---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-QSB



(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | -------------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)



For the transition period from
 to



Commission file number 1-4324



---



ANDREA
ELECTRONICS CORPORATION

(Exact name of small business issuer as specified in its charter)



|New
York                                                       |  | 11-0482020                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                              
|45 Melville Park Road, Melville, New
York                      |  | 11747                               
|(Address of principal executive
offices)                       |  | (Zip Code)                          



Issuers telephone number, including area code: 631-719-1800



---



Indicate the number of shares outstanding of each of the
issuers classes of common equity, as of the latest practicable date: As of May 13, 2003, there are 22,149,775 common shares outstanding.



Transitional Small Business Disclosure format (check one) Yes ̈No  x



---



---

EXPLANATORY NOTE



Andrea Electronics Corporation has met the definition of a small business issuer at the end of the two most
recent fiscal years. As a result, Andrea Electronics Corporation has elected to file as a small business issuer.



PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                |  | March 31, 2003 (unaudited) |             |   | December 31, 2002 (audited) |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | - | --------------------------- | -
|ASSETS                                                                                                                                                                                                          |  |                            |             |   |                             |  
|CURRENT ASSETS:                                                                                                                                                                                                 |  |                            |             |   |                             |  
|Cash and cash equivalents                                                                                                                                                                                       |  | $                          | 1,946,832   |   |                             | $
|Accounts receivable, net of allowance for doubtful accounts of $70,831                                                                                                                                          |  |                            | 404,413     |   |                             |  
|Inventories, net                                                                                                                                                                                                |  |                            | 2,057,385   |   |                             |  
|Prepaid expenses and other current assets                                                                                                                                                                       |  |                            | 237,288     |   |                             |  
|Assets from discontinued operations                                                                                                                                                                             |  |                            | 1,675,674   |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total current assets                                                                                                                                                                                            |  |                            | 6,321,592   |   |                             |  
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                                     |  |                            | 443,630     |   |                             |  
|INTANGIBLE ASSETS, net                                                                                                                                                                                          |  |                            | 8,039,830   |   |                             |  
|OTHER ASSETS, net                                                                                                                                                                                               |  |                            | 280,984     |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total assets                                                                                                                                                                                                    |  | $                          | 15,086,036  |   |                             | $
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|LIABILITIES AND SHAREHOLDERS (DEFICIENCY)
EQUITY                                                                                                                                                               |  |                            |             |   |                             |  
|CURRENT LIABILITIES:                                                                                                                                                                                            |  |                            |             |   |                             |  
|Trade accounts payable                                                                                                                                                                                          |  | $                          | 781,765     |   |                             | $
|Current portion of long-term debt                                                                                                                                                                               |  |                            | 20,488      |   |                             |  
|Accrued restructuring charges                                                                                                                                                                                   |  |                            | 363,799     |   |                             |  
|Deferred revenue                                                                                                                                                                                                |  |                            | 1,666,680   |   |                             |  
|Other current liabilities                                                                                                                                                                                       |  |                            | 2,187,356   |   |                             |  
|Liabilities from discontinued operations                                                                                                                                                                        |  |                            | 124,064     |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total current liabilities                                                                                                                                                                                       |  |                            | 5,144,152   |   |                             |  
|LONG-TERM DEBT                                                                                                                                                                                                  |  |                            | 11,450      |   |                             |  
|DEFFERRED REVENUE                                                                                                                                                                                               |  |                            | 1,963,294   |   |                             |  
|OTHER LIABILITIES                                                                                                                                                                                               |  |                            | 263,915     |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total liabilities                                                                                                                                                                                               |  |                            | 7,382,811   |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized: 1,000
shares; issued and outstanding: 46 and 66 shares, respectively ; liquidation value: $460,000 and $660,000, respectively |  |                            | 450,119     |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized: 1,500
shares; issued and outstanding: 749 shares; liquidation value: $7,491,876                                               |  |                            | 7,387,027   |   |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                   |  |                            |             |   |                             |  
|SHAREHOLDERS (DEFICIENCY) EQUITY:                                                                                                                                                                              |  |                            |             |   |                             |  
|Preferred stock, $.01 par value; authorized: 4,997,500 shares; none issued and
outstanding                                                                                                                      |  |                            |            |   |                             |  
|Common stock, $.01 par value and $.50 par value, respectively; authorized: 200,000,000
shares; issued and outstanding: 22,149,775 and 21,127,918 shares, respectively                                           |  |                            | 221,498     |   |                             |  
|Additional paid-in capital                                                                                                                                                                                      |  |                            | 64,536,063  |   |                             |  
|Deferred stock compensation                                                                                                                                                                                     |  |                            | (12,677     | ) |                             |  
|Accumulated deficit                                                                                                                                                                                             |  |                            | (64,878,805 | ) |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total shareholders (deficiency) equity                                                                                                                                                                         |  |                            | (133,921    | ) |                             |  
|                                                                                                                                                                                                                |  |                            |             |   |                             |  
|Total liabilities and shareholders (deficiency) equity                                                                                                                                                         |  | $                          | 15,086,036  |   |                             | $
|                                                                                                                                                                                                                |  |                            |             |   |                             |  



See Notes
to Condensed Consolidated Financial Statements



2



---



ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                                           |  | For the Three Months Ended |           
|-------------------------------------------------------------------------- |  | -------------------------- | ----------
|                                                                           |  | March 31, 2003             |           
|REVENUES                                                                   |  |                            |           
|Net Product Revenues                                                       |  | $                          | 864,405   
|License Revenues                                                           |  |                            | 416,670   
|                                                                           |  |                            |           
|Revenues                                                                   |  |                            | 1,281,075 
|                                                                          
|COST OF SALES                                                              |  |                            | 571,478   
|                                                                           |  |                            |           
|Gross margin                                                               |  |                            | 709,597   
|                                                                          
|RESEARCH AND DEVELOPMENT EXPENSES                                          |  |                            | 780,720   
|GENERAL, ADMINISTRATIVE AND SELLING EXPENSES                               |  |                            | 1,011,748 
|                                                                           |  |                            |           
|Loss from operations                                                       |  |                            | (1,082,871
|                                                                           |  |                            |           
|OTHER INCOME                                                               |  |                            |           
|Interest income, net                                                       |  |                            | 27,997    
|Rent and miscellaneous income                                              |  |                            | 5,117     
|                                                                           |  |                            |           
|Other Income                                                               |  |                            | 33,114    
|                                                                           |  |                            |           
|LOSS FROM CONTINUING OPERATIONS                                            |  |                            | (1,049,757
|INCOME FROM DISCONTINUED OPERATIONS                                        |  |                            | 292,251   
|                                                                           |  |                            |           
|Net Loss                                                                   |  |                            | (757,506  
|                                                                          
|PREFERRED STOCK DIVIDENDS                                                  |  |                            | 110,519   
|                                                                           |  |                            |           
|Net loss attributable to common shareholders                               |  | $                          | (868,025  
|                                                                           |  |                            |           
|PER SHARE INFORMATION                                                      |  |                            |           
|                                                                          
|Loss from continuing operations  Basic and Diluted                        |  | $                          | (.05      
|Income from discontinued operations  Basic and Diluted                    |  |                            | .01       
|                                                                           |  |                            |           
|Net Loss  Basic and Diluted                                               |  |                            | (.04      
|Preferred Stock Dividends  Basic and Diluted                              |  |                            | (.00      
|                                                                           |  |                            |           
|Net Loss Per Share attributable to common shareholders  Basic and
Diluted |  | $                          | (.04      
|                                                                           |  |                            |           
|Shares used in computing net loss per share  Basic and Diluted            |  |                            | 21,320,935
|                                                                           |  |                            |           



See Notes
to Condensed Consolidated Financial Statements.





3



---

ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS (DEFICIENCY) EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2003

(UNAUDITED)



|                                                               |  | Shares Outstanding |  | Common Stock |             |   | Additional Paid-In Capital |   |            | Deferred Stock Compensation |  |   | Accumulated Deficit |   |  | Total Shareholders (Deficiency) Equity |            
|-------------------------------------------------------------- |  | ------------------ |  | ------------ | ----------- | - | -------------------------- | - | ---------- | --------------------------- |  | - | ------------------- | - |  | --------------------------------------- | -----------
|BALANCE, January 1, 2003                                       |  | 21,127,918         |  | $            | 10,563,959  |   |                            | $ | 54,074,247 |                             |  | $ | (23,099             | ) |  | $                                       | (64,121,299
|Change in Par Value                                            |  |                   |  |              | (10,352,680 | ) |                            |   | 10,352,680 |                             |  |   |                    |   |  |                                         |           
|Conversions of Series B Redeemable Convertible Preferred Stock |  | 1,021,857          |  |              | 10,219      |   |                            |   | 219,655    |                             |  |   |                    |   |  |                                         |           
|Amortization of option grant to consultant                     |  |                   |  |              |            |   |                            |   |           |                             |  |   | 10,422              |   |  |                                         |           
|Preferred stock dividends                                      |  |                   |  |              |            |   |                            |   | (110,519   | )                           |  |   |                    |   |  |                                         |           
|Net loss                                                       |  |                   |  |              |            |   |                            |   |           |                             |  |   |                    |   |  |                                         | (757,506   
|                                                               |  |                    |  |              |             |   |                            |   |            |                             |  |   |                     |   |  |                                         |            
|BALANCE, March 31, 2003                                        |  | 22,149,775         |  | $            | 221,498     |   |                            | $ | 64,536,063 |                             |  | $ | (12,677             | ) |  | $                                       | (64,878,805
|                                                               |  |                    |  |              |             |   |                            |   |            |                             |  |   |                     |   |  |                                         |            



See Notes
to Condensed Consolidated Financial Statements.





4



---



ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                |  | For the Three Months Ended March 31, |           
|------------------------------------------------------------------------------- |  | ------------------------------------ | ----------
|                                                                                |  | 2003                                 |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                                      |           
|Net loss from continuing operations                                             |  | $                                    | (1,049,757
|Adjustments to reconcile net loss to net cash used in continuing
operations     |  |                                      |           
|Depreciation and amortization                                                   |  |                                      | 299,565   
|Non-cash stock compensation expense                                             |  |                                      | 10,422    
|Change in:                                                                      |  |                                      |           
|Accounts receivable, net                                                        |  |                                      | 8,436     
|Inventories, net                                                                |  |                                      | 165,065   
|Prepaid expenses and other current assets                                       |  |                                      | 72,417    
|Other assets, net                                                               |  |                                      | 1,598     
|Trade accounts payable                                                          |  |                                      | (241,588  
|Accrued restructuring charges                                                   |  |                                      | (778      
|Deferred revenue                                                                |  |                                      | (416,670  
|Other current and long term liabilities                                         |  |                                      | (278,030  
|                                                                                |  |                                      |           
|Net cash used in continuing operations                                          |  |                                      | (1,429,320
|                                                                                |  |                                      |           
|Income from discontinued operations                                             |  |                                      | 292,251   
|Change in:                                                                      |  |                                      |           
|Assets from discontinued operations                                             |  |                                      | (188,192  
|Liabilities from discontinued operations                                        |  |                                      | 1,161     
|                                                                                |  |                                      |           
|Net cash provided by discontinued operations                                    |  |                                      | 105,220   
|                                                                                |  |                                      |           
|Net cash used in operating activities                                           |  |                                      | (1,324,100
|                                                                                |  |                                      |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                                      |           
|Purchases of property and equipment                                             |  |                                      | (5,275    
|Patents and trademarks                                                          |  |                                      | (25,540   
|                                                                                |  |                                      |           
|Net cash used in investing activities                                           |  |                                      | (30,815   
|                                                                                |  |                                      |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                                      |           
|Payment of debt obligations                                                     |  |                                      | (5,690    
|                                                                                |  |                                      |           
|Net cash used in financing activities                                           |  |                                      | (5,690    
|                                                                                |  |                                      |           
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                       |  |                                      | (1,360,605
|CASH AND CASH EQUIVALENTS, beginning of period                                  |  |                                      | 3,307,437 
|                                                                                |  |                                      |           
|CASH AND CASH EQUIVALENTS, end of period                                        |  | $                                    | 1,946,832 
|                                                                                |  |                                      |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |  |                                      |           
|Non-cash investing and financing activities:                                    |  |                                      |           
|Conversion of Series B Redeemable Convertible Preferred Stock into common
stock |  | $                                    | 229,874   
|                                                                                |  |                                      |           
|Stock grant to employee and officers                                            |  | $                                    |          
|                                                                                |  |                                      |           



See Notes
to Condensed Consolidated Financial Statements.



5



---



ANDREA
ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Note 1. Basis of Presentation and Management Liquidity Plans



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



These unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the
results of operations to be expected for the fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in Andreas annual report on Form 10-K for the year ended December 31, 2002.



Managements Liquidity Plans  As of March 31,
2003, Andrea had working capital of $1,177,440 and cash on hand of $1,946,832. During the three months ended March 31, 2003, Andrea used $1,324, 100 of cash for its operating activities. This was primarily a result of its net loss from continuing
operations of $1,049,757 for the three months ended March 31, 2003. On April 11, 2003, Andrea sold its Aircraft Communications Products segment for approximately $3.8 million. The Aircraft Communications Products division is engaged in the
manufacture and sale of intercommunications systems and amplifiers primarily used on legacy military aircraft. For the three-month period ended March 31, 2003, this business segment generated approximately $1.1 million in revenue, and total
operating profit of approximately $292 thousand. Pursuant to the terms of the purchase agreement, Andrea received $2.5 million in cash, and the balance of the purchase price is payable in equal installments over the succeeding eleven month period
(Note 9).



In addition to the proceeds resulting from the sale of
the Aircraft Communications Products segment, the Company plans to continue to improve its cash flows during 2003 by continuing to implement reductions of administrative overhead expenses where necessary and feasible as well as aggressively pursue
1) existing and prospective opportunities to sell its Superbeam Array Microphone generated through its co-marketing efforts with Analog Devices in the personal computing market, 2) existing opportunities in the automotive (in-vehicle computing)
market, 3) opportunities in the video and audio conferencing market and 4) opportunities in the call center market. However, there can be no assurance that the Company will be able to successfully execute the aforementioned plans.



As of April 30, 2003, after receipt of the $2.5 million from the sale of the
Aircraft Communications Products Division, Andrea has approximately $3.8 million of cash. As a result, management believes that Andrea has sufficient liquidity available for Andrea to continue in operation through at least March 2004. However,
additional liquidity will be required in early 2004. Accordingly, if Andrea fails to develop additional revenues from sales of its products to generate adequate funding from operations, or if Andrea fails to obtain additional financing through a
capital transaction or other type of funding, Andrea will be required to continue to significantly reduce its operating expenses and/or operations or Andrea may have to relinquish its products, technologies or markets. Andrea has no commitment for
additional financing, and may experience difficulty in obtaining additional financing on favorable terms, if at all.



Note 2. Summary of Significant Accounting Policies



Management Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have been included.



6



---



Among other things, estimates
are used in accounting for allowances for bad debts, inventory obsolescence, restructuring reserves, product warranty, depreciation, deferred income taxes, expected realizable values for assets (primarily goodwill and intangible assets),
contingencies, revenue recognition as well as the recording and presentation of our convertible preferred stock. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the consolidated
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.



Revenue Recognition  Non software-related revenue is recognized
upon shipment. Andrea reports such sales levels on a net sales basis, with net sales being computed by deducting from gross sales, the amount of actual sales returns and the amount of reserves established for anticipated returns. With respect to
license revenues, Andrea recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in
Financial Statements. License revenue is recognized based on the terms and conditions of individual contracts (see Note 6). In addition, fee-based services are performed on a time-and-material basis or on a fixed-fee basis, under separate
service arrangements.



Loss Per Share  Andrea
follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. In accordance with this statement, basic net loss per common share is computed by dividing net loss applicable to
common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares and dilutive common share
equivalents and convertible securities then outstanding.



Securities that could potentially dilute basic earnings per share (EPS), in the future, which were not in the computation of the diluted EPS because to do so would have been anti-dilutive for the periods presented,
consist of the following:



|Warrants to purchase common stock                                  |  | 75,000    
|------------------------------------------------------------------ |  | ----------
|Options to purchase common stock                                   |  | 5,356,125 
|Redeemable Convertible Preferred Stock                             |  | 45,883,346
|                                                                   |  |           
|Total potential common shares upon conversion as of March 31, 2003 |  | 51,314,471
|                                                                   |  |           



Stock-Based
Compensation  At March 31, 2003, Andrea had two stock-based employee compensation plans. As permitted under SFAS No. 148 (FAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure, which
amended SFAS No. 123 (FAS 123), Accounting for Stock-Based Compensation, Andrea has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. No compensation expense has been recognized for options granted to employees, as all options granted under those plans have an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if Andrea had applied the fair value recognition provisions of FAS 123 to options granted to employees:



7



---



|                                                                                                 |  | For the Three Months Ended March 31, |           
|------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ----------
|                                                                                                 |  | 2003                                 |           
|Net loss attributable to common shareholders as reported:                                        |  | $                                    | (868,025  
|Deduct: Total stock-based employee compensation expense determined under fair
value-based method |  |                                      | 235,556   
|                                                                                                 |  |                                      |           
|Pro forma net loss attributable to common shareholders:                                          |  | $                                    | (1,103,581
|                                                                                                 |  |                                      |           
|Basic and diluted net loss attributable to common shareholders per share as
reported:            |  | $                                    | (.04      
|                                                                                                 |  |                                      |           
|Basic and diluted pro forma net loss attributable to common shareholders per
share:              |  | $                                    | (.05      
|                                                                                                 |  |                                      |           



The fair values of the
stock options granted were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|Expected life in years   |  | 4    |  
|------------------------ |  | ---- | -
|Risk-free interest rates |  | 4.09 | %
|Volatility               |  | 190  | %
|Dividend yield           |  | 0    | %



Cash and Cash
Equivalents  Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less.



Concentration of Credit Risk  All of the deferred revenues relate to licensing agreements with one customer at March 31, 2003 (Note 6). Sales
related to the recognition of the deferred revenue as well as other service related revenues to this customer were approximately 33% and 1% of the total sales for the three months ended March 31, 2003 and 2002, respectively. Sales of noise canceling
and active noise canceling products were significant to one customer and its affiliates, accounting for approximately 6%, and 26% of the total sales for the three months ended March 31, 2003 and 2002, respectively.



Inventories  Inventories are stated at the lower of cost (on a
first-in, first-out) or market basis.



|                               |  | March 31, 2003 |           |   | December 31, 2002 |  
|------------------------------ |  | -------------- | --------- | - | ----------------- | -
|Raw materials                  |  | $              | 1,495,261 |   |                   | $
|Work-in-process                |  |                | 45,486    |   |                   |  
|Finished goods                 |  |                | 1,111,596 |   |                   |  
|                               |  |                |           |   |                   |  
|                               |  |                | 2,652,343 |   |                   |  
|Less: reserve for obsolescence |  |                | (594,958  | ) |                   |  
|                               |  |                |           |   |                   |  
|                               |  | $              | 2,057,385 |   |                   | $
|                               |  |                |           |   |                   |  



Goodwill And Other Intangible Assets



In
June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (FAS 142). FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their
acquisition. FAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.



In accordance with FAS 142, Andrea completed its impairment testing during 2002, resulting in the determination that the
carrying amount of the Andrea DSP Microphone and Audio Software business unit exceeded its fair value. Accordingly, Andrea recorded an impairment charge of approximately $12.5 million as a cumulative effect of a change in accounting principle in the
fourth quarter of 2002, which reduced goodwill to zero.



8



---



Andrea amortizes its core
technology, patents and trademarks on a straight-line basis over the estimated useful lives of its intangible assets that range from 15 to 17 years. For the three-month periods ended March 31, 2003 and 2002 amortization expense was $194,348 and
$191,564, respectively.



Recently Issued Accounting Pronouncements



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entitys recurring operations from those that are unusual and
infrequent that meet the criteria for classification for an extraordinary item. Andrea adopted SFAS No. 145 during the first quarter of 2003. The adoption of this statement did not have a material impact on Andreas consolidated financial
statements.



In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The
adoption of this statement did not have a material effect on Andrea s consolidated financial statements.



In November 2002, the FASB issued interpretation No. 45 (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees
and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002. Adoption of the disclosure requirements were effective for interim and annual periods ending after December 15,
2002, and did not have a material impact on Andreas consolidated financial position or operations.



In January 2003, the FASB issued interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material effect on Andreas consolidated financial statements.



Note 3. Series B Redeemable Convertible Preferred Stock



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



All of
the Series B Preferred Stock is currently convertible into Andreas Common Stock, and Andrea has currently reserved 4,447,775 shares of Common Stock for issuance upon conversion.



During the three months ended March 31, 2003, 20 shares of the Series B Preferred Stock, together with related accrued
dividends, were converted into 1,021,857 shares of Common Stock.



9



---



The original value of the
warrant upon issuance was $348,457. As of March 31, 2003, the Series B Preferred Stock is recorded net of the unaccreted present value of the warrant of $9,881. Due to the redemption features discussed above, the Series B Preferred Stock is
presented outside of shareholders (deficiency) equity in the accompanying condensed consolidated balance sheets.



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



Andrea is actively seeking to obtain additional capital and funding which, if successful, could involve the triggering of the redemption rights. If such redemption rights are triggered and Andrea has
insufficient funds to satisfy the redemption, Andrea will be required to obtain a waiver from the holders of the Series B Preferred Stock. If the Series B Preferred Stock holders do not consent to such a waiver, Andreas efforts to obtain
additional funding and capital will be materially adversely affected and its ability to continue its current operations will be materially adversely affected.



Note 4. Series C Redeemable Convertible Preferred Stock



On October 10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C Redeemable Convertible Preferred Stock (the Series C
Preferred Stock). Each of the 750 shares of Series C Preferred Stock has a stated value of $10,000 plus dividends of 5% per annum, which sum is convertible into Common Stock at a conversion price which was initially equal to $7.0565 or 110% of
the average of the two lowest closing bid prices of the Common Stock during the 5 consecutive trading days immediately preceding the issuance date, for the first nine months. The conversion price reset every six months thereafter to the lesser of
the then existing conversion price or the average of the two lowest closing bid prices of the Common Stock during the 5 consecutive trading days immediately preceding the six-month reset dates or, for the period beginning on the day two years after
the initial issuance and ending on the maturity of the Series C Preferred Stock, the least of: (i) the then existing conversion price, (ii) the average of the two lowest closing bid prices of the Common Stock during the 15 consecutive trading days
immediately preceding such two year date or (iii) the closing bid price on the day of conversion, subject in each case to certain adjustments. The 5% dividend amount may, at the option of Andrea, be paid in cash or in shares of Andreas Common
Stock. The Series C Preferred Stock is convertible or redeemable at maturity by Andrea, based upon certain circumstances at that time, and is redeemable by the holder upon certain events. As of March 31, 2003, all of the Series C Preferred Stock is
currently convertible into Andreas Common Stock at a maximum conversion price of $0.30 and Andrea has currently reserved 60,429,684 shares of Common Stock for issuance upon conversion of the shares of the Series C Preferred Stock.



In accordance with Emerging Issues Task Force (EITF)
Issue 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments, in the third quarter of 2001, Andrea recorded a non-cash charge of $7,500,000 to shareholders (deficiency) equity. This pronouncement values the
economic benefit of the contingent beneficial conversion feature that the holders of the Series C Preferred Stock received when the conversion price of the Series C Preferred Stock was reset from $7.0565 to $1.44 in July 2001. This charge
represented the maximum charge under this standard.



The original
value of the transaction costs upon issuance was $175,000. As of March 31, 2003, the Series C Preferred Stock is recorded net of the unaccreted present value of the transaction costs of $104,849. Due to the redemption features discussed above, the
Series C Preferred Stock is presented outside of shareholders (deficiency) equity in the accompanying condensed consolidated balance sheets.



Upon the announcement of a major transaction or upon certain triggering events, as defined, the investors have the right to require Andrea to redeem all
or a portion of the investors Series C Preferred Stock at a redemption price



10



---

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



On March 15, 2002, Andrea announced that a triggering event had occurred and
that as a result of the trigger, the investor had the right to require Andrea to redeem all of the Series C Preferred Stock. The investor has agreed, in a Waiver Agreement, to waive its right to receive the aggregate Triggering Event Redemption
Price (as defined in the Certificate of Amendment) (together with any interest and related cash payments or penalties thereon) the investor was otherwise entitled to as a result of the existing triggering event until April 7, 2007. In addition, the
investor agreed to waive, until April 7, 2007, its right to receive the aggregate Triggering Event Redemption Price, as defined, (together with any interest and related cash payments or penalties thereon) with respect to (1) any future triggering
event relating to additional registration failures, provided that the existing registration statements remain effective and available to the investor for the number of shares covered by such registration statements as of the date of the waiver (less
any future sales made pursuant to such registration statements), and (2) any future triggering event relating to the delisting of Andreas Common Stock, provided that the Common Stock is thereafter authorized for trading on the OTC Bulletin
Board. In addition, the investor agreed to waive, until April 7, 2007, Andreas obligation to register any additional shares and Andreas obligation to make certain cash payments, if any, for its failure to register any additional shares.
Finally, the investor acknowledged that no Maturity Date Redemption Price (as defined) was due on October 10, 2002. The investors waivers described above shall be null and void immediately, however, upon the earlier of April 7, 2007, if such
Triggering Event Redemption Price is not paid on April 7, 2007, the first date on which Andrea fails to comply in any material respect with the terms of the Waiver Agreement, and related agreements entered into between Andrea and the investor and
the first date on which Andrea is insolvent.



As consideration
for the Waiver Agreement, Andrea agreed to grant the investor a security interest in all of Andreas assets; however, the investor agreed to have its lien on Andreas assets subordinated to (1) any lien granted in the future to a
non-affiliated third party in connection with a strategic transaction with a financing component, provided that such third-party lien relates only to the amount of the financing component of such transactions, and (2) any lien granted in the future
to a bank or other similar institution pursuant to any asset-based financing transaction. In addition, the investor agreed to release its lien in connection with any sale of any assets subject to the investors lien, provided the investor
receives a lien on the proceeds of the sale. The investor acknowledged that its lien in any portion of Andreas intellectual property is effectively subordinate to the interest of any current or future licensee of such intellectual property, as
any interest the investor may have in such intellectual property cannot be greater than Andreas interest therein.



Given that the waiver granted by the investor does not cover all triggering events set forth in the Certificate of Amendment and that the Waiver Agreement
will be null and void in the event Andrea fails to comply in any material respect with the terms of the Agreements, among other things, there is a risk that the investor could declare a triggering event that would trigger the redemption rights.



If such redemption rights are triggered and Andrea has
insufficient funds to satisfy the redemption, Andrea will be required to obtain a new waiver from the holders of the Series C Preferred Stock. If the Series C Preferred Stockholders do not consent to such a waiver, Andreas efforts to obtain
additional funding and capital will be materially adversely affected and its ability to continue its current operations will be materially adversely affected.



Note 5. Restructuring Accrual



During the fourth quarter of 2001, Andrea recorded restructuring charges in connection with exiting a PC headset channel, or customer-type, within the
Anti-Noise Product segment. During the three months ended March 31, 2003 and March 31, 2002, Andrea made payments of $778 and $62,603, respectively, which reduced the restructuring liability.



11



---

Note 6. Licensing Agreements



In December 2001 and March 2002, Andrea entered into two agreements with Analog Devices. These license agreements relate to
Andreas high performance noise canceling technologies that enable clear voice communications and high-performance audio in small home-office and regular office environments. Under these agreements, Analog Devices paid Andrea a total of $5
million in license fees during 2002. The unamortized portion of the license agreements, as amended, is recorded as deferred revenue ($1,666,680 of which is classified as current and $1,963,294 is classified as long-term as of March 31, 2003) in the
accompanying condensed consolidated balance sheets. All license revenues are being recognized on a straight-line basis over three-years, $3 million of which started to be recognized during the first quarter of 2002, and $2 million which started in
the third quarter of 2002. During the three months ended March 31, 2003 and March 31, 2002, $416,670 and $8,219, respectively, of license revenues were recognized in the accompanying condensed consolidated statement of operations.



Note 7. Commitments And Contingencies



Leases



Andreas corporate headquarters is located in Melville, New York, where Andrea leases space for manufacturing, research
and development, sales and executive offices from an unrelated party. The lease is for approximately 40,000 square feet and expires in June 2008. Rent expense under this operating lease was approximately $149,500, and $144,000 for the three-month
period ended March 31, 2003 and 2002, respectively. As of March 31, 2003, the minimum future lease commitments, under this lease and all other noncancellable operating leases, are as follows:



|April 1, 2003 to December 31, 2003 |  | $ | 571,197  
|---------------------------------- |  | - | ---------
|2004                               |  |   | 737,802  
|2005                               |  |   | 651,063  
|2006                               |  |   | 677,106  
|2007                               |  |   | 704,190  
|Thereafter                         |  |   | 521,067  
|                                   |  |   |          
|Total                              |  | $ | 3,862,425
|                                   |  |   |          



Employment Agreements



The Board of
Directors of Andrea is currently in the process of negotiating employment contracts with the Chairman of the Board and the officers of the Company. At March 31, 2003, the future minimum cash commitments for 2003 aggregate $300,000 for these same
individuals.



Legal
Proceedings



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



Note 8. Segment
Information



Andrea follows the provisions of SFAS No.
131,Disclosures about Segments of an Enterprise and Related Information. Reportable operating segments are determined based on Andreas management approach. The management approach, as defined by SFAS No. 131, is based on the way
that the chief operating decision-maker organizes the segments within an enterprise for making operating decisions and assessing performance. While Andreas results of operations are primarily reviewed on a consolidated basis, the chief
operating decision-maker also manages the enterprise in segments. With the sale of the Aircraft Communications Products division on April 11, 2003 (Note 9), Andrea operates in two segments: (i) Andrea Anti-Noise Products and (ii) Andrea DSP
Microphone and Audio Software Products. Our Andrea Anti-Noise Products include our noise cancellation and active noise cancellation computer headset products and related computer peripheral products. Our 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



12



---



Finding and Tracking Array
microphone technology (DFTA), Andrea PureAudio noise filtering technology, and Andrea EchoStop, an advanced acoustic echo cancellation technology. The following represents selected condensed consolidated financial information for Andreas
segments for the three-month periods ended March 31, 2003 and 2002:



|Segment Data                  |  | Andrea Anti- Noise Products |          |   | Andrea DSP Microphone and Audio Software Products |   |            | Total 2003 | 
|----------------------------- |  | --------------------------- | -------- | - | ------------------------------------------------- | - | ---------- | ---------- | 
|Net sales                     |  | $                           | 767,277  |   |                                                   | $ | 513,798    |            | 
|Income (loss) from operations |  |                             | 81,529   |   |                                                   |   | (1,164,400 | )          | 
|Depreciation                  |  |                             | 21,327   |   |                                                   |   | 60,867     |            | 
|                             
|                              |  | Andrea Anti- Noise Products |          |   | Andrea DSP Microphone and Audio Software Products |   |            | Total 2002 | 
|Net sales                     |  | $                           | 589,594  |   |                                                   | $ | 115,006    |            | 
|Income (loss) from operations |  |                             | (268,031 | ) |                                                   |   | (1,792,010 | )          | 
|Depreciation                  |  |                             | 43,844   |   |                                                   |   | 91,636     |            | 



Management of Andrea
assesses assets and non-operating income statement data on a consolidated basis only. International revenues are based on the country in which the end-user is located. For the three-month periods ended March 31, 2003 and 2002, and as of each
respective period-end, sales and accounts receivable by geographic area are as follows:



|Geographic Data      |  | March 31, 2003 |           | March 31, 2002
|-------------------- |  | -------------- | --------- | --------------
|Sales:               |  |                |           |               
|United States        |  | $              | 1,116,950 |               
|Europe               |  |                | 41,074    |               
|Other foreign        |  |                | 123,051   |               
|                     |  |                |           |               
|                     |  | $              | 1,281,075 |               
|                     |  |                |           |               
|Accounts receivable: |  |                |           |               
|United States        |  | $              | 273,735   |               
|Europe               |  |                | 446       |               
|Other foreign        |  |                | 130,232   |               
|                     |  |                |           |               
|                     |  | $              | 404,413   |               
|                     |  |                |           |               



Note 9. Subsequent
Event  Discontinued Operations



Sale of Aircraft Communication Products Division



On April 11, 2003, Andrea completed the sale of substantially all of the assets and liabilities of the Andrea Aircraft Communications Products division for approximately $3.8 million. Andrea received $2.5 million in cash, and
approximately $1.3 million in notes which are payable in equal installments over the succeeding eleven month period. The sale resulted in a gain to be recorded in the quarter ending June 30, 2003, of approximately $2.25 million, before transaction
costs, which reflects the difference between the purchase price of $3.8 million and the net assets sold (accounts receivable of $693,861, net inventories of $981,813, and accounts payable and accrued liabilities of $124,064). The Aircraft
Communications Products division is engaged in the manufacture and sale of intercommunications systems and amplifiers primarily used on legacy military aircraft. The consideration for the sale was determined through arms-length negotiations between
Andrea and Andrea Systems, LLC. Andrea Systems, LLC is a new entity that was



13



---

established by a group of private investors. As part of the sale, Andrea entered into a one-year
transition services agreement with Andrea Systems, LLC pursuant to which the Company will receive approximately $307,000.



During the quarter ended March 31, 2003, Andrea committed to a plan to sell its Aircraft Communications Products division. Accordingly, the results of
operations and the assets and liabilities of this division are presented as discontinued operations for both current and prior periods. The following table reflects the results of the discontinued operations of the Aircraft Communication Products
business segment for the three-month periods ended March 31, 2003 and 2002, respectively:



|                                             |  | March 31, 2003 |           | March 31, 2002
|-------------------------------------------- |  | -------------- | --------- | --------------
|Net sales                                    |  | $              | 1,068,976 |               
|Cost Of Sales                                |  |                | 569,128   |               
|                                             |  |                |           |               
|Gross margin                                 |  |                | 499,848   |               
|Research And Development Expenses            |  |                | 119,871   |               
|General, Administrative And Selling Expenses |  |                | 87,726    |               
|                                             |  |                |           |               
|Income from Discontinued Operations          |  | $              | 292,251   |               
|                                             |  |                |           |               



Sales to the federal
government and related subcontractors aggregated $525,068 and $490,468 for the three months ended March 31, 2003 and 2002, respectively.



Note 10. Increase in Authorized Shares and Change in the Par Value of the Common Stock



Increase in Authorized Shares



On January 31, 2003, Andreas shareholders approved to
increase the authorized shares of common stock from 70,000,000 shares to 200,000,000 shares.



Change in the Par Value of the Common Stock



On January 31, 2003, Andreas shareholders approved to reduce the par value of Andreas common stock from $0.50 per
share to $0.01 per share.



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



Overview



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



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



14



---



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 high
volume assembly of most of our Andrea Anti-Noise®Products from purchased
components, and we are assembling low volume Andrea DSP Microphone and Audio Software Products from purchased components primarily at our Israeli facility. 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
condensed consolidated financial statements and the notes to our condensed consolidated financial statements contain information that is pertinent to managements discussion and analysis. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. In addition to
the recording and presentation of our convertible preferred stock, we believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of
operations. We have discussed the application of these critical accounting policies with our Audit Committee.



Revenue Recognition  Non license-related revenue is recognized upon shipment. Andrea reports such sales levels on a net sales basis, with net sales being computed by deducting from gross sales
the amount of actual sales returns and the amount of reserves established for anticipated returns. With respect to license revenues, Andrea recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended, and Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statement. In addition, fee-based services are performed on a time-and material basis or on a fixed-fee basis, under
separate service arrangements. We recognize license-related revenues primarily based on an evaluation of the terms of individual contracts (see Note 6 of our condensed consolidated financial statements, for example) considering, specifically,
whether 1) significant obligations remain, 2) evidence of an arrangement exists, 3) the fees are fixed or determinable, and 4) collectibility is reasonably assured.



Accounts Receivable  We are required to estimate the collectibility of our trade receivables. Judgment is required in
assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. We evaluate specific accounts when we become aware of a situation where a customer may not be able to
meet its financial obligations due to a deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and reevaluated and adjusted as additional information is received.
Our reserves also are determined by using percentages applied to certain aged receivable categories. At March 31, 2003 and December 31, 2002, our allowance for doubtful accounts from continuing operations was approximately $71 thousand.



Inventory  We are required to state our inventories at the
lower of cost or market. In assessing the ultimate realization of inventories, we are required to make considerable judgments as to future demand requirements and compare that with our current inventory levels. Our reserve requirements generally
increase as our projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously expected usage periods. Inventories from continuing operations of approximately $2.1
million and $2.2 million at March 31, 2003 and December 31, 2002 are net of reserves of approximately $595 thousand and $524 thousand, respectively. It is possible that additional charges to inventory may occur in the future if there is further
declines in market conditions, or if additional restructuring actions are taken.



Statement of Financial Accounting Standards (SFAS), No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144) supersedes SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) and Accounting Principles Board (APB) Opinion No. 30 Reporting Results of Operations  Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS 144 retains the fundamental provisions of FAS 121 for recognition and measurement of impairment, but amends the accounting and reporting standards
for segments of a business to be disposed of. The provisions of this statement require management



15



---



judgments regarding the future
operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. The impact of adopting this standard was not material to the financial statements.



SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets (FAS 142) requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). Andrea adopted this standard effective January 1, 2002. Other intangible assets, which do not have indefinite lives, continue to be amortized.



We performed initial transitional impairment testing of goodwill and intangible assets during the first six months of fiscal
2002. The impairment testing is performed in two steps: (step one) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (step two) if there is an impairment, this step measures the
amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. FAS 142 required that an entity complete step one of the transitional goodwill impairment test within six months of adoption, and
that if there is an indication that the carrying amount of the net assets of a reporting unit exceeds its fair value, step two must be completed by the end of the fiscal year. Andrea completed its step two impairment testing during the fourth
quarter of 2002 in accordance with FAS 142 with the assistance of an independent appraisal firm, relying primarily on discounted net cash flows for the respective business segment, and determined that the carrying amount of the Andrea DSP Microphone
and Audio Software business segment exceeded its fair value. Accordingly, the Company recorded an impairment charge of approximately $12.5 million as a cumulative effect of a change in accounting principle in accordance with this new pronouncement
and reduced goodwill to zero.



Deferred Tax Assets  We
currently have significant deferred tax assets. SFAS No. 109, Accounting for Income Taxes(FAS 109), requires a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets
will not be realized. Furthermore, FAS 109 provides that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in
the overall assessment. During 2002, we recorded a full valuation allowance, representing a charge of $1.8 million, against our deferred tax assets. In addition, we expect to provide a full valuation allowance on future tax benefits until we can
sustain a level of profitability that demonstrates our ability to utilize the assets, or other significant positive evidence arises that suggests our ability to utilize such assets. The future realization of a portion of our reserved deferred tax
assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the condensed consolidated statement of operations, but rather will result in an increase in additional paid in
capital. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis.



During 2001, we recorded significant charges in connection with a restructuring program. The related reserves established in that restructuring reflect
various estimates, primarily those pertaining to inventory and settlements of contractual obligations. We reassess the reserve requirements under our restructuring program at the end of each reporting period. Actual experience may be different from
our estimates used and, accordingly, additional charges related to our restructuring may be incurred.



We are subject to proceedings, lawsuits and other claims, including proceedings under laws and government regulations related to securities, environmental, labor, product and other matters. We are
required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is based on an analysis of
each individual issue with the assistance of legal counsel. The amount of any reserves may change in the future due to new developments in each matter.



The impact of changes in the estimates and judgments pertaining to revenue recognition, receivables and inventories is directly reflected in our
segments income (loss) from operations. Although any charges related to our deferred tax assets are not reflected in our segment results, the long-term forecasts supporting the realization of those assets and changes in them are significantly
affected by the actual and expected results of each segment.



16



---



Cautionary Statement
Regarding Forward-Looking Statements



Certain information
contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2003 (the 2003 First Quarter) compared to the three months ended March 31, 2002 (the
2002 First Quarter) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words anticipates,
believes, estimates, expects, intends, plans, seeks, variations of such words, and similar expressions are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and projections about our business and industry, our beliefs and certain assumptions made by our management. Investors are cautioned that matters subject to forward-looking statements
involve risks and uncertainties including economic, competitive, governmental, technological and other factors that may affect our business and prospects. These statements are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. In order to obtain the benefits of these safe harbor provisions for any such forward-looking statements, we wish to caution investors and prospective investors about the
following significant factors, which, among others, have in some cases affected our actual results and are in the future likely to affect our actual results and could cause them to differ materially from those expressed in any such forward-looking
statements. These factors include the following:



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



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



| |  |  | the volume of sales of our products under our collaborative marketing arrangements;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the cost of development of our products;
| | - |  | ----------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------



We cannot assure that the level of sales and gross profit, if any, that we achieve in any particular fiscal period will not be significantly lower than in
other fiscal periods. Our revenues for the 2003 First Quarter were approximately $1.3 million versus $705 thousand for the 2002 First Quarter. Net loss applicable to common shareholders for the 2003 First Quarter was approximately $900 thousand, or
$.04 per share on a basic and diluted basis, versus net loss applicable to common shareholders of approximately $1.9 million, or $.11 per share on a basic and diluted basis for the 2002 First Quarter. During 2002 and the 2002 First Quarter, we
continued to experience cash flow constraints and, in response, on April 11, 2003, we sold our Aircraft Communications Products segment. Although we believe this sale will provide the Company with necessary working capital, the Aircraft
Communications Products division generated approximately $1.1 million in revenue and total operating profit of approximately $292 thousand and $289 thousand, for the three-month periods ended March 31, 2003 and 2002, respectively. Consequently, this
sale is expected to result in a further decrease in sales during fiscal 2003. While we continue to explore opportunities to grow sales, we are also examining additional opportunities for cost-reduction, production efficiencies and further
diversification of our business. Although we intend to continue improving cash flows by reducing overall expenses, we may not be able to easily and quickly implement such initiatives and, if our revenues continue to decline, our net income or loss
may be disproportionately affected. Furthermore, our acquisition in 1998 of Lamar Signal Processing, Ltd. (Lamar) resulted in a substantial amount of goodwill and other intangible assets. The amortization of these intangible assets has
had, and will continue to have, a negative, non-cash impact on our results of operations (other



17



---



than goodwill). In addition,
at December 31, 2002 we recorded an impairment charge of approximately $12.5 million as a cumulative effect of a change in accounting principle to write off the goodwill associated with the Lamar acquisition. Although the strategic intent of the
business has not changed, the realization of the economic benefits from the business has been limited by the overall poor economic conditions affecting the computing and communications industries. As a result of all the above factors, we expect to
continue to accumulate losses and the market price of our common stock could decline.



If we fail to obtain additional capital or maintain access to funds sufficient to meet our operating needs, we may be required to significantly reduce, sell, or refocus, our operations and our business, results of
operations and financial condition could be materially and adversely effected, and could result in our delisting on the American Stock Exchange or inability to continue operations.



In recent years, we have sustained significant operating losses. Since 1997, we have been unable to generate sufficient cash
flow from operations to meet our operating needs and, correspondingly, from time to time during the past several years, we have raised additional capital from external sources. We expect to continue to have to raise additional capital from external
sources. These sources may include private or public financings through the issuance of debt, convertible debt or equity, or collaborative arrangements. Such additional capital and funding may not be available on favorable terms, if at all.
Additionally, we may only be able to obtain additional capital or funds through arrangements that require us to relinquish rights to our products, technologies or potential markets, in whole or in part, or result in the sale of Andrea. Additionally,
Andreas funding and capital raising efforts could trigger change in control payments due to certain executive officers of Andrea under their employment contracts, or redemptions of Andreas Series B and Series C Redeemable Convertible
Preferred Stock. On April 11, 2003, we sold our Aircraft Communications Products segment for $3.8 million. Given our current financial condition and market conditions, it may be difficult to attract additional financings on favorable terms, or at
all, as compared to prior periods. We have revised our business strategies to reduce our expenses and capital expenditures, but we still do not generate sufficient cash flow from operations to meet our operating needs and we cannot assure you that
we will be successful in obtaining financings or access to additional sources of funding in amounts necessary to continue our operations. Failure to maintain sufficient access to funding may also result in our delisting from the American Stock
Exchange.



We face the risk that Andrea could be required to
redeem the Series B Redeemable Convertible Preferred Stock.



On June 22, 1999, Andrea issued and sold in a private placement $7,500,000 of Series B Redeemable Convertible Preferred Stock (the Series B Preferred Stock), and a warrant covering 75,000 shares of Andreas Common
Stock. Each of the remaining 46 shares of Series B Preferred Stock (par value $0.01 per share), as of May 13, 2003, has a stated value of $10,000 plus dividends of 4% per annum, which sum is convertible into Common Stock (par value $0.01 per share)
at a conversion price equal to the lower of $8.775 (the Maximum Conversion Price) and the average of the two lowest closing bid prices of the Common Stock during the 15 consecutive trading days immediately preceding a conversion date
(the Market Price), subject to certain adjustments, including anti-dilution. The 4% dividends may, at the option of Andrea, be paid in cash. The warrant has an exercise price of $8.775 per share and expires on June 18, 2004.



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



18



---



We face the risk that
Andrea could be required to redeem the Series C Redeemable Convertible Preferred Stock



On October 10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series C Redeemable Convertible Preferred Stock (the Series C Preferred Stock). The Series C Preferred Stock
is convertible or redeemable at maturity by Andrea, based upon certain circumstances at that time, and is redeemable by the holder upon certain events, including the announcement of a major transaction, as defined in the Certificate of Amendment, or
upon certain other triggering events. In the first quarter of 2002, a triggering event occurred and we obtained a waiver from the Series C Preferred Stock holders of their redemption right. A final agreement regarding the waiver arrangement was
reached on March 28, 2002. The waiver related to the existing triggering event, as well as certain possible future triggering events, however, the waiver will be null and void upon the earlier of April 7, 2007, the first date on which Andrea fails
to comply in any material respect with the terms of the waiver and related documents, and the first date on which Andrea is insolvent.



As consideration for the Series C Preferred Stock holders agreement to waive its current and, in certain circumstances, any future right to receive
the aggregate Triggering Event Redemption Price for the Series C Preferred Stock, Andrea agreed to grant a security interest in all of Andreas assets. However, the Series C Preferred Stock holder agreed to have its lien on Andreas assets
subordinated to (1) any lien granted in the future to a non-affiliated third party in connection with a strategic transaction with a financing component, provided that such third-party lien relates only to the amount of the financing component of
such transactions, and (2) any lien granted in the future to a bank or other similar institution pursuant to any asset based financing transaction. In addition, the Series C Preferred Stock holder agreed to release its lien in connection with any
sale of any assets subject to its lien, provided they receive a lien on the proceeds of the sale. The Series C Preferred Stock holder acknowledged that its lien in any portion of Andreas intellectual property is effectively subordinate to the
interest of any current or future licensee of such intellectual property, as any interest the investor may have in such intellectual property cannot be greater than Andreas interest therein.



Given that the waiver granted by the Series C Preferred Stock holder does not
cover all triggering events that could require the redemption of the Series C Preferred Stock, and that the waiver will be null and void in the event Andrea fails to comply in any material respect with the terms of the agreements relating to the
waiver, among other things, there is a risk that the Series C Preferred Stock holder could declare a triggering event that would trigger the redemption rights. If such redemption rights are triggered and Andrea has insufficient funds to satisfy the
redemption, which would be the case if a redemption occurred at this time, Andrea will be required to obtain a new waiver from the holder of the Series C Preferred Stock. If no such waiver can be obtained, Andreas ability to continue its
current operations will be materially adversely affected and if Andrea has insufficient funds to redeem the Series C Preferred Stock, it could result in Andreas inability to meet its operating obligations and, consequently, delisting from the
American Stock Exchange.



Shares Eligible For Future Sale May
Have An Adverse Effect On Market Price; You May Experience Substantial Dilution.



Sales of a substantial number of shares of our common stock in the public market could have the effect of depressing the prevailing market price of our common stock. Of the 200,000,000 shares of common stock presently
authorized, 22,149,775 were outstanding as of May 13, 2003. The number of shares outstanding does not include 6,376,125 shares of our common stock reserved for issuance upon exercise of outstanding awards granted under our 1991 Performance Equity
Plan and 1998 Stock Plan, and shares of our common stock reserved for further awards under the 1998 Stock Plan; nor does it include 64,952,459 shares of common stock reserved for issuance upon conversion of the Series B and Series C convertible
preferred stock and exercise of related warrants.



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



As of May 13, 2003, we had 46 shares of Series B Preferred Stock and 749.19 shares of Series C Preferred Stock outstanding. Both the Series B Preferred
Stock and the Series C Preferred Stock are convertible into shares of common stock, subject to ownership limitations that prohibit the holders of the preferred stock from owning more than 4.99% of the outstanding shares of common stock at the time
of conversion or 9.99% over the sixty day period prior to the conversion. These restrictions do not prevent purchasers from converting and selling some of their holdings and then later converting the rest of their holdings.



19



---



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



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



The following table illustrates the varying amounts of shares of common stock issuable upon conversion of all 46 shares of Series B Preferred Stock at the
indicated conversion prices (without regard to any limitations on conversion) and assuming that the 4% dividend is paid in cash:



|Conversion Price |  | Number of Shares of Common Stock Issuable Upon
Conversion(1) |  | Percentage of Outstanding Common Stock(2)
|---------------- |  | ------------------------------------------------------------ |  | -----------------------------------------
|$0.15            |  | 3,066,667                                                    |  | 12%                                      
|$0.20            |  | 2,300,000                                                    |  | 9%                                       
|$0.25            |  | 1,840,000                                                    |  | 8%                                       
|$0.30            |  | 1,533,333                                                    |  | 6%                                       
|$0.35            |  | 1,314,286                                                    |  | 6%                                       
|$0.40            |  | 1,150,000                                                    |  | 5%                                       



|(1) |  | The holder of Series B Preferred Stock is prohibited from converting its holdings of the Series B Preferred Stock if after giving effect to such conversion it would
beneficially own in excess of 4.99% or, over the sixty day period prior to the conversion, 9.99% of the outstanding shares of our Common Stock following such conversion. The numbers in this column do not reflect these limitations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Based on 22,149,775 shares of common stock outstanding as of May 13, 2003.
|--- |  | --------------------------------------------------------------------------



The following table illustrates, as of any reset date and assuming the conversion price indicated is lower than the then
applicable conversion price on that date, the varying amounts of shares of common stock that would be issuable upon conversion of all outstanding 749.19 shares of Series C Preferred Stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 5% dividend amount is paid in cash:



|Conversion Price |  | Number of Shares of Common Stock Issuable Upon
Conversion(1) |  | Percentage of Outstanding Common Stock(2)
|---------------- |  | ------------------------------------------------------------ |  | -----------------------------------------
|$0.15            |  | 49,945,840                                                   |  | 69%                                      
|$0.20            |  | 37,459,380                                                   |  | 63%                                      
|$0.25            |  | 29,967,504                                                   |  | 58%                                      
|$0.30            |  | 24,972,920                                                   |  | 53%                                      



|(1) |  | The holder of Series C Preferred Stock is prohibited from converting its holdings of the Series C Preferred Stock if after giving effect to such conversion it would
beneficially own in excess of 4.99% or, over the sixty day period prior to the conversion, 9.99% of the outstanding shares of our common stock following such conversion. The numbers in this column do not reflect these limitations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Based on 22,149,775 shares of common stock outstanding as of May 13, 2003.
|--- |  | --------------------------------------------------------------------------



The maximum conversion price of the Series C Preferred Stock is $0.30.



The following table illustrates the varying amounts of shares of Common Stock
that would be issuable upon conversion of all 46 outstanding shares of Series B Preferred stock and all 749.19 outstanding shares of Series C Preferred Stock at the indicated conversion prices (without regard to any limitations on conversion) and
assuming that all additional amounts are paid in cash:



20



---



|Conversion Price |  | Number of Shares of Common Stock Issuable Upon Conversion(1)
(2) (3) |  | Percentage of Outstanding Common Stock(4)
|---------------- |  | -------------------------------------------------------------------- |  | -----------------------------------------
|$0.15            |  | 53,012,507                                                           |  | 71%                                      
|$0.20            |  | 39,759,380                                                           |  | 64%                                      
|$0.25            |  | 31,807,504                                                           |  | 59%                                      
|$0.30            |  | 26,506,253                                                           |  | 54%                                      
|$0.35            |  | 26,287,206                                                           |  | 54%                                      
|$0.40            |  | 26,122,920                                                           |  | 54%                                      



|(1) |  | The calculation assumes that the conversion price of the Series B and Series C Preferred Stock are the same at the assumed conversion prices of $0.15, $0.20, $0.25
and $0.30.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The calculation assumes that for any conversion of the Series B Preferred Stock when the prevailing market price is above $ 0.30, the Series C Preferred Stock would
still be converted at its maximum conversion price of $ 0.30.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The holders of Series B and Series C Preferred Stock is prohibited from converting the Series C or Series B Preferred Stock, or from exercising the warrants issued
in connection with the Series B Preferred Stock, if after giving effect to such conversion it would beneficially own in excess of 4.99% or, over the sixty day period prior to the conversion, 9.99% of the outstanding shares of our Common Stock
following such conversion.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Based on 22,149,775 shares of common stock outstanding as of May 13, 2003.
|--- |  | --------------------------------------------------------------------------



The conversion rate at May 13, 2003 of the Series B Preferred Stock and the Series C Preferred Stock was $0.195. If all of
the outstanding shares of the Series B Preferred Stock and the Series C Preferred Stock were converted on May 13, 2003, we would have issued a total of 46,120,771 shares of common stock. If the market price of our common stock continues to decline,
the conversion rates would increase, resulting in our issuing a greater number of shares upon conversion of the Series B Preferred Stock and the Series C Preferred Stock



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



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



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



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



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



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



21



---



companies in the computing and
communications industries. Since we began sales of our initial Andrea Anti-Noise Headset products in 1995, we have developed and introduced new products in this line. However, in the fourth quarter of 2001, we also restructured this business segment
which resulted in a significant reduction in revenues.



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



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



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



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



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



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



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



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



22



---



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



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



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



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



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



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



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



We generate sales to regions outside the United States, particularly in Europe and areas in the Americas and Asia. For the three-month period ended March 31, 2003, and 2002, sales to customers outside the United States
accounted for approximately 13% and 38%, respectively, of our net sales from continuing operations. International sales and operations are subject to a number of risks, including:



| |  |  | trade restrictions in the form of license requirements;
| | - |  | -------------------------------------------------------



| |  |  | restrictions on exports and imports and other government controls;
| | - |  | ------------------------------------------------------------------



| |  |  | changes in tariffs and taxes;
| | - |  | -----------------------------



| |  |  | difficulties in staffing and managing international operations;
| | - |  | ---------------------------------------------------------------



| |  |  | problems in establishing and managing distributor relationships;
| | - |  | ----------------------------------------------------------------



| |  |  | general economic conditions; and
| | - |  | --------------------------------



| |  |  | political and economic instability or conflict.
| | - |  | -----------------------------------------------



23



---



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



We face risk from operating in Israel.



Our principal research and development facility is located in the State of Israel and, as a result, certain of our key research and development employees are located in Israel. Although substantially all of our sales currently are
being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in
degree and intensity, between Israel and Arab countries. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve
some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved.



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



Our
performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of these executive officers or key employees could have a material adverse effect on our business, results of
operations and financial condition. Our future success depends on our continuing ability to attract and retain highly qualified managers and technical personnel. As of the date of this filing, the Board of Directors of Andrea Electronics is in the
process of negotiating contracts with each of Douglas J. Andrea, Chairman of the Board of Directors, Christopher P. Sauvigne, President and Chief Executive Officer, Joseph Marash, Chief Technology Officer, and Richard A. Maue, Chief Financial
Officer. Competition for qualified personnel is intense and we may not be able to attract, assimilate or retain qualified personnel in the future.



Results Of Operations



Quarter ended March 31, 2003 compared to Quarter ended March 31, 2002.



Sales



Sales for the 2003 First Quarter, were $1,281,075, an increase of 82% from sales of $704,600 for the 2002
First Quarter. This increase in sales reflects an approximate 30% increase in sales of Andrea Anti-Noise Products to $767,277, or 60% of total sales and an approximate 347% increase in sales of Andrea DSP Microphone and Audio Software Products, to
$513,798, or 40% of total sales. The increase in sales of Andrea Anti-Noise Headset Products is primarily due to an increasing number of businesses utilizing distance learning and on-line collaboration software utilizing our noise canceling headset
products. The increase in sales of Andrea DSP Microphone and Audio Software Products is primarily due to licensing revenue recognized related to our agreements with Analog Devices. The unamortized portion of the same license agreements is recorded
as deferred revenue ($1,666,680 of which is classified as current and $1,963,294 is classified as long-term) as of March 31, 2003. All license revenues are being recognized on a straight-line basis over three-years, $3 million of which started to be
recognized during the first quarter of 2002, and $2 million which started in the third quarter of 2002.



Cost of Sales



Cost of sales as a percentage of sales for the 2003 First Quarter decreased to 45% from 78% for the 2002 First Quarter. This decrease
primarily reflects the impact of the significant changes in the composition of our revenues as described under Sales above, in particular, the significant increase in high-margin license revenues associated with our agreements with
Analog Devices.



24



---



Research and Development



Research and development expenses for the 2003 First Quarter decreased 4% to $780,720 from $810,850 for the 2002 First Quarter. The substantial amount of research and development is primarily a reflection of our efforts to develop
and commercialize DSP microphone and audio technologies. For the first three months ended March 31, 2003, the Andrea DSP Microphone and Audio Software Technology efforts were $732,586, or 94% of total research and development expenses and Andrea
Anti-Noise Headset Product efforts were $48,134, or 6% of total research and development expenses. With respect to DSP Microphone and Audio Software Technologies, research efforts are primarily focused on the pursuit of commercializing optimal
far-field microphone solutions for various voice-driven interfaces, incorporating Andreas digital super directional array microphone technology (DSDA), and certain other related technologies such as noise suppression and stereo
acoustic echo cancellation. We believe that continued research and development spending should provide Andrea with a competitive advantage, however, as part of our overall effort to conserve cash, we intend to reduce the relatively high levels of
such expenses during fiscal 2003.



General, Administrative and Selling Expenses



General, administrative and selling expenses decreased approximately 28% to $1,011,748 for 2003 First Quarter from $1,404,319 for the 2002 First Quarter. These decreases are primarily due to cost reduction efforts, primarily
related to employee compensation and other general corporate overhead. As part of our overall effort to conserve cash, we intend to reduce the relatively high levels of such expenses during fiscal 2003.



Other Income (Expense)



Other income for 2003 First Quarter was $33,114 compared to
$33,697 for the 2002 First Quarter. This decrease is due to lower cash balances coupled with unfavorable market conditions for those invested cash balances during 2002.



Provision for Income Taxes



We provide a full valuation allowance on future tax benefits
until we can sustain a level of profitability that demonstrates our ability to utilize the assets, or other significant positive evidence arises that suggests our ability to utilize such assets. The future realization of a portion of our reserved
deferred tax assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the condensed consolidated statement of operations, but rather will result in an increase in
additional paid in capital. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis.



Discontinued Operations



We sold our Aircraft Communications Products division on April 11, 2003. The purchase price was comprised of $2.5 million in cash, and
approximately $1.3 million in notes payable in equal installments over the succeeding 11-month period. The gain on the sale, recorded in the second quarter of 2003, was approximately $2.25 million before transaction expenses. The results of the
Aircraft Communication Products division for both the 2003 and 2002 First Quarter have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Income from discontinued operations was approximately
$292 thousand and $289 thousand, respectively, for the 2003 First Quarter and 2002 First Quarter. Aircraft Communications Products revenues during the 2003 First Quarter and 2002 First Quarter were $1.1 million. For Fiscal 2002, Aircraft
Communications Products revenues, before reclassification for discontinued operations, were $3.3 million, or 46% of total revenues. See Note 9 to the condensed consolidated financial statements for summarized financial information of the
discontinued operations.



Net
Loss



Net loss for 2003 First Quarter was
$757,506 compared to a net loss of $1,737,492 for the 2002 First Quarter. The net loss for 2003 First Quarter principally reflects the factors described above.



Liquidity And Capital Resources



Andreas principal sources of funds have historically been, and are expected to continue to be, gross cash flows from operations and
proceeds from the sale of convertible notes, preferred stock or other securities to certain financial institutions and potential industry partners. At March 31, 2003, we had cash and cash equivalents of $1,946,832 compared with $3,307,437 at
December 31, 2002. The balance of cash and cash equivalents at March 31, 2003, is primarily a result of our license transactions with Analog Devices, Inc., together with gross cash flows from operations.



Working capital at March 31, 2003 was $1,177,440 compared to
$2,131,828 at December 31, 2002. The decrease in working capital reflects decrease in total current assets of $1,418,331 and a decrease in total current liabilities of $463,943. The decrease in total current assets reflects decreases in cash and
cash equivalents of $1,360,605, a decrease in accounts receivable of $8,436, a decrease in inventory of $165,065 , an increase in assets from



25



---



discontinued operations for
sale of $188,192 and a decrease in prepaid expenses and other current assets of $72,417. The decrease in total current liabilities reflects a decrease in trade accounts payable of $241,588, a decrease in current portion of long-term debt of $568, a
decrease of $778 in accrued restructuring charges, a decrease of $222,170 in other current liabilities, and a increase of $1,161 in liabilities from discontinued operations.



The decrease in cash of $1,360,605 reflects $105,220 of net cash provided by discontinued operating
activities, $1,429,320 of net cash used in continuing operating activities, $30,815 of net cash used in investing activities and $5,690 of net cash used in financing activities.



The cash used in operating activities, excluding non-cash charges, is primarily attributable to the
$1,049,757 net loss from continuing operations for 2003 First Quarter, a $8,436 decrease in accounts receivable, a $165,065 decrease in inventory, a $72,417 decrease in prepaid expenses and other current assets, a $1,598 decrease increase in other
assets, a $241,588 decrease in accounts payables, a $278,030 decrease in other current and other liabilities, a $778 decrease in accrued restructuring charges and a $416,670 decrease in deferred revenue. The change in deferred revenue reflects
licensing revenue that was recognized during the 2003 First Quarter as a result of our license agreements with Analog Devices, Inc. The changes in inventory, accounts payable and other current and long-term liabilities primarily reflect differences
in the timing related to both the payments for and the acquisition inventory as well as for other services in connection with ongoing efforts related to Andreas various product lines.



The cash provided by discontinued operating activities is a
result of net income from discontinued operations of $292,252 partial offset by an increase in assets from discontinued operations of $188,192 and an increase in liabilities from discontinued operations of $1,161.



The cash used in investing activities reflects an increase in
property and equipment of $5,275 and an increase in patents and trademarks of $25,540. The increase in property and equipment primarily relates to capital expenditures related to manufacturing dies for our Andrea Anti Noise Headset business line and
our Andrea DSP Microphone and Audio Software business line. The increase in patents and trademarks reflects capital expenditures associated with intellectual property related to our Andrea DSP Microphone and Audio Software business line.



The net cash used in financing activities
reflects payments related to the debt we assumed in connection with the acquisition of Lamar.



We believe that it will be necessary to raise additional working capital to support operations. In recent years, we have sustained significant operating losses and we have been unable to generate
sufficient cash flow from operations to meet our operating needs. Consequently, from time to time during the past several years, we raised capital from external sources. In December 1995, April 1996, August 1996 and June 1998, Andrea raised working
capital through the issuance of convertible subordinated debentures. In June 1999, Andrea raised $7.5 million through the issuance and sale of Series B Preferred Stock. In October 2000, Andrea raised $7.5 million through the issuance and sale of
Series C Preferred Stock. During 2002, we continued to explore different sources of external funding in amounts necessary to continue our operations, while pursuing opportunities in our Andrea DSP Microphone and Audio Software Products segment and
our Andrea Anti-Noise Products segment. As a result of our efforts, on April 11, 2003, we sold our Aircraft Communications Products division for approximately $3.8 million. Pursuant to the terms of the purchase agreement, we received $2.5 million in
cash with the balance of the purchase price payable in equal installments over the succeeding eleven-month period. In addition to the proceeds resulting from the sale of the Aircraft Communications Products segment, we plan to continue to improve
our cash flows during 2003 by continuing to implement reductions of administrative overhead expenses where necessary and feasible as well as aggressively pursue 1) existing and prospective opportunities to sell our Superbeam Array Microphone
generated through our co-marketing efforts with Analog Devices in the personal computing market, 2) existing opportunities in the automotive (in-vehicle computing) market, 3) opportunities in the video and audio conferencing market and 4)
opportunities in the call center market. However, there can be no assurance that we will be able to successfully execute the aforementioned plans. As of April 30, 2003, after receipt of the $2.5 million from the sale of the Aircraft Communications
Products Division, Andrea has approximately $3.8 million of cash. During 2002, we burned $4.6 million in cash, excluding the $5 million in cash generated from the license agreements with Analog Devices. We expect our burn rate to decrease as a
result of planned reductions of certain administrative, overhead and research and development expenses that are expected to begin during the second quarter of 2003, partially offset by the elimination of positive net cash flows from the Aircraft
Communications Products division. As a result, we believe that we have sufficient liquidity available to continue in operation through at least March 2004. However, to



26



---



the extent the Company does
not experience growth from its remaining business segments, additional liquidity will be required in early 2004. Accordingly, if we fail to develop additional revenues from sales of our products to generate adequate funding from operations, or if we
fail to obtain additional financing through a capital transaction or other type of funding, we will be required to continue significantly reducing our operating expenses and/or operations or we may have to relinquish our products, technologies or
markets. 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.



ITEM 3.
CONTROLS AND PROCEDURES



| | a) |  | Evaluation of disclosure controls and procedures. Andrea maintains controls and procedures designed to ensure that information required to be disclosed in the
reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their
evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of Andrea concluded that Andreas disclosure controls and procedures were
adequate.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | Changes in internal controls. Andrea made no significant changes in its internal controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART II OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  Cautionary Statement Regarding
Forward-Looking Statements  An unfavorable ruling in any current litigation proceeding or future proceeding may adversely affect our business, results of operations and financial condition and Note 7 to the unaudited condensed
consolidated financial statements in this quarterly report for a discussion of the legal proceedings of Andrea.



ITEM 2. CHANGES IN SECURITIES



None.



ITEM 3. DEFAULTS UPON SENIOR
SECURITIES



None.



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



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a) |  | Exhibits
| | -- |  | --------



Exhibit 99.1  Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002



| | b) |  | Reports on Form 8-K
| | -- |  | -------------------



On January 8, 2003, Andrea filed a Current Report on Form 8-K reporting that it had executed an Agreement with HTFP Investment LLP
(HFTP), the holder of all of Andreas Series B and Series C



27



---



Convertible
Preferred Stock (C Preferred Stock), whereby Andrea and HTFP agreed to certain modifications in regards to the calculation of the C Preferred Stock Conversion Price and the C Preferred Stock Maturity Alternate Price, under the
Certificate of Amendment of the Certificate of Incorporation for the C Preferred Stock as described in the Agreement.



On April 4, 2003, Andrea filed a Current Report on Form 8-K reporting that it had issued a press release, announcing the sale of its
Aircraft Communication Products division to a private investor group for $3.25 million, subject to net receivables and inventory adjustments as of the balance sheet closing date.



On April 17, 2003, Andrea filed a Current Report on Form 8-K reporting that it had issued a press release,
announcing Fourth Quarter and Year End 2002 Results.



On April 28, 2003, Andrea filed a Current Report on Form 8-K reporting that on April 11, 2003, it had completed the sale of substantially all of the assets and liabilities of the Andrea Aircraft Communications Products division to
Andrea Systems, LLC for approximately $3.8 million.



SIGNATURES



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



|                    |  |  |  | ANDREA ELECTRONICS
CORPORATION
|------------------- |  |  |  | ------------------------------
|                   
|                    |  |  |  | By:                           
|                    |  |  |  | Name:                         
|Date:  May 13, 2003 |  |  |  | Title:                        



|                                                     
|-----------------------------------------------------
|/s/    CHRISTOPHER P.
SAUVIGNEChristopher P. Sauvigne
|                                                     
|/s/    RICHARD A.
MAUERichard
A. Maue                



28



---

CERTIFICATION



I, Christopher P. Sauvigne, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Andrea Electronics Corporation;
|-- |  | ---------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  
|------------------
|Date: May 13, 2003
|                  



29



---



CERTIFICATION



I, Richard A. Maue, certify
that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Andrea Electronics Corporation;
|-- |  | ---------------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  
|------------------
|Date: May 13, 2003
|                  





30