest rates
            
            
            4.57
            %Volatility
            
            
            94.3
            %Dividend
                yield
            
            
            0
            %





Option
      activity during 2007 is summarized as follows:





Options
                Outstanding
            
            Options
                ExercisableOptions
                Outstanding
            
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted
                Average
              Remaining
              Contractual
                Life
            
            Options
              Exercisable
            
            
            Weighted
                Average
              Exercise
                PriceAt
                January 1, 2007
            
            
            7,590,001
            
            
            
            1.05
            
            8.01
                years
            
            
            4,397,500
            
            
            $
            1.72Granted
            
            
            2,251,819
            
            
            
            0.11Cancelled
            
            
            (155,000
            )
            
            
            5.38At
                September 30, 2007
            
            
            9,686,820
            
            
            
            0.76
            
            8.05
                years
            
            
            4,970,975
            
            
            $
            1.38





The
      weighted average fair value of options at the date of grant using the
      Black-Scholes fair value based method for the three and nine-month periods
      ended
      September 30, 2007 is estimated at $0.09.  The weighted average fair
      value of options at the date of grant using the Black-Scholes fair value based
      method for the nine-month period ended September 30, 2006 is estimated at
      $0.04.  The were no stock options granted during the three month
      period ended September 30, 2006.




The
      following table is the summary of the Company’s nonvested shares as of September
      30, 2007 and 2006:





Options
              Outstanding
                and
              Nonvested
            
            
            Weighted
                Average
              Exercise
                Price
            
            
            Weighted
                Average
              Fair
                ValueNonvested
                at January 1, 2006
            
            
            330,000
            
            
            
            0.04
            
            
            
            0.04Granted
            
            
            3,230,001
            
            
            
            0.12
            
            
            
            0.10Vested
            
            
            (367,500
            )
            
            
            0.04
            
            
            
            0.04Nonvested
                at December 31, 2006
            
            
            3,192,501
            
            
            
            0.12
            
            
            
            0.10Granted
            
            
            2,251,819
            
            
            
            0.11
            
            
            
            0.09Vested
            
            
            (728,475
            )
            
            
            0.12
            
            
            
            0.10Nonvested
                at September 30, 2007
            
            
            4,715,845
            
            
            
            0.12
            
            
            
            0.10




14




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


The
      following table summarizes information about stock options outstanding at
      September 30, 2007:




Options
                    Outstanding
                
                
                
                
                
                Options
                    ExercisableRange
                      of
                
                Number
                
                
                Weighted-
                    Average
                    Remaining
                
                
                Weighted-
                    Average
                    Exercise
                
                
                Number
                
                
                Weighted-
                    Average
                    ExerciseExercise
                    Prices
                
                Outstanding
                
                
                Contractual
                    Life
                
                
                Price
                
                
                Exercisable
                
                
                Price$0.04
                
                to
                $
                0.06
                
                
                2,340,000
                
                
                
                7.88
                
                
                $
                0.05
                
                
                
                2,340,000
                
                
                $
                0.050.07
                
                to
                
                0.11
                
                
                2,516,819
                
                
                
                9.64
                
                
                
                0.11
                
                
                
                265,000
                
                
                
                0.100.12
                
                to
                
                0.17
                
                
                3,580,001
                
                
                
                8.84
                
                
                
                0.12
                
                
                
                1,115,975
                
                
                
                0.120.28
                
                to
                
                0.43
                
                
                35,000
                
                
                
                5.62
                
                
                
                0.34
                
                
                
                35,000
                
                
                
                0.340.44
                
                to
                
                0.65
                
                
                70,000
                
                
                
                5.20
                
                
                
                0.57
                
                
                
                70,000
                
                
                
                0.570.66
                
                to
                
                1.00
                
                
                342,500
                
                
                
                4.34
                
                
                
                0.69
                
                
                
                342,500
                
                
                
                0.691.52
                
                to
                
                2.28
                
                
                75,000
                
                
                
                3.53
                
                
                
                1.75
                
                
                
                75,000
                
                
                
                1.752.29
                
                to
                
                3.43
                
                
                10,000
                
                
                
                3.18
                
                
                
                3.30
                
                
                
                10,000
                
                
                
                3.305.17
                
                to
                
                7.75
                
                
                482,500
                
                
                
                2.18
                
                
                
                6.24
                
                
                
                482,500
                
                
                
                6.247.76
                
                to
                
                11.65
                
                
                40,000
                
                
                
                1.85
                
                
                
                8.25
                
                
                
                40,000
                
                
                
                8.2511.66
                
                to
                
                17.49
                
                
                195,000
                
                
                
                0.61
                
                
                
                14.28
                
                
                
                195,000
                
                
                
                14.28$0.04
                
                to
                $
                17.49
                
                
                9,686,820
                
                
                
                8.05
                
                
                $
                0.76
                
                
                
                4,970,975
                
                
                $
                1.38


As
      of
      September 30, 2007, there was $315,488 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 4 years ($57,280 during the remaining period
      in
      2007, $174,479 in 2008, $68,319 in 2009 and $15,410 in 2010).





During
      2007, 2006 and 2005, pursuant to Andrea’s compensation policy for outside
      directors, Andrea granted 181,820 shares of Common Stock with a fair market
      value of $0.11, 166,668 shares of Common Stock with a fair market value of
      $0.12
      and 400,000 shares of Common stock with a fair market value of
      $0.05.  Compensation expense related to these awards was $5,834 and
      $5,001 for the three period ended September 30, 2007 and 2006,
      respectively.  Compensation expense related to these awards was
      $15,834 and $15,003 for the nine month period ended September 30, 2007 and
      2006,
      respectively.





**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.





The
      following represents selected condensed consolidated financial information
      for
      Andrea’s segments for the three-month periods ended September 30, 2007 and
      2006:





2007
                  Three Month Segment Data
            
            Andrea
                  DSP
                Microphone
                  and
                Audio
                  Software
                Products
            
            
            Andrea
                  Anti-
                Noise
                  Products
            
            
            Total
                  2007 Three
                Month
                  Segment
                DataNet
                revenues from external customers
            
            $
            531,621
            
            
            $
            428,342
            
            
            $
            959,963License
                Revenues
            
            
            89,952
            
            
            
            -
            
            
            
            89,952Loss
                from operations
            
            
            134,811
            
            
            
            61,839
            
            
            
            196,650Depreciation
                and amortization
            
            
            117,082
            
            
            
            4,718
            
            
            
            121,800Purchases
                of patents and trademarks
            
            
            110
            
            
            
            1,350
            
            
            
            1,460Assets
            
            
            3,972,985
            
            
            
            1,400,584
            
            
            
            5,373,569Total
                long lived assets
            
            
            2,952,665
            
            
            
            169,910
            
            
            
            3,122,575




15




**ANDREA
        ELECTRONICS CORPORATION AND SUBSIDIARIES**
 NOTES
        TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  2006
                      Three Month Segment Data
                
                Andrea
                      DSP
                    Microphone
                      and
                    Audio
                      Software
                    Products
                
                
                Andrea
                      Anti-
                    Noise
                      Products
                
                
                Total
                      2006 Three
                    Month
                      Segment
                    DataNet
                    revenues from external customers
                
                $
                915,875
                
                
                $
                570,805
                
                
                $
                1,486,680License
                    Revenues
                
                
                205,771
                
                
                
                -
                
                
                
                205,771Income
                    from operations
                
                
                45,117
                
                
                
                23,335
                
                
                
                68,452Depreciation
                    and amortization
                
                
                116,161
                
                
                
                4,805
                
                
                
                120,966Purchases
                    of patents and trademarks
                
                
                535
                
                
                
                3,631
                
                
                
                4,166
  The
        following represents selected condensed consolidated financial information
        for
        Andrea’s segments for the nine-month periods ended September 30, 2007 and
        2006:





2007
                  Nine Month Segment Data
            
            Andrea
                  DSP
                Microphone
                  and
                Audio
                  Software
                Products
            
            
            Andrea
                  Anti-
                Noise
                  Products
            
            
            Total
                  2007 Nine
                Month
                  Segment
                DataNet
                revenues from external customers
            
            $
            1,327,706
            
            
            $
            1,799,372
            
            
            $
            3,127,078License
                Revenues
            
            
            497,853
            
            
            
            -
            
            
            
            497,853Loss
                from operations
            
            
            245,115
            
            
            
            42,130
            
            
            
            287,245Depreciation
                and amortization
            
            
            351,407
            
            
            
            14,093
            
            
            
            365,500Purchases
                of patents and trademarks
            
            
            620
            
            
            
            7,110
            
            
            
            7,7302006
                Nine Month Segment Data
            
            Andrea
                  DSP
                Microphone
                  and
                Audio
                  Software
                Products
            
            
            Andrea
                  Anti-
                Noise
                  Products
            
            
            Total
                  2006 Nine
                Month
                  Segment
                DataNet
                revenues from external customers
            
            $
            1,609,118
            
            
            $
            2,043,904
            
            
            $
            3,653,022License
                Revenues
            
            
            477,330
            
            
            
            -
            
            
            
            477,330(Loss)
                income from operations
            
            
            (186,058
            )
            
            
            211,293
            
            
            
            25,235Depreciation
                and amortization
            
            
            349,911
            
            
            
            16,117
            
            
            
            366,028





The
      following represents selected condensed consolidated financial information
      for
      Andrea’s segments as of December 31, 2006.





2006
                  Year End Segment Data
            
            Andrea
                  DSP
                Microphone
                  and
                Audio
                  Software
                Products
            
            
            Andrea
                  Anti-
                Noise
                  Products
            
            
            Total
                December
                  31, 2006Assets
            
            
            4,329,036
            
            
            
            1,759,979
            
            
            
            6,089,015Total
                long lived assets
            
            
            3,297,304
            
            
            
            179,371
            
            
            
            3,476,675





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 September 30,
      2007 and 2006, and as of each respective period-end, net revenues and accounts
      receivable by geographic area are as follows:





Geographic
                  Data
            
            September
                  30,
                2007
            
            
            September
                  30,
                2006Net
                revenues:United
                States
            
            $
            596,271
            
            
            $
            673,102Foreign(1)
            
            
            453,644
            
            
            
            1,019,349$
            1,049,915
            
            
            $
            1,692,451




(1)
            Net
              revenue to the People’s Republic of China represented 34% of total net
              revenues for three months ended September 30, 2007.  Net revenue
              to the People’s Republic of China and Singapore represented 38% and 10%,
              respectively of total net revenues for three months ended September
              30,
              2006.




16




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




For
      the
      nine-month periods ended September 30, 2007 and 2006, by geographic area, net
      revenues are as follows:





Geographic
                  Data
            
            September
                  30,
                2007
            
            
            September
                  30,
                2006Net
                revenues:United
                States
            
            $
            2,434,017
            
            
            $
            2,113,762Foreign(2)
            
            
            1,190,914
            
            
            
            2,016,590$
            3,624,931
            
            
            $
            4,130,352




(2)
              Net
                  revenue to the People’s Republic of China and Singapore represented 20% of
                  total net revenues for nine months ended September 30,
                  2007.  Net revenue to the People’s Republic of China and
                  Singapore represented 19% and 10%, respectively of total net revenues
                  for
                  nine months ended September 30,
                  2007.




As
      of
      September 30, 2007 and December 31, 2006, account receivable by geographic
      area
      is as follows:





Geographic
                  Data
            
            September
                  30,
                2007
            
            
            December
                  31,
                2006Accounts
                receivable:United
                States
            
            $
            250,171
            
            
            $
            231,416Foreign
            
            
            431,504
            
            
            
            608,183$
            681,675
            
            
            $
            839,599





**Note
      9.                 Accounting
      for the Uncertainty in Income Taxes**





The
      Company has adopted the provisions of FIN 48, on January 1, 2007.  FIN
      48 clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement 109,
      "Accounting for Income Taxes," and prescribes a recognition threshold and
      measurement process for financial statement recognition and measurement of
      a tax
      position taken or expected to be taken in a tax return.  FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim period, disclosure and transition.  There were
      no unrecognized tax benefits as of January 1, 2007.





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 2006, the only periods subject to examination.  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.  In addition, the Company did not
      record a cumulative effect adjustment related to the adoption of FIN
      48.





The
      Company's policy for recording interest and penalties associated with audits
      is
      to record such items as a component of income tax expense.  There were
      no amounts accrued for penalties or interest as of or during the three or nine
      months ended September 30, 2007.  The Company does not expect its
      unrecognized tax benefit position to change during the next twelve
      months.  Management is currently unaware of any issues under review
      that could result in significant payments, accruals or material deviations
      from
      its position.





17





**ITEM
      2.                           MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




**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 devises, 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-KSB for the year ended December 31, 2006.  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-KSB for the year ended December 31, 2006. 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 audited
      financial statements for the year ended December 31, 2006 as filed with the
      Securities and Exchange Commission.





**Cautionary
      Statement Regarding Forward-Looking Statements**





Certain
      information contained in this report are forward-looking statements within
      the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended.  The words
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “seeks,”
variations of such words, and similar expressions are intended to identify
      forward-looking statements.  We have based these forward-looking
      statements on our current expectations, estimates and projections about our
      business and industry, our beliefs and certain assumptions made by our
      management.  Investors are cautioned that matters subject to
      forward-looking statements involve risks and uncertainties including economic,
      competitive, governmental, technological and other factors that may affect
      our
      business and prospects.  These statements are not guarantees of future
      performance and are subject to certain risks, uncertainties and assumptions
      that
      are difficult to predict.  In order to obtain the benefits of these
“safe harbor” provisions for any such forward-looking statements, we wish to
      caution investors and prospective investors about the following significant
      factors, which, among others, have in some cases affected our actual results
      and
      are in the future likely to affect our actual results and could cause them
      to
      differ materially from those expressed in any such forward-looking
      statements.  These factors include the following:





**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:




18




–
            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 revenues for the three months ended September 30,
      2007 were $1,049,915 versus $1,692,451 for the three months ended September
      30,
      2006.  Net loss for the three months ended September 30, 2007 was
      $194,569, or $0.00 loss per share on a basic and diluted basis, versus net
      income of $46,877, or $0.00 per share on a basic and diluted basis for the
      three
      months ended September 30, 2006. Our revenues for the nine months ended
      September 30, 2007 were $3,624,931 versus $4,130,352 for the nine months ended
      September 30, 2006.  Net loss for the nine months ended September 30,
      2007 was $313,214, or $0.01 loss per share on a basic and diluted basis, versus
      net loss of $17,146, or $0.00 loss per share on a basic and diluted basis for
      the nine months ended September 30, 2006.  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 and increasing sales, if our revenues 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/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.  Since 1997, we have
      been unable to generate sufficient cash flow from operations to meet our
      operating needs and, correspondingly, from time to time during the past several
      years, we have raised additional capital from external sources.  We
      may have to continue 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 past few
      years of performance, we believe that we have sufficient liquidity to continue
      our operations at least through September 2008, provided our net revenues do
      not
      decline and our operating expenses do not 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, 59,861,193 were outstanding as of November 9, 2007. The number
      of
      shares outstanding does not include an aggregate of 29,417,677 shares of common
      stock that are issuable.  This number of issuable common shares is
      equal to approximately 49% of the 59, 861,193 outstanding
      shares.  These issuable common shares are comprised of:  a)
      9,686,820 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) 14,984 shares reserved for future grants under
      our
      1998 Stock Plan; c) 5,636,361 shares reserved for future grants under our 2006
      Stock Plan; d) 4,149,736 shares of common stock that are issuable upon
      conversion of the Series C Preferred Stock; e) 4,771,432 shares of common stock
      issuable upon conversion of the Series D Preferred Stock; and f) 5,158,344
      of
      common stock issuable upon exercise of warrants relating to the Series D
      Preferred stock.





**Conversions
      of our Series C Preferred Stock, Series D Preferred Stock and related Warrants
      may result in substantial dilution to other holders of our common
      stock.**





As
      of
      November 9, 2007, we had 90.701477 shares of Series C Preferred Stock, 1,192,858
      shares of Series D Preferred Stock and 5,158,344 Common Stock warrants
      outstanding.  The issuance of shares of common stock upon conversion
      of the Series C Preferred Stock is limited to that amount which, after given
      effect to the conversion, would cause the holder not to beneficially own in
      excess of 4.99% or, together with other shares beneficially owned during the
      60
      day period prior to such conversion, not to beneficially own in excess of 9.99%
      of the outstanding shares of common stock.  The issuance of common
      stock upon conversion of the Series D Preferred Stock and the related warrants
      also are limited to that amount which, after given effect to the conversion,
      would cause the holder not to beneficially own an excess of 4.99% of then
      outstanding shares of our common stock, except that each holder has a right
      to
      terminate such limitation upon 61 days notice to us.  Beneficial
      ownership for purposes of calculation of such percentage limitations does not
      include shares whose acquisition is subject to similar
      limitations.  If all shares of the Series C and Series D Preferred
      Stock and warrants, which are outstanding to be issued, are assumed to be
      converted into or exercised for shares of common stock, the number of new shares
      of common stock required to be issued as a result would aggregate 14,079,512
      shares, which would represent 24% of the then outstanding shares of common
      stock.




19




**Short
      sales of our common stock may be attracted by or accompany conversions of Series
      C Preferred Stock and Series D Preferred Stock, which sales may cause downward
      pressure upon the price of our common stock.**





Short
      sales of our common stock may be attracted by or accompany the sale of converted
      common stock, which in the aggregate could cause downward pressure upon the
      price of the common stock, regardless of our operating results, thereby
      attracting additional short sales of the common stock.





**If
      we fail to commercialize and fully market our Andrea DSP Microphone and Audio
      Software products, or continue to develop, and not fully market, Andrea
      Anti-Noise Headset products, our revenues may not increase at a high enough
      rate
      to improve our results of operations or may not increase at
      all.**





Our
      business, results of operations and financial condition depend on the successful
      commercialization of our Andrea DSP Microphone and Audio Software products
      and
      technologies.  We introduced our first Andrea DSP Microphone products
      in 1998 and we continued to introduce complementary products and technologies
      over the last several years.  We are primarily targeting these
      products at the desktop computer market, the audio and video conferencing
      markets and the market for in-vehicle computing, among others.  The
      success of these products is subject to the risks frequently encountered by
      companies in an early stage of product commercialization, particularly companies
      in the computing and communications industries.





**If
      we are unable to obtain market acceptance of Andrea DSP Microphone and Audio
      Software products and technologies or if market acceptance of these products
      and
      technologies occurs at a slow rate, then our business, results of operations
      and
      financial condition will be materially and adversely
      affected.**





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





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





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





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





Further,
      the markets for our products and technologies are characterized by evolving
      industry and government standards and specifications that may require us to
      devote substantial time and expense to adapt our products and
      technologies.  For example, certain of our Andrea DSP Microphone and
      Audio Software and Andrea Anti-Noise Headset products are subject to the Federal
      Communications Commission requirements.  We may not successfully
      anticipate and adapt our products and technologies in a cost effective and
      timely manner to changes in technology and industry standards or to
      introductions of new products and technologies by others that render our then
      existing products and technologies obsolete.





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





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




20


**Shortages
      of, or interruptions in, the supply of more specialized components for our
      products could have a material adverse effect on our sales of these
      products.**





The
      majority of our assembly operations are fulfilled by subcontractors (primarily
      in the Far East) using purchased components.  Some specialized
      components for the Andrea DSP Microphone and Audio Software products and Andrea
      Anti-Noise products, such as microphones and digital signal processing boards,
      are available from a limited number of suppliers (in some cases foreign) and
      subject to long lead times.  We may not be able to continue to obtain
      sufficient supplies of these more specialized components, particularly if the
      sales of our products increase substantially or market demand for these
      components otherwise increases.  If our subcontractors fail to meet
      our production and shipment schedules, our business, results of operations
      and
      financial condition would be materially and adversely affected.





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





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





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





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





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





We
      generate revenues to regions outside the United States, particularly in
      Asia.  For the three-month period ended September 30, 2007, and 2006,
      net revenues to customers outside the United States accounted for approximately
      43% and 60% of our net revenues.  For the nine-month period ended
      September 30, 2007, and 2006, net revenues to customers outside the United
      States accounted for approximately 33% and 49%, respectively, of our net
      revenues.  International revenues and operations are subject to a
      number of risks, including:




•           trade
      restrictions in the form of license requirements;


•           restrictions
      on exports and imports and other government controls;


•           changes
      in tariffs and taxes;


•           difficulties
      in staffing and managing international operations;


•           problems
      in establishing and managing distributor relationships;


•           general
      economic conditions; and


•           political
      and economic instability or conflict.




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




21




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





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





**Compliance
      with the Sarbanes-Oxley Act of 2002 will require substantial financial and
      management resources and may result in additional expenses, which as a smaller
      public company many be disproportionately high.**





Section
      404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report
      on
      our system of internal controls as of December 31, 2007 and requires that we
      have such system of internal controls audited beginning with our Annual Report
      on 10-KSB for the year ending December 31, 2008.  If we fail to
      maintain the adequacy of our internal controls, we could be subject to
      regulatory scrutiny, civil or criminal penalties and/or stockholder
      litigation.  Any inability to provide reliable financial reports could
      harm our business.  Section 404 of the Sarbanes-Oxley Act of 2002 also
      requires that our independent registered public accounting firm report on
      management’s evaluation of our system of internal controls.  The
      development of the internal controls of any such entity to achieve compliance
      with the Sarbanes-Oxley Act may increase the time and costs necessary to
      complete any such acquisition.  Furthermore, any failure to implement
      required new or improved controls, or difficulties encountered in the
      implementation of adequate controls over our financial processes and reporting
      in the future, could harm our operating results or cause us to fail to meet
      our
      reporting obligations.  Inferior internal controls could also cause
      investors to lose confidence in our reported financial information, which could
      have a negative effect on the trading price of our stock.





**Results
      Of Operations**





***Quarter
      ended September 30, 2007 compared to Quarter ended September 30, 2006 and Nine
      Months Ended September 30, 2007 compared to the Nine Months Ended September
      30,
      2006.***





Net
      Revenues


For
                  the Three Months Ended
            
            
            
            
            
            For
                  the Nine Months EndedSeptember
                  30,
                2007
            
            
            September
                  30,
                2006
            
            
            %
                Change
            
            
            September
                  30,
                2007
            
            
            September
                  30,
                2006
            
            
            %
                ChangeAndrea
                Anti-Noise Products net Product revenuesSales
                of products to an OEM customer for use with speech recognition
                software
            
            $
            8,460
            
            
            $
            127,350
            
            
            
            (93
            )
            
            $
            139,821
            
            
            $
            473,150
            
            
            
            (70
            )All
                other Andrea Anti-Noise net product revenues
            
            
            419,882
            
            
            
            443,455
            
            
            
            (5
            )
            
            
            1,659,551
            
            
            
            1,570,754
            
            
            
            6Total
                Andrea Anti-Noise Products net Product revenues
            
            
            428,342
            
            
            
            570,805
            
            
            
            (25
            )
            
            
            1,799,372
            
            
            
            2,043,904
            
            
            
            (12
            )Andrea
                DSP Microphone and Audio Software Products revenuesSales
                of array microphone products to an OEM customer
            
            
            359,357
            
            
            
            736,890
            
            
            
            (51
            )
            
            
            731,467
            
            
            
            1,036,112
            
            
            
            (29
            )All
                other Andrea DSP Microphone and Audio product revenues
            
            
            172,264
            
            
            
            178,985
            
            
            
            (4
            )
            
            
            596,239
            
            
            
            573,006
            
            
            
            4License
                revenues
            
            
            89,952
            
            
            
            205,771
            
            
            
            (56
            )
            
            
            497,853
            
            
            
            477,330
            
            
            
            4Total
                Andrea DSP Microphone and Audio Software Products revenues
            
            
            621,573
            
            
            
            1,121,646
            
            
            
            (45
            )
            
            
            1,825,559
            
            
            
            2,086,448
            
            
            
            (13
            )Total
                Revenues
            
            $
            1,049,915
            
            
            $
            1,692,451
            
            
            
            (38
            )
            
            $
            3,624,931
            
            
            $
            4,130,352
            
            
            
            (12
            )





The
      significant decrease in sales of Andrea Anti-Noise Products to an OEM customer
      for use with speech recognition software relates to decreased demand by the
      OEM
      for the first nine months of 2007.  However, we have increased volumes
      forecasted for the remainder of the 2007, which we expect will narrow the
      cumulative year date decrease to an approximate 40% decrease for the calendar
      year 2007 versus the 70% nine-month decrease.  The significant
      decrease in sales of microphone array products to an OEM customer relates to
      the
      decreased demand from the OEM customer.  We believe that this decrease
      is from the introduction of the OEM’s product in 2006 whereas the OEM customer
      needed to supply all of its customers for the initial launch as opposed to
      regular fulfillment of a regularly stocked product.  Therefore the
      introduction in 2006 caused the first year of sales to be significantly higher
      than the second.  We have no assurance that these revenues will
      continue into 2008 although we continue to work with this customer as well
      as to
      market this product to additional OEM customers.  The decrease in
      licensing revenues for the three months ended September 30, 2007 is a result
      of
      Creative no longer offering Sound Blaster Live! ADVANCED MB, an audio upgrade
      that bundled VoiceCenter recording application, partially offset by increases
      in
      our Analog licensing revenue.  Creative is continuing to license other
      of our technologies, which Creative distributes in certain of their products
      to
      enable optimized far-field voice input.  We are in the process of
      negotiating other license agreements, which we believe will be able to replace
      the Creative VoiceCenter revenues.  We expect to start realize some of
      the benefits of these efforts in the remainder of 2007.  See Note 5 of
      the accompanying financial statements for additional information on our
      licensing agreements.




22


Cost
      of
      Revenues





Cost
      of
      revenues as a percentage of sales for the three months ended September 30,
      2007
      decreased to 54% from 57% for the three months ended September 30,
      2006.  Cost of revenues as a percentage of sales for the nine months
      ended September 30, 2007 decreased to 50% from 54% for the nine months ended
      September 30, 2006.  These decreases primarily reflect the impact of
      the changes in the composition of our revenues as described under “Net Revenues”
above.





Research
      and Development





Research
      and development expenses for the three months ended September 30, 2007 increased
      19% to $173,895 from $145,783 for the three months ended September 30,
      2006.  Research and development expenses for the nine months ended
      September 30, 2007 were $502,755, an increase of 21% from the nine months ended
      2006 research and development expenses of $414,176.  These increases
      relate to the adoption of the provisions of SFAS No. 123R as well employee
      compensation and related benefit costs related to a dedicated employee focused
      on product development.  The substantial level of research and
      development is a reflection of our efforts to develop and commercialize DSP
      Microphone and Audio Software technologies, coupled with, to a lesser extent,
      Andrea Anti-Noise headset products.  For the three months ended
      September 30, 2007, the Andrea DSP Microphone and Audio Software Technology
      efforts were $124,817, or 72% of total research and development expenses and
      Andrea Anti-Noise Headset Product efforts were $49,078, or 28% of total research
      and development expenses.  For the three months ended September 30,
      2006, the Andrea DSP Microphone and Audio Software Technology efforts were
      $117,236, or 80% of total research and development expenses and Andrea
      Anti-Noise Headset Product efforts were $28,547, or 20% of total research and
      development expenses.  For the nine months ended September 30, 2007,
      the Andrea DSP Microphone and Audio Software Technology efforts were $361,687,
      or 72% of total research and development expenses and Andrea Anti-Noise Headset
      Product efforts were $141,068, or 28% of total research and development
      expenses.  For the nine months ended September 30, 2006, the Andrea
      DSP Microphone and Audio Software Technology efforts were $326,841, or 79%
      of
      total research and development expenses and Andrea Anti-Noise Headset Product
      efforts were $87,335, or 21% 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 2% to $507,503
      for
      the three months ended September 30, 2007 from $516,625 for the three months
      ended September 30, 2006.  General, administrative and selling
      expenses for the nine months ended September 30, 2007 were $1,587,335, an
      increase of 9% from the nine months ended September 30, 2006 general,
      administrative and selling expenses of $1,453,597.  The nine-month
      increase is primarily the result of amortization of stock based compensation
      issued in 2006 as well as the new employment agreement entered into with the
      Company’s President and Chief Executive Officer in November 2006.  For
      the three months ended September 30, 2007, the Andrea DSP Microphone and Audio
      Software Technology efforts were $298,642, or 59% of total general,
      administrative and selling expenses and Andrea Anti-Noise Headset Product
      efforts were $208,861, or 42% of total general, administrative and selling
      expenses.  For the three months ended September 30, 2006, the Andrea
      DSP Microphone and Audio Software Technology efforts were $330,170, or 64%
      of
      total general, administrative and selling expenses and Andrea Anti-Noise Headset
      Product efforts were $186,455, or 36% of total general, administrative and
      selling expenses.  For the nine months ended September 30, 2007, the
      Andrea DSP Microphone and Audio Software Technology efforts were $926,714,
      or
      58% of total general, administrative and selling expenses and Andrea Anti-Noise
      Headset Product efforts were $660,621, or 42% of total general, administrative
      and selling expenses.  For the nine months ended September 30, 2006,
      the Andrea DSP Microphone and Audio Software Technology efforts were $909,121,
      or 62% of total general, administrative and selling expenses and Andrea
      Anti-Noise Headset Product efforts were $544,476, or 38% of total general,
      administrative and selling expenses.





Interest
      Income (Expense), net





Interest
      income, net for the three months ended September 30, 2007 was $3,967 compared
      to
      interest expense, net of $1,129 for the three months ended September 30, 2006.
      Interest income, net for the nine months ended September 30, 2007 was $4,371
      compared to interest expense of $1,439 for the nine months ended September
      30,
      2006.  The increase in net interest income (expense) is a result of
      higher cash balances during 2007.




23




Provision
      for 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.  Amounts are based on net revenues and
      are therefore subject to change.  Effective January 1, 2007, the
      Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
      interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48
      establishes for all entities a minimum threshold for financial statement
      recognition of the benefit of tax positions, and requires certain expanded
      disclosures.  FIN 48 is effective for fiscal years beginning after
      December 15, 2006, and is to be applied to all open tax years as of the date
      of
      effectiveness.  The adoption of FASB Interpretation No. 48 did not
      have a material effect on the Company’s condensed consolidated financial
      position or results of operations or cash flows (See Note 9 of the accompanying
      financial statements).





Net
      Loss





Net
      loss
      for three months ended September 30, 2007 was $194,569 compared to net income
      of
      $46,877 for the three months ended September 30, 2006.  Net loss for
      the nine months ended September 30, 2007 was $313,214 compared to net loss
      of
      $17,146 for the nine months ended September 30, 2006.  The net loss
      for three and nine months ended September 30, 2007 principally reflects the
      factors described above.





Off-Balance
      Sheet Arrangements





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





**Liquidity
      And Capital Resources**





Andrea’s
      principal sources of funds are and are expected to continue to be gross cash
      flows from operations.  At September 30, 2007, we had cash and cash
      equivalents of $854,015 compared with $303,678 at December 31,
      2006.  The balance of cash and cash equivalents at September 30, 2007
      is primarily a result of our cash provided from operations during the nine
      months ended September 30, 2007.





Working
      capital balance at September 30, 2007 was $1,767,004 compared to a working
      capital balance of $1,562,083 at December 31, 2006.  The increase in
      working capital reflects a decrease in total current assets of $226,940 coupled
      with a decrease in total current liabilities of $431,861. The decrease in total
      current assets reflects an increase in cash and cash equivalents of $550,337,
      a
      decrease in accounts receivable of $157,924, a decrease in inventory of
      $352,893, and a decrease in prepaid expenses and other current assets of
      $226,940.  The decrease in total current liabilities reflects a
      decrease in trade accounts payable of $286,317, a decrease in the current
      portion of capital lease of $4,305, and a decrease of $141,239 in other current
      liabilities. The increase in cash and cash equivalents of $550,337 reflects
      $562,372 of net cash provided by operating activities, $7,730 of net cash used
      in investing activities, and $4,305 of net cash used in financing
      activities.





The
      cash
      provided by operating activities of $562,372, excluding non-cash charges for
      the
      quarter ended September 30, 2007, is attributable to a $158,037 decrease in
      accounts receivable, a $352,671 decrease in inventory, a $266,460 decrease
      in
      prepaid expenses and other current assets, a $286,317 decrease in accounts
      payable, and a $124,527 decrease 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 reflects patents and trademarks expenditures of
      $7,730 associated with intellectual property.





The
      net
      cash used in financing activities of $4,305 reflects payment of our capital
      leases associated with communication related equipment.





We
      plan to
      continue to improve our cash flows during 2007 by aggressively pursuing
      additional licensing opportunities related to our Andrea DSP Audio Software
      and
      increasing our Andrea Anti-Noise Headset Products through the introduction
      of
      refreshed product line set to introduced in the early 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 November 9,
      2007, Andrea has approximately $900,000 of cash and cash
      equivalents.  We believe that we have sufficient liquidity available
      to continue in operation through at least September 2008.  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.




24


Recently
        Issued Accounting Pronouncements


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





**ITEM
      3.                      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.




Limitations
      on the Effectiveness of Controls




A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that all control issues and instance 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 is 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
      2.                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.




**ITEM
      3.                      DEFAULTS
      UPON SENIOR SECURITIES**




None.




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




On
      September 12, 2007, 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 (49,135,864 shares for, 1,392,018 shares
      withheld); Gary A. Jones (49,120,451 shares for, 1,407,431 shares withheld);
      Louis Libin (49,122,764 shares for, 1,405,118 shares withheld); Joseph J.
      Migliozzi (49,129,954 shares for, 1,397,928 shares withheld); Jonathan D. Spaet
      (49,115,664 shares for, 1,412,218 shares withheld).  In addition, the
      shareholders ratified the selection of Marcum & Kliegman LLP as the
      Company's independent accountants for the year ended December 31, 2007
      (50,126,288 shares for, 245,119 shares against, and 156,475 shares
      abstained).




**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





25




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




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




Date: November
        14, 2007




/s/    DOUGLAS
                J. ANDREA
            Chairman
                of the Board, President, Chief
            November
                14, 2007**Douglas
                J. Andrea**
            Executive
                Officer and Corporate Secretary/s/    CORISA
                L. GUIFFRE
            Vice
                President, Chief Financial Officer and
            November
                14, 2007**Corisa
                L. Guiffre**
            Assistant
                Corporate Secretary




26