UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|(X) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 
|    |  |                                                                                         
|    |  | For the quarterly period ended June 30, 2012                                            
|    |  |                                                                                         
|OR 
|   
|( ) |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|    |  |                                                                                         
|    |  | For the transition
period from ____________ to ____________                             

Commission file number 1-4324

--------

ANDREA ELECTRONICS CORPORATION

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

(Exact name of registrant as specified
in its charter)

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

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YesxNo ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). YesxNo ̈

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

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

Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈Nox

Indicate the number of shares outstanding of each
of the issuer's classes of common equity, as of the latest practicable date: As of August 9, 2012, there were 63,721,035 common
shares outstanding.

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PART
I.	FINANCIAL INFORMATION

ITEM
1.	FINANCIAL STATEMENTS

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                              |  | June 30,    |             | December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ------------
|                                                                                                                                                              |  | 2012        |             | 2011        
|                                                                                                                                                              |  | (unaudited) |             |             
|ASSETS                                                                                                                                                        |  |             |             |             
|Current assets:                                                                                                                                               |  |             |             |             
|Cash                                                                                                                                                          |  | $           | 1,927,460   |             
|Accounts receivable, net of allowance for doubtful accounts of $18,575 and $18,580, respectively                                                              |  |             | 546,460     |             
|Inventories, net                                                                                                                                              |  |             | 614,467     |             
|Deferred income taxes, net                                                                                                                                    |  |             | -           |             
|Prepaid expenses and other current assets                                                                                                                     |  |             | 103,967     |             
|Total current assets                                                                                                                                          |  |             | 3,192,354   |             
|                                                                                                                                                              |  |             |             |             
|Property and equipment, net                                                                                                                                   |  |             | 292,394     |             
|Intangible assets, net                                                                                                                                        |  |             | 978,679     |             
|Deferred income taxes, net                                                                                                                                    |  |             | 154,621     |             
|Other assets, net                                                                                                                                             |  |             | 12,864      |             
|Total assets                                                                                                                                                  |  | $           | 4,630,912   |             
|                                                                                                                                                              |  |             |             |             
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                          |  |             |             |             
|                                                                                                                                                              |  |             |             |             
|Current liabilities:                                                                                                                                          |  |             |             |             
|Trade accounts payable                                                                                                                                        |  | $           | 235,147     |             
|Accrued Series C Preferred Stock Dividends                                                                                                                    |  |             | 73,921      |             
|Other current liabilities                                                                                                                                     |  |             | 168,433     |             
|Total current liabilities                                                                                                                                     |  |             | 477,501     |             
|                                                                                                                                                              |  |             |             |             
|                                                                                                                                                              |  |             |             |             
|Series B Redeemable Convertible Preferred Stock, $.01 par value; authorized: 1,000 shares; issued and outstanding: 0 shares                                   |  |             | -           |             
|                                                                                                                                                              |  |             |             |             
|Commitments and contingencies                                                                                                                                 |  |             |             |             
|                                                                                                                                                              |  |             |             |             
|Shareholders’ equity:                                                                                                                                         |  |             |             |             
|Preferred stock, $.01 par value; authorized: 2,497,500 shares; none issued and outstanding                                                                    |  |             | -           |             
|Series C Convertible Preferred Stock, net, $.01 par value; authorized: 1,500 shares; issued and outstanding: 44.2 shares; liquidation value: $442,314         |  |             | 1           |             
|Series D Convertible Preferred Stock, net, $.01 par value; authorized: 2,500,000 shares; issued and outstanding: 907,144 shares; liquidation value:  $907,144 |  |             | 9,072       |             
|Common stock, $.01 par value; authorized:  200,000,000 shares; issued and outstanding: 63,721,035 shares                                                      |  |             | 637,210     |             
|Additional paid-in capital                                                                                                                                    |  |             | 77,503,227  |             
|Accumulated deficit                                                                                                                                           |  |             | (73,996,099 | )           
|                                                                                                                                                              |  |             |             |             
|Total shareholders’ equity                                                                                                                                    |  |             | 4,153,411   |             
|                                                                                                                                                              |  |             |             |             
|Total liabilities and shareholders’ equity                                                                                                                    |  | $           | 4,630,912   |             



See Notes to Condensed Consolidated
Financial Statements.

2

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)





|                                             |  | For the Three Months Ended |            | For the Six Months Ended
|-------------------------------------------- |  | -------------------------- | ---------- | ------------------------
|                                             |  | June 30, 2012              |            | June 30, 2011           
|Revenues                                     |  |                            |            |                         
|Net product revenues                         |  | $                          | 677,963    |                         
|License revenues                             |  |                            | 206,525    |                         
|Revenues                                     |  |                            | 884,488    |                         
|                                             |  |                            |            |                         
|Cost of revenues                             |  |                            | 393,132    |                         
|                                             |  |                            |            |                         
|Gross margin                                 |  |                            | 491,356    |                         
|                                             |  |                            |            |                         
|Research and development expenses            |  |                            | 197,007    |                         
|                                             |  |                            |            |                         
|General, administrative and selling expenses |  |                            | 554,021    |                         
|                                             |  |                            |            |                         
|Loss from operations                         |  |                            | (259,672   | )                       
|                                             |  |                            |            |                         
|Interest income, net                         |  |                            | 2,118      |                         
|                                             |  |                            |            |                         
|Loss before provision for income taxes       |  |                            | (257,554   | )                       
|                                             |  |                            |            |                         
|Provision for income taxes                   |  |                            | 16         |                         
|                                             |  |                            |            |                         
|Net loss                                     |  | $                          | (257,570   | )                       
|                                             |  |                            |            |                         
|Basic weighted average shares                |  |                            | 63,721,035 |                         
|                                             |  |                            |            |                         
|Diluted weighted average shares              |  |                            | 63,721,035 |                         
|                                             |  |                            |            |                         
|Basic and diluted net loss per share         |  | $                          | (.00       | )                       











See Notes to Condensed Consolidated
Financial Statements.

3

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(UNAUDITED)





|                                                                |  | Series C Convertible Preferred Stock Outstanding |           | Series C Convertible Preferred Stock |  | Series D Convertible Preferred Stock Outstanding |   | Series D Convertible Preferred Stock |  | Common Stock Shares Outstanding |         | Common Stock |  | Additional Paid-In Capital |       | Accumulated Deficit |  | Total Shareholders’ Equity
|--------------------------------------------------------------- |  | ------------------------------------------------ | --------- | ------------------------------------ |  | ------------------------------------------------ | - | ------------------------------------ |  | ------------------------------- | ------- | ------------ |  | -------------------------- | ----- | ------------------- |  | --------------------------
|                                                                |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Balance, January 1, 2012                                        |  |                                                  | 44.231432 |                                      |  | $                                                | 1 |                                      |  |                                 | 907,144 |              |  | $                          | 9,072 |                     |  |                           
|                                                                |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Stock-based Compensation Expense related to Stock Option Grants |  |                                                  | -         |                                      |  |                                                  | - |                                      |  |                                 | -       |              |  |                            | -     |                     |  |                           
|                                                                |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Net loss                                                        |  |                                                  | -         |                                      |  |                                                  | - |                                      |  |                                 | -       |              |  |                            | -     |                     |  |                           
|                                                                |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           
|Balance, June 30, 2012                                          |  |                                                  | 44.231432 |                                      |  | $                                                | 1 |                                      |  |                                 | 907,144 |              |  | $                          | 9,072 |                     |  |                           
|                                                                |  |                                                  |           |                                      |  |                                                  |   |                                      |  |                                 |         |              |  |                            |       |                     |  |                           



























See Notes to Condensed Consolidated
Financial Statements.

4

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                            |  | For the Six Months Ended
|--------------------------------------------------------------------------- |  | ------------------------
|                                                                            |  | June 30, 2012           
|                                                                            |  |                         
|Cash flows from operating activities:                                       |  |                         
|Net loss                                                                    |  | $                       
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         
|Depreciation and amortization                                               |  |                         
|Stock based compensation                                                    |  |                         
|Provision for doubtful accounts                                             |  |                         
|Deferred income taxes                                                       |  |                         
|Change in:                                                                  |  |                         
|Accounts receivable                                                         |  |                         
|Inventories                                                                 |  |                         
|Prepaid expenses and other current assets                                   |  |                         
|Trade accounts payable                                                      |  |                         
|Short-term deferred revenue                                                 |  |                         
|Other current liabilities                                                   |  |                         
|Net cash used in operating activities                                       |  |                         
|                                                                            |  |                         
|Cash flows from investing activities:                                       |  |                         
|Purchases of property and equipment                                         |  |                         
|Purchases of patents and trademarks                                         |  |                         
|Net cash used in investing activities                                       |  |                         
|                                                                            |  |                         
|Cash flows from financing activities:                                       |  |                         
|Principal repayments of long term debt                                      |  |                         
|Net cash used in financing activities                                       |  |                         
|                                                                            |  |                         
|Net decrease in cash                                                        |  |                         
|                                                                            |  |                         
|Cash, beginning of year                                                     |  |                         
|Cash, end of period                                                         |  | $                       
|                                                                            |  |                         
|Supplemental disclosures of cash flow information:                          |  |                         
|                                                                            |  |                         
|Cash paid for:                                                              |  |                         
|Income Taxes                                                                |  | $                       
|Interest                                                                    |  | $                       

















See Notes to Condensed Consolidated
Financial Statements.

5

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



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



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



These unaudited condensed consolidated
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete financial statements. In addition, the December
31, 2011 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, 2011 included in the Company's Form 10-K for the fiscal year ended December 31, 2011, filed on March 23, 2012.
The accounting policies used in preparing these unaudited condensed consolidated interim financial statements are consistent with
those described in the December 31, 2011 audited consolidated financial statements.



Note
2.Summary of Significant Accounting Policies



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



|                                                                            |  | For the Three and Six Months Ended
|--------------------------------------------------------------------------- |  | ----------------------------------
|                                                                            |  | June 30,
2012                     
|Total potential common shares as of:                                        |  |                                   
|Options to purchase common stock (Note 7)                                   |  |                                   
|Series C Convertible Preferred Stock and related accrued dividends (Note 3) |  |                                   
|Series D Convertible Preferred Stock and related warrants (Note 4)          |  |                                   
|                                                                            |  |                                   
|Total potential common shares                                               |  |                                   



Cash - Cash includes cash and highly liquid investments
with original maturities of three months or less. At times during the periods ended June 30, 2012 and December 31, 2011, the Company
had cash deposits in excess of the maximum amounts insured by the Federal Deposit Insurance Corporation insurance limits. At June
30, 2012 and December 31, 2011, the Company’s cash is held at three financial institutions.



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



|           |  | For the Three Months Ended |    | For the Six Months Ended
|---------- |  | -------------------------- | -- | ------------------------
|           |  | June 30, 2012              |    | June 30, 2011           
|           |  |                            |    |                         
|Customer A |  |                            | 21 | %                       
|Customer B |  |                            | 15 | %                       
|Customer C |  |                            | 10 | %                       
|           |  |                            |    |                         

_________________

* Amounts are less than 10%



Customers A, B and C accounted for approximately 34%,
24%, and 16%, respectively of total accounts receivable at June 30, 2012. Customer A and Customer C accounted for approximately
61% and 8%, respectively, of total accounts receivable at December 31, 2011.

6

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



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



|           |  | For the Three Months Ended |    | For the Six Months Ended
|---------- |  | -------------------------- | -- | ------------------------
|           |  | June 30, 2012              |    | June 30, 2011           
|           |  |                            |    |                         
|Supplier A |  |                            | 41 | %                       
|Supplier B |  |                            | 39 | %                       
|Supplier C |  |                            | 22 | %                       
|Supplier D |  |                            |    | *                       

_________________

* Amounts are less than 10%



At June 30, 2012 and December 31, 2011, Supplier A accounted
for approximately 54% and 64% of accounts payable, respectively.



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



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



|                               |  | June 30, |           | December 31,
|------------------------------ |  | -------- | --------- | ------------
|                               |  | 2012     |           | 2011        
|Raw materials                  |  | $        | 39,703    |             
|Finished goods                 |  |          | 1,221,342 |             
|                               |  |          | 1,261,045 |             
|Less: reserve for obsolescence |  |          | (646,578  | )           
|                               |  | $        | 614,467   |             



Intangible and Lived Assets - Andrea accounts
for its long-lived assets in accordance with Statement of Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) 360 “Plant, Property and Equipment, ” for purposes of determining and measuring
impairment of its long-lived assets (primarily intangible assets) other than goodwill. Andrea’s policy is to review the value
assigned to its long lived assets to determine if they have been permanently impaired by adverse conditions which may affect Andrea
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If Andrea identifies a permanent
impairment such that the carrying amount of Andrea’s long lived assets is not recoverable using the sum of an undiscounted
cash flow projection (gross margin dollars from product sales), the impaired asset is adjusted to its estimated fair value, based
on an estimate of future discounted cash flows which becomes the new cost basis for the impaired asset. Considerable management
judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could
vary significantly from such estimates. No impairment charges were recognized during the three and six month periods ended June
30, 2012 and 2011.



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



Income Taxes - Andrea accounts for income taxes
in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 requires an asset and liability approach
for financial accounting and reporting for income taxes and establishes for all entities a minimum threshold for financial statement
recognition of the benefit of tax positions, and requires certain expanded disclosures. The provision for income taxes is based
upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income.
Deferred income taxes represent the tax effects of differences between the financial reporting and

7

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



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. Andrea expects it will reduce its valuation allowance in future
periods to the extent that it can demonstrate its ability to utilize the assets. Management makes judgments as to the interpretation
of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s
opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies
from estimates, additional allowances or reversals of reserves may be necessary. Income tax expense consists of the tax payable
for the period and the change during the period in deferred tax assets and liabilities. The Company has identified its federal
tax return and its state tax return in New York as "major" tax jurisdictions. Based on the Company's evaluation, it has
been concluded that there are no significant uncertain tax positions requiring recognition in the Company's condensed consolidated
interim financial statements. The Company's evaluation was performed for tax years ended 2008 through 2011. The Company believes
that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result
in a material change to its financial position.



Stock-Based Compensation -At June 30, 2012, Andrea
had two stock-based employee compensation plans, which are described more fully in Note 8. Andrea accounts for stock-based compensation
in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). ASC 718 establishes
accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, stock-based compensation cost
is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite
service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options are
estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk
free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance
with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing
activities. The future realization of the reserved deferred tax assets related to these tax benefits associated with the exercise
of stock options will result in a credit to additional paid in capital if the related tax deduction reduces taxes payable. The
Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether
the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefit would be recognized
in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.



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



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



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



Subsequent Events - The Company
evaluates events that occurred after the balance sheet date but before the condensed consolidated interim financial statements
are issued. Based upon the evaluation, except as noted in Note 6, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the condensed consolidated interim financial statements.



Note
3.Series C Convertible Preferred Stock



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

8

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ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



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



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



As of June 30, 2012, there
were 44.231432 shares of Series C Preferred Stock outstanding, which were convertible into 2,023,658 shares of Common Stock and
remaining accrued dividends of $73,921.



Note
4.Series D Convertible Preferred Stock



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



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



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



In accordance with Sub Topic815-40, Andrea evaluated the Series D Preferred Stock and concluded that it is not considered to be indexed to the Company’s
stock because of the conversion price adjustment feature described above. Accordingly, under the provisions of ASC 815, Andrea
evaluated the Series D Preferred Stock embedded conversion feature. The Company has concluded that the embedded conversion feature
would be classified in stockholders’ equity if it were a freestanding instrument as the Series D Preferred Stock is more
akin to equity and as such it should not be bifurcated from the Series D instrument and accounted for separately.

9

---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



As of June 30, 2012, there
were 907,144 shares of Series D Preferred Stock outstanding which were convertible into 3,628,576 shares of Common Stock.



Note
5.Licensing Agreements



The Company has entered into various licensing, production
and distribution agreements with manufacturers of PC and related components. These agreements provide for revenues based on the
terms of each individual agreement. The Company's two largest licensing customers accounted for $183,169 and $21,651 of license
revenues for the three months ended June 30, 2012 and $243,431 and $56,323 of license revenues for the three months ended June
30, 2011. The Company's two largest licensing customers accounted for $384,584 and $36,177 of license revenues for the six months
ended June 30, 2012 and $541,439 and $110,158 of license revenues for the six months ended June 30, 2011.



Note
6.Commitments And Contingencies



Leases



Andrea leases its corporate headquarters located in Bohemia,
New York. The lease from an unrelated party, which currently expires in April 2015, is for approximately 11,000 square feet and
houses Andrea’s warehousing, sales and executive offices. Rent expense under this operating lease was $23,498 and $46,536
for the three and six-month periods ended June 30, 2012, respectively. Rent expense under this operating lease was $22,865 and
$45,232 for the three and six-month periods ended June 30, 2011, respectively.



As of June 30, 2012, the minimum annual future lease
payments, under this lease and all other noncancellable operating leases, are as follows:



2012 (July 1 – December 31)
    $55,3322013
    112,5622014
    112,5752015
    37,749Total
    $318,218


Employment Agreements



In July 2010, the Company entered into
an employment agreement with the President, Chief Executive Officer and Chairman of the Board, Douglas J Andrea. The effective
date of the employment agreement is August 1, 2010 and expires July 31, 2012 and is subject to renewal as approved by the Compensation
Committee of the Board of Directors. Pursuant to his employment agreement, Mr. Andrea received an annual base salary of $337,500
for the period of August 1, 2010 through July 31, 2011 and for the period of August 1, 2011 through July 31, 2012 Mr. Andrea received
an annual base salary of $350,000. The employment agreement provides for quarterly bonuses equal to 25% of the Company’s
pre-bonus net after tax quarterly earnings in excess of $25,000 for a total quarterly bonus amount not to exceed $12,500; and annual
bonuses equal to 10% of the Company’s annual pre-bonus net after tax earnings in excess of $300,000. All bonuses shall be
payable as soon as the Company's cash flow permits. All bonus determinations or any additional bonus in excess of the above will
be made in the sole discretion of the Compensation Committee. On August 1, 2010, the Board granted Mr. Andrea 1,000,000 stock options
with an aggregate fair value of $130,000 (fair value was estimated using the Black-Scholes option-pricing model). The 1,000,000
grant vests in three equal annual installments over a three year period commencing August 1, 2011. These 1,000,000 stock options
have an exercise price of $0.13 per share, which was the fair market value of the Company’s common stock at the date of grant,
and a term of 10 years. Mr. Andrea is also entitled to a change in control payment equal to two times his salary with continuation
of health and medical benefits for two years in the event of a change in control, as defined in the agreement. At June 30, 2012,
the future minimum cash commitments under this agreement aggregate $29,167.



In July
2012, the Company entered into an employment agreement with Mr. Andrea. The effective date of the employment agreement is August
1, 2012 and expires July 31, 2013 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 $350,000 (which is identical to Mr. Andrea’s
salary for the period from August 1, 2011 to July 31, 2012) through July 31, 2013. 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. Adjustments to net after tax earnings shall be made to remove the impact
of change in recognition of accumulated deferred tax asset value. 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. 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. In the event of his termination without

10

---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



cause
or resignation with the Company’s consent, Mr. Andrea is also entitled to a severance payment equal to six months of his
salary and a continuation for 12 months of health insurance coverage for Mr. Andrea, his spouse and his dependents.



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



Legal Proceedings



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



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



Note
7.Stock Plans and Stock Based Compensation



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



In October 2006, the Board adopted the Andrea Electronics
Corporation 2006 Equity Compensation Plan (“2006 Plan”), which was subsequently approved by the shareholders. The 2006
Plan, as amended, authorizes the granting of awards, the exercise of which would allow up to an aggregate of 18,000,000 shares
of Andrea’s Common Stock to be acquired by the holders of those awards. The awards can take the form of stock options, stock
appreciation rights, restricted stock or other stock-based awards. Awards may be granted to key employees, officers, directors
and consultants. At June 30, 2012, there were 4,269,436 shares available for further issuance under the 2006 Plan.



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



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



There were no options granted during the three and six
months ended June 30, 2012 and 2011.



Option activity during 2012 is summarized as follows:



|                   |  |  | Options Outstanding |   |  |   | Options Exercisable              |  | 
|------------------ |  |  | ------------------- | - |  | - | -------------------------------- |  | 
|                   |  |  | Options Outstanding |   |  |   | Weighted Average Exercise Price |  | 
|                   |  |  |                     |   |  |   |                                  |  | 
|At January 1, 2012 |  |  | 17,760,321          |   |  | $ | 0.10                             |  | 
|Expired            |  |  | (377,500            | ) |  | $ | 0.68                             |  | 
|                   |  |  |                     |   |  |   |                                  |  | 
|At June 30, 2012   |  |  | 17,382,821          |   |  | $ | 0.08                             |  | 

11

---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



During the three months ended June 30, 2012, no additional
options vested. During the six months ended June 30, 2012, 45,924 options vested with a weighted average exercise price and a weighted
average fair value of $0.08 per option. There was no intrinsic value for these options for the three and six months ended June
30, 2012.



Total compensation expense recognized related to stock
option awards was $20,316 and $51,051 for the three months ended June 30, 2012 and 2011, respectively. In the accompanying condensed
consolidated statements of operations for the three months ended June 30, 2012, $16,554 of expense is included in general, administrative
and selling expenses, $2,607 is included in research and development expenses and $1,155 is included in cost of revenues. In the
accompanying consolidated statements of operations for the three months ended June 30, 2011, $41,307 of expense is included in
general, administrative and selling expenses, $6,966 is included in research and development expenses and $2,778 is included in
cost of revenues. Total compensation expense recognized related to all stock option awards was $40,632 and $102,839 for the six
months ended June 30, 2012 and 2011, respectively. In the accompanying condensed consolidated statements of operations for the
six months ending June 30, 2012, $33,108 of expense is included in general, administrative and selling expenses, $5,214 is included
in research and development expenses and $2,310 is included in cost of revenues. In the accompanying condensed consolidated statements
of operations for the six months ending June 30, 2011, $83,351 of expense is included in general, administrative and selling expenses,
$13,932 is included in research and development expenses and $5,556 is included in cost of revenues.



As of June 30, 2012, there was $73,263 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 2 years ($59,041 in 2012 and $14,222 in 2013).



Note
8.Segment Information



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



The following represents selected condensed consolidated
interim financial information for Andrea’s segments for the three-month periods ended June 30, 2012 and 2011.



|2012 Three Month Segment Data        |  | Andrea DSP Microphone and Audio Software Products |           | Andrea Anti- Noise Products |  | 2012 Three
 Month Total
|------------------------------------ |  | ------------------------------------------------- | --------- | --------------------------- |  | -----------------------
|                                     |  |                                                   |           |                             |  |                        
|Net revenues from external customers |  | $                                                 | 191,204   |                             |  | $                      
|License revenues                     |  |                                                   | 206,525   |                             |  |                        
|Loss from operations                 |  |                                                   | (68,104   | )                           |  |                        
|Depreciation and amortization        |  |                                                   | 120,777   |                             |  |                        
|Purchases of property and equipment  |  |                                                   | 2,453     |                             |  |                        
|Purchases of patents and trademarks  |  |                                                   | 10,457    |                             |  |                        
|Assets                               |  |                                                   | 2,621,538 |                             |  |                        
|Total long lived assets              |  |                                                   | 890,294   |                             |  |                        
|                                     |  |                                                   |           |                             |  |                        

12

---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



|2011 Three Month Segment Data           |  | Andrea DSP Microphone and Audio Software Products |                                                   | Andrea Anti- Noise Products |  | 2011 Three
 Month Total
|--------------------------------------- |  | ------------------------------------------------- | ------------------------------------------------- | --------------------------- |  | -----------------------
|                                        |  |                                                   |                                                   |                             |  |                        
|Net revenues from external customers    |  | $                                                 | 68,442                                            |                             |  | $                      
|License revenues                        |  |                                                   | 302,899                                           |                             |  |                        
|Loss from operations                    |  |                                                   | (15,950                                           | )                           |  |                        
|Depreciation and amortization           |  |                                                   | 119,901                                           |                             |  |                        
|Purchases of property and equipment     |  |                                                   | 8,203                                             |                             |  |                        
|Purchases of patents and trademarks     |  |                                                   | 150                                               |                             |  |                        
|                                        |  |                                                   |                                                   |                             |  |                        
|December 31, 2011 Year End Segment Data |  |                                                   | Andrea DSP Microphone and Audio Software Products |                             |  |                        
|                                        |  |                                                   |                                                   |                             |  |                        
|Assets                                  |  | $                                                 | 3,114,849                                         |                             |  | $                      
|Total long lived assets                 |  |                                                   | 1,150,426                                         |                             |  |                        



The following represents selected condensed consolidated
interim financial information for Andrea’s segments for the six-month periods ended June 30, 2012 and 2011:



|2012 Six Month Segment Data          |  | Andrea DSP Microphone and Audio Software Products |                                                   | Andrea Anti- Noise Products |  | 2012 Six 
Month Total
|------------------------------------ |  | ------------------------------------------------- | ------------------------------------------------- | --------------------------- |  | ---------------------
|                                     |  |                                                   |                                                   |                             |  |                      
|Net revenues from external customers |  | $                                                 | 311,371                                           |                             |  | $                    
|License revenues                     |  |                                                   | 424,357                                           |                             |  |                      
|Loss from operations                 |  |                                                   | (174,618                                          | )                           |  |                      
|Depreciation and amortization        |  |                                                   | 240,775                                           |                             |  |                      
|Purchases of property and equipment  |  |                                                   | 2,453                                             |                             |  |                      
|Purchases of patents and trademarks  |  |                                                   | 11,223                                            |                             |  |                      
|                                     |  |                                                   |                                                   |                             |  |                      
|2011 Six Month Segment Data          |  |                                                   | Andrea DSP Microphone and Audio Software Products |                             |  |                      
|                                     |  |                                                   |                                                   |                             |  |                      
|Net revenues from external customers |  | $                                                 | 146,228                                           |                             |  | $                    
|License revenues                     |  |                                                   | 699,706                                           |                             |  |                      
|Income (loss) from operations        |  |                                                   | 47,675                                            |                             |  |                      
|Depreciation and amortization        |  |                                                   | 239,034                                           |                             |  |                      
|Purchases of property and equipment  |  |                                                   | 14,834                                            |                             |  |                      
|Purchases of patents and trademarks  |  |                                                   | 204                                               |                             |  |                      
|                                     |  |                                                   |                                                   |                             |  |                      



Management assesses non-operating income statement data on a consolidated
basis only. International revenues are based on the country in which the end-user is located. For the three-month periods ended
June 30, 2012 and 2011, and as of each respective period-end, net revenues and accounts receivable by geographic area are as follows:



|Geographic Data |  | June 30, 2012 |         | June 30, 2011
|--------------- |  | ------------- | ------- | -------------
|                |  |               |         |              
|Net revenues:   |  |               |         |              
|United States   |  | $             | 766,977 |              
|Foreign(1)      |  |               | 117,511 |              
|                |  | $             | 884,488 |              

13

---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)



(1)Net revenues to any one foreign country did not exceed 10% of total net revenues for the three
months ended June 30, 2012 and June 30, 2011.

For the six-month periods ended June 30, 2012 and 2011, and as of
each respective period-end, net revenues and by geographic area are as follows:



|Geographic Data |  | June 30, 2012 |           | June 30, 2011
|--------------- |  | ------------- | --------- | -------------
|                |  |               |           |              
|Net revenues:   |  |               |           |              
|United States   |  | $             | 1,388,467 |              
|Foreign(1)      |  |               | 261,102   |              
|                |  | $             | 1,649,569 |              

(1)Net revenues to any one foreign country did not exceed 10% of total net revenues for the six
months ended June 30, 2012 and June 30, 2011.

As of June 30, 2012 and December 31, 2011, accounts receivable
by geographic area is as follows:



|Geographic Data      |  | June 30, 2012 |         | December 31, 2011
|-------------------- |  | ------------- | ------- | -----------------
|                     |  |               |         |                  
|Accounts receivable: |  |               |         |                  
|United States        |  | $             | 510,023 |                  
|Foreign(1)           |  |               | 36,437  |                  
|                     |  | $             | 546,460 |                  

14

---



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



Overview



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



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



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



Our Critical Accounting Policies



Our unaudited condensed consolidated interim financial
statements and the notes to our unaudited condensed consolidated interim financial statements contain information that is pertinent
to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual
basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical
experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly.
Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our significant accounting
policies are described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2011. A discussion of our critical accounting policies and estimates are included in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December
31, 2011. Management has discussed the development and selection of these policies with the Audit Committee of the Company’s
Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company’s disclosures of these policies.
There have been no material changes to the critical accounting policies or estimates reported in the Management’s Discussion
and Analysis section of the Annual Report on Form 10-K for the year ended December 31, 2011.



Cautionary Statement Regarding Forward-Looking
Statements



This report contains forward-looking
statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking
statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”,
“estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in economic, competitive, governmental, technological
and other factors that may affect our business and prospects. Additional factors are discussed below under “Risk Factors”
and in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2011. These risks and uncertainties should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake,
and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking
statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated
events.

15

---



Risk Factors



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



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



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

–	the cost of
development of our products;

–	the mix of products
we sell;

–	the mix of distribution
channels we use;

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

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

–	general economic
conditions.



We cannot assure that the level of revenues and gross
profit, if any, that we achieve in any particular fiscal period will not be significantly lower than in other fiscal periods. Our
net revenues for the three months ended June 30, 2012 were $884,488 compared to $876,363 for the three months ended June 30, 2011.
Net loss for the three months ended June 30, 2012 was $257,570, or $0.00 loss per share on a basic and diluted basis compared to
net loss of $175,883, or $0.00 loss per share on a basic and diluted basis for the three months ended June 30, 2011. Our revenues
for the six months ended June 30, 2012 were $1,649,569 compared to $1,875,376 for the six months ended June 30, 2011. Net loss
for the six months ended June 30, 2012 was $615,717 or $.01 loss per share on a basic and diluted basis, compared to net loss of
$313,506, or $.00 loss per share on a basic and diluted basis for the six months ended June 30, 2011. We continue to explore opportunities
to grow sales in other business areas; we are also examining additional opportunities for cost reduction, production efficiencies
and further diversification of our business.



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



Sales of a substantial number of shares of our common
stock in the public market could have the effect of depressing the prevailing market price of our common stock. Of the 200,000,000
shares of common stock presently authorized, 63,721,035 were outstanding as of August 9, 2012. The number of shares outstanding
does not include an aggregate of 27,304,491 shares of common stock that are issuable. This number of issuable common shares is
equal to approximately 43% of the 63,721,035 outstanding shares. These issuable common shares are comprised of: a) 17,382,821 shares
of our common stock reserved for issuance upon exercise of outstanding awards granted under our 1998 Stock Plan and 2006 Stock
Plan; b) 4,269,436 shares reserved for future grants under our 2006 Stock Plan; c) 2,023,658 shares of common stock that are issuable
upon conversion of the Series C Preferred Stock; and d) 3,628,576 shares of common stock issuable upon conversion of the Series
D Preferred Stock.



In addition to the risk factors set forth above and the
other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A –
Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which could materially
affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form
10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

16

---



Results Of Operations



Three and Six Months ended June 30, 2012 compared
to Three and Six Months ended June 30, 2011



Net Revenues



|                                                                     |  | For the Three Months  Ended June 30, |         | % Change |  | For the Six Months  Ended June 30, |         | %  Change
|-------------------------------------------------------------------- |  | ------------------------------------ | ------- | -------- |  | ---------------------------------- | ------- | ---------
|                                                                     |  | 2012                                 |         | 2011     |  |                                    | 2012    |          
|Andrea Anti-Noise Products net Product revenues                      |  |                                      |         |          |  |                                    |         |          
|Sales of products to OEM customers for use with educational software |  | $                                    | 79,609  |          |  | $                                  | 67,888  |          
|All other Andrea Anti-Noise net product revenues                     |  |                                      | 407,150 |          |  |                                    | 437,134 |          
|Total Andrea Anti-Noise Products net Product revenues                |  | $                                    | 486,759 |          |  | $                                  | 505,022 |          
|                                                                     |  |                                      |         |          |  |                                    |         |          
|Andrea DSP Microphone and Audio Software Products revenues           |  |                                      |         |          |  |                                    |         |          
|Sales of automotive array microphone products                        |  |                                      | 150,477 |          |  |                                    | 45,166  |          
|All other Andrea DSP Microphone and Audio product revenues           |  |                                      | 40,726  |          |  |                                    | 23,276  |          
|License revenues                                                     |  |                                      | 206,526 |          |  |                                    | 302,899 |          
|Total Andrea DSP Microphone and Audio Software Products revenues     |  |                                      | 397,729 |          |  |                                    | 371,341 |          
|                                                                     |  |                                      |         |          |  |                                    |         |          
|Total Revenues                                                       |  | $                                    | 884,488 |          |  | $                                  | 876,363 |          
|                                                                     |  |                                      |         |          |  |                                    |         |          



|(a) |  | The increase of approximately $12,000 for the three
months ended June 30, 2012, as compared to the three months ended June 30, 2011 represents increased product sales to our educational
customers for use with their distance learning products. The decrease of approximately $49,000 for the six months ended June 30,
2012, represents decreased product sales to our educational customers for use with their distance learning products. We believe
that these changes in product sales relate to the timing of the customers’ demand for our products.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | The decreases of approximately $30,000 and $67,000 for
the three and six month periods, respectively, ended June 30, 2012, as compared to the same periods in 2011 in all other Andrea
Anti-noise product revenues is related to decreased demand from our distance learning customers as well as distributor and reseller
customers who sell both to distance learning customers and speech recognition end users.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | The increases of approximately $105,000 and $129,000
for the three and six month periods, respectively, ended June 30, 2012, as compared to the same periods in 2011 in sales of automotive
array microphone products are primarily the result of increased product sales to integrators of public safety vehicle solutions.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | The increases of approximately $17,000 and $36,000 for
the three and six month periods, respectively, ended June 30, 2012, as compared to the same periods in 2011 in all other Andrea
DSP Microphone and Audio Software product revenues is related to increased demand from our OEM customer.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | The decreases in license revenues of $96,000 and $275,000
are the result of decreased royalties reported for the three and six months ending June 30, 2012, respectively, as compared to
the same period last year. We believe this decrease is related to a decrease in sales of PC models which feature our technology.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of Revenues



Cost of revenues as a percentage of net revenues for
the three months ended June 30, 2012 increased to 44% from 34% for the three months ended June 30, 2011. The cost of revenues as
a percentage of net revenues for the three months ended June 30, 2012 for Andrea Anti-Noise Products is 60% compared to 55% for
the three months ended June 30, 2011. The cost of revenues as a percentage of net revenues for the three months ended June 30,
2012 for Andrea DSP Microphone and Audio Software Products is 26% compared to 5% for the three months ended June 30, 2011. Cost
of revenues as a percentage of net revenues for the six months ended June 30, 2012 increased to 43% from 34% for the six months
ended June 30, 2011. The cost of revenues as a percentage of net revenues for the six months ended June 30, 2012 for Andrea Anti-Noise
Products is 60% compared to 57% for the six months ended June 30, 2011. The cost of revenues as a percentage of net revenues
for the six months ended June 30, 2012 for

17

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Andrea DSP Microphone and Audio Software Products is 22% compared to 5% for the six months
ended June 30, 2011. The increases for the Andrea Anti-Noise Products revenues for the three and six month periods was attributable
to the different product mix of revenues which resulted in sales of higher margin products combined with decrease in revenues in
this segment and therefore decreased revenue to apply to our fixed cost of revenues decreases in revenues related to this segment.
The increases in cost of sales as a percentage of sales for Andrea DSP Microphone and Audio Software products segment for the three
and six month periods relate to decreased licensing revenues offset in part by increased OEM revenues.



Research and Development Expenses



Research and development expenses for the three months
ended June 30, 2012 increased 5% to $197,007 from $186,816 for the three months ended June 30, 2011. For the three months ended
June 30, 2012, the increase in research and development expenses reflects a 1% increase in our Andrea DSP Microphone and Audio
Software Technology efforts to $107,739, or 55% of total research and development expenses and an 11% increase in our Andrea Anti-Noise
Headset Product efforts to $89,268, or 45% of total research and development expenses. Research and development expenses for the
six months ended June 30, 2012 decreased 3% to $385,049 from $395,128 for the six months ended June 30, 2011. For the six months
ended June 30, 2012, the decrease in research and development expenses reflects a 5% decrease in our Andrea DSP Microphone and
Audio Software Technology efforts to $216,369, or 56% of total research and development expenses and a 1% increase in our Andrea
Anti-Noise Headset Product efforts to $168,680, or 44% of total research and development expenses. These increases primarily relate
to ongoing development of new products.



General, Administrative and Selling Expenses



General, administrative and selling expenses decreased
1% to $554,021 for the three months ended June 30, 2012 from $557,152 for the three months ended June 30, 2011. For the three months
ended June 30, 2012, the expenses reflect a 2% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to $255,362,
or 46% of total general, administrative and selling expenses and a 1% increase in our Andrea Anti-Noise Headset Product efforts
to $298,659, or 54% of total general, administrative and selling expenses. General, administrative and selling expenses increased
2% to, $1,170,692 for the six months ended June 30, 2012 from $1,148,674 for the six months ended June 30, 2011. For the six months
ended June 30, 2012, the expenses reflect a 1% increase in our Andrea DSP Microphone and Audio Software Technology efforts to $530,942,
or 45% of total general, administrative and selling expenses and a 3% increase in our Andrea Anti-Noise Headset Product efforts
to $639,750, or 55% of total general, administrative and selling expenses. The quarter over quarter decrease relates to a decrease
of stock based compensation expense partially offset by increased promotional and marketing expenses related to our newly engaged
distribution channels. The six month increases relate to promotional and marketing expenses related to our newly engaged distribution
channels partially offset by decreases in stock based compensation expenses.



Interest Income, net



Interest income, net for the three months ended June
30, 2012 was $2,118 compared to $1,988 for the three months ended June 30, 2011. Interest income, net for the six months ended
June 30, 2012 was $4,339 compared to $3,689 for the six months ended June 30, 2011.



Provision for Income Taxes



The provision for income taxes for
the three months ended June 30, 2012 was $16 compared to a provision for income taxes of $11,625 for the three months ended June
30, 2011. The provision for income taxes for the six months ended June 30, 2012 was $16 compared to a provision for income taxes
of $16,961 for the three months ended June 30, 2011. The decrease is a result of a decreased estimated taxable income.



Net Loss



Net loss for the three months ended June 30, 2012 was
$257,570 compared to net loss of $175,883 for the three months ended June 30, 2011. Net loss for the six months ended June 30,
2012 was $615,717 compared to net loss of $313,506 for the six months ended June 30, 2011. The net loss for the three and six months
ended June 30, 2012 and 2011 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.

18

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Liquidity And Capital Resources



At June 30, 2012, we had cash of $1,927,460
compared with $2,193,377 at December 31, 2011. The cash balance at June 30, 2012 is primarily a result of our cash that we historically
generated from operations.



Our working capital balance at June 30, 2012 was $2,714,853
compared to a working capital of $3,080,486 at December 31, 2011. The decrease in working capital reflects a decrease in total
current assets of $397,000 and a decrease in total current liabilities of $31,367. The decrease in total current assets reflects
a decrease in cash of $265,917, a decrease in accounts receivable of $16,303, a decrease in inventories of $87,710, a decrease
in deferred income taxes of $22,801, and a decrease in prepaid expenses of $4,269. The decrease in total current liabilities reflects
a decrease in trade accounts payable of $32,206, and an increase of $839 in other current liabilities.



The decrease in cash of $265,917
reflects $213,157 of net cash used in operating activities and $52,760 of net cash used in investing activities.



The cash used in operating activities
of $213,157, excluding non-cash charges for the six months ended June 30, 2012, is attributable to a $16,303 decrease in accounts
receivable, an $87,710 decrease in inventories, a $4,269 decrease in prepaid expenses and other current assets, a $32,206 decrease
in accounts payable and an $839 increase in other current liabilities. The changes in receivables, inventory, prepaid expenses
and accounts payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory
as well as for other services in connection with ongoing efforts related to Andrea’s various product lines.



The cash used in investing activities
of $52,760 reflects purchases of property and equipment of $29,709 and an increase in patents and trademarks of $23,051. The significant
increase in property and equipment reflects capital expenditures associated with information technology purchases including and,
to a lesser extent, molds associated with our Andrea Anti-Noise Headset Products. The increase in patents and trademarks reflects
capital expenditures associated with our intellectual property.



We plan to continue to improve our
cash flows in 2012 by aggressively pursuing additional licensing opportunities related to our Andrea DSP Audio Software and increasing
the sales of our Andrea Anti-Noise Headset Products through the introduction of new products as well as the increased efforts we
are putting into our sales and marketing efforts. However, there can be no assurance that we will be able to successfully execute
the aforementioned plans. As of August 9, 2012, Andrea has approximately $1,800,000 of cash deposits. We believe that we have sufficient
liquidity available to continue in operation through at least June 2013. To the extent that we do not generate sufficient cash
flows from our operations in the next twelve months, additional financing might be required. Although we have improved cash flows
by reducing overall expenses, if our revenues decline, these reductions may impede our ability to be cash flow positive and our
net income or loss may be disproportionately affected. We have no commitment for additional financing and may experience difficulty
in obtaining additional financing on favorable terms, if at all. Any financing we obtain may contain covenants that restrict our
freedom to operate our business or may have rights, preferences or privileges senior to our common stock and may dilute our current
shareholders’ ownership interest in Andrea. We cannot assure that demand will continue for any of our products, including
future products related to our Andrea DSP Microphone and Audio Software technologies, or, that if such demand does exist, that
we will be able to obtain the necessary working capital to increase production and provide marketing resources to meet such demand
on favorable terms, or at all.



ITEM 3.	QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.	CONTROLS AND PROCEDURES

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

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

19

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

PART II	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

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

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

ITEM
1A.	RISK FACTORS

Not applicable.

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

None.

ITEM 3.	DEFAULTS UPON SENIOR
SECURITIES

None.

ITEM 4.	MINE SAFETY DISCLOSURES

None Noted.

ITEM 5.	OTHER INFORMATION

None.

ITEM 6.	EXHIBITS

a)Exhibits

Exhibit 31.1 – Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer

Exhibit 31.2 – Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer

Exhibit 32 – Section 1350 Certifications

|  |                      | 
|- | -------------------- | 
|* | Furnished, not filed | 



20

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SIGNATURES

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

|ANDREA ELECTRONICS CORPORATION
|------------------------------
|By:                           
|                              
|                              



|Date: August 14, 2012    |                                             |                
|------------------------ | ------------------------------------------- | ---------------
|/s/    DOUGLAS J. ANDREA | Chairman of the Board, President, Chief     | August 14, 2012
|Douglas J. Andrea        | Executive Officer and Corporate Secretary   |                
|                         |                                             |                
|/s/    CORISA L. GUIFFRE | Vice President, Chief Financial Officer and | August 14, 2012
|Corisa L. Guiffre        | Assistant Corporate Secretary               |                
|                         |                                             |                

21

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