**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,
                    2007




OR




o
                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.)65
                Orville Drive, Bohemia, New York
            
            11716(Address
                of principal executive offices)
            
            (Zip
                Code)Issuer’s
              telephone number, including area code:
            631-719-1800






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




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




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      equity, as of the latest practicable date: As of May 10, 2007, there are
      59,679,373 common shares outstanding.




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















**PART
      I.** **FINANCIAL
      INFORMATION**




**ITEM
      1.** **FINANCIAL
      STATEMENTS**




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


CONDENSED
      CONSOLIDATED BALANCE SHEETS


March
                31,
              2007
            
            December
                31,
              2006(unaudited)
            
            (audited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            700,183
            
            $
            303,678Accounts
                receivable, net of allowance for doubtful accounts of $16,626 and
                $16,704,
                respectively
            
            
            679,043
            
            
            839,599Inventories,
                net
            
            
            848,171
            
            
            1,088,778Prepaid
                expenses and other current assets
            
            
            177,234
            
            
            367,421Total
                current assets
            
            
            2,404,631
            
            
            2,599,476Property
                and equipment, net
            
            
            35,392
            
            
            39,243Intangible
                assets, net
            
            
            3,319,478
            
            
            3,437,432Other
                assets, net
            
            
            12,864
            
            
            12,864Total
                assets
            
            $
            5,772,365
            
            $
            6,089,015LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Trade
                accounts payable
            
            $
            205,677
            
            $
            619,159Short-term
                portion of capital lease
            
            
            2,290
            
            
            5,068Other
                current liabilities
            
            
            447,588
            
            
            413,166Total
                liabilities
            
            
            655,555
            
            
            1,037,393Series
                B Redeemable Convertible Preferred Stock, $.01 par value; authorized:
                1,000 shares; none issued and outstanding
            
            
            -
            
            
            -Commitments
                and contingenciesShareholders’
                equity:Preferred
                stock, $.01 par value; authorized: 2,497,500 shares; none issued
                and
                outstanding
            
            
            -
            
            
            -Series C Convertible Preferred Stock, net, $.01 par value; authorized:
                1,500 shares; issued and outstanding: 100.7 shares; liquidationvalue:
              $1,007,015
            
            
            1
            
            
            1Series D Convertible Preferred Stock, net, $.01 par value; authorized:
                2,500,000 shares; issued and outstanding: 1,217,858 and 1,242,858
                shares,
              respectively;
                liquidation value: $1,217,858 and $1,242,858, respectively
            
            
            12,179
            
            
            12,429Common stock, $.01 par value; authorized: 200,000,000 shares; issued
                and
                outstanding: 59,121,857 and 59,021,857 shares,
                respectively
            
            
            591,219
            
            
            590,219Additional paid-in capital
            
            
            76,416,356
            
            
            76,352,407Accumulated deficit
            
            
            (71,902,945
            )
            
            (71,903,434
            )Total
                shareholders’ equity
            
            
            5,116,810
            
            
            5,051,622Total
                liabilities and shareholders’ equity
            
            $
            5,772,365
            
            $
            6,089,015




See
      Notes
      to Condensed Consolidated Financial Statements (unaudited).


2




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)




For
                the Three Months EndedMarch
                31, 2007
            
            March
                31, 2006RevenuesNet
                product revenues
            
            $
            1,304,822
            
            $
            926,667License
                revenues
            
            
            267,730
            
            
            126,658Revenues
            
            
            1,572,552
            
            
            1,053,325Cost
                of revenues
            
            
            789,169
            
            
            497,357Gross
                margin
            
            
            783,383
            
            
            555,968Research
                and development expenses
            
            
            172,759
            
            
            133,535General,
                administrative and selling expenses
            
            
            588,761
            
            
            476,077Income
                (loss) from operations
            
            
            21,863
            
            
            (53,644
            )Other
                expense, net
            
            
            (1,172
            )
            
            (142
            )Income
                (loss) before provision for income taxes
            
            
            20,691
            
            
            (53,786
            )Provision
                for income taxes
            
            
            20,202
            
            
            -Net
                income (loss)
            
            $
            489
            
            $
            (53,786
            )Basic
                weighted average shares
            
            
            59,039,635
            
            
            58,283,575Diluted
                weighted average shares
            
            
            69,958,736
            
            
            58,283,575Basic
                and diluted net income (loss) per share
            
            $
            0.00
            
            $
            (0.00
            )




See
      Notes
      to Condensed Consolidated Financial Statements (unaudited)..


3




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**





CONDENSED  CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007


(UNAUDITED)




Series
                C Convertible Preferred Stock Outstanding
            
            Series
                C Convertible Preferred Stock
            
            Series
                D Convertible Preferred Stock Outstanding
            
            Series
                D Convertible Preferred Stock
            
            Common
              Stock
              Shares
              Outstanding
            
            Common
              Stock
            
            Additional
              Paid-In
              Capital
            
            Accumulated
              Deficit
            
            Total
              Shareholders’
              EquityBalance,
                January 1, 2007
            
            
            100.701477
            
            $
            1
            
            
            1,242,858
            
            $
            12,429
            
            
            59,021,857
            
            $
            590,219
            
            $
            76,352,407
            
            $
            (71,903,434
            )
            $
            5,051,622Conversions
                of Series D Convertible Preferred Stock
            
            
            -
            
            
            -
            
            
            (25,000
            )
            
            (250
            )
            
            100,000
            
            
            1,000
            
            
            (750
            )
            
            -
            
            
            -Stock
                Grant to Outside Directors and related amortization
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,000
            
            
            -
            
            
            5,000Amortization
                of Stock Option Grants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            59,699
            
            
            -
            
            
            59,699Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            489
            
            
            489Balance,
                March 31, 2007
            
            
            100.701477
            
            $
            1
            
            
            1,217,858
            
            $
            12,179
            
            
            59,121,857
            
            $
            591,219
            
            $
            76,416,356
            
            $
            (71,902,945
            )
            $
            5,116,810




See
      Notes
      to Condensed Consolidated Financial Statements (unaudited)..


4




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


For
                the Three Months EndedMarch
                31, 2007
            
            March
                31, 2006Cash
                flows from operating activities:Net
                income (loss)
            
            $
            489
            
            $
            (53,786
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Depreciation
                and amortization
            
            
            121,805
            
            
            123,899Stock
                compensation expense
            
            
            64,699
            
            
            8,726Provision
                for bad debt
            
            
            (78
            )
            
            (462
            )Inventory
                reserve
            
            
            3,199
            
            
            (208
            )Change
                in:Accounts
                receivable
            
            
            160,634
            
            
            (28,638
            )Inventories
            
            
            237,408
            
            
            (59,949
            )Prepaid
                expenses and other current assets
            
            
            190,187
            
            
            (198,630
            )Trade
                accounts payable
            
            
            (413,482
            )
            
            178,721Other
                current liabilities
            
            
            34,422
            
            
            (14,302
            )Net
                cash provided by (used in) operating activities
            
            
            399,283
            
            
            (44,629
            )Cash
                flows from investing activities:Purchases
                of patents and trademarks
            
            
            -
            
            
            (225
            )Net
                cash used in investing activities
            
            
            -
            
            
            (225
            )Cash
                flows from financing activities:Payments
                under capital lease
            
            
            (2,778
            )
            
            (3,048
            )Net
                cash used in financing activities
            
            
            (2,778
            )
            
            (3,048
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            396,505
            
            
            (47,902
            )Cash
                and cash equivalents, beginning of period
            
            
            303,678
            
            
            418,597Cash
                and cash equivalents, end of period
            
            $
            700,183
            
            $
            370,695Cash
                paid for:Interest
            
            $
            1,189
            
            $
            373Income
                Taxes
            
            $
            43,509
            
            $
            4,061




See
      Notes
      to Condensed Consolidated Financial Statements (unaudited)..


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





These
      unaudited, condensed consolidated interim financial statements have been
      prepared in accordance with accounting principles generally accepting in the
      United States of America for interim financial information and with the
      instructions to Form 10-QSB. Accordingly, they do not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States of America (“GAAP”) for complete financial statements. In
      addition, the December 31, 2006 balance sheet data was derived from the audited
      consolidated financial statements, but does not include all disclosures required
      by GAAP. In the opinion of management, all adjustments (consisting of normal
      recurring accruals) considered necessary for a fair presentation have been
      included. The results of operations of any interim period are not necessarily
      indicative of the results of operations to be expected for any other interim
      period or for the fiscal year.





These
      unaudited interim condensed consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements and notes thereto
      for the fiscal year ended December 31, 2006 included in the Company's Form
      10-KSB for the fiscal year ended December 31, 2006, filed on March 23, 2007.
      The
      accounting policies used in preparing these unaudited condensed consolidated
      interim financial statements are consistent with those described in the December
      31, 2006 audited consolidated financial statements except for the adoption
      of
      Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109"("FIN 48"), which is discussed in Note 9.





Management's
      Liquidity Plans - As of
      March 31, 2007, Andrea had working capital of $1,749,076 and cash on hand of
      $700,183. Andrea’s income from operations was $21,863 for the quarter ended
      March 31, 2007. Andrea plans to continue to improve its cash flows during 2007
      by placing heightened emphasis on its sales and marketing efforts.





As
      of May
      10, 2007, Andrea has approximately $540,000 (unaudited) of cash. Management
      believes that Andrea has sufficient liquidity available to operate through
      at
      least March 2008. While Andrea continues to explore opportunities to increase
      sales in new business areas, the Company is also examining additional
      opportunities for cost reduction, production efficiencies and further
      diversification of its business. In 2005, Andrea made significant changes in
      its
      facilities to improve overall cash expenditures. In 2006, Andrea increased
      sales
      whereas they reached profitability and become cash flow positive. Although
      these
      steps are encouraging, if Andrea fails to develop additional revenues from
      sales
      of its products or to generate adequate funding from operations, or if Andrea
      fails to obtain additional financing through a capital transaction or other
      type
      of financing, Andrea will be required to continue to significantly reduce its
      operating expenses and/or operations or Andrea may have to relinquish its
      products, technologies or markets which could have a materially adverse effect
      on revenue and operations. Andrea has no commitment for additional financing
      and
      may experience difficulty in obtaining additional financing on favorable terms,
      if at all.





**Note
      2.**  **Summary
      of Significant Accounting Policies**





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





For
                the Three Months EndedMarch
                31, 2007
            
            March
                31, 2006Total
                potential common shares as of:Options
                to purchase common stock (Note 7)
            
            
            4,980,001
            
            
            4,427,500Series
                C Convertible Preferred Stock and related accrued dividends (Note
                3)
            
            
            -
            
            
            4,836,010Series
                D Convertible Preferred Stock and related warrants (Note
                4)
            
            
            5,158,344
            
            
            10,472,632Total
                potential common shares
            
            
            10,138,345
            
            
            19,736,142






6


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





The
      following table sets forth the components used in the computation of basic
      and
      diluted earnings per share:





For
                the Three Months EndedMarch
                31, 2007
            
            March
                31, 2006Numerator:Net
                income (loss)
            
            $
            489
            
            $
            (53,786
            )Denominator:Weighted
                average shares
            
            
            59,039,635
            
            
            58,283,575Effect
                of dilutive securities:Series
                C Convertible Preferred Stock
            
            
            4,607,252
            
            
            -
            
            (1)Series
                D Convertible Preferred Stock
            
            
            4,871,432
            
            
            -
            
            (1)Employee
                stock options
            
            
            1,440,417
            
            
            -
            
            (1)Denominator
                for diluted earnings per share-adjusted weighted average shares after
                assumed conversions
            
            
            69,958,736
            
            
            58,283,575




1.
            There
                were no dilutive securities for the quarter ended March 31, 2006
                as the
                period had a net loss and the effect of any dilutive security would
                be
                anti-dilutive





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





Concentration
      of Credit Risk - Andrea
      is a manufacturer of audio communications equipment for several industries.
      Revenues of noise canceling and active noise canceling products were significant
      to one customer and its affiliates, accounting for approximately 8% and 21%
      of
      the total net revenues for the three months ended March 31 2007 and 2006,
      respectively, and accounted for 0% and 3% of total accounts receivable at March
      31, 2007 and December 31, 2006, respectively. Revenues of superbeam array
      microphone products were significant to one customer and its affiliates,
      accounting for approximately 13% and 0% of the total net revenues for the three
      months ended March 31, 2007 and 2006, respectively, and accounted for 30% and
      24% of total accounts receivable at March 31, 2007 and December 31, 2006,
      respectively. Licensing revenues and other revenues of noise canceling and
      active noise canceling products were significant to one customer and its
      affiliates, accounting for approximately 23% and 9% of the total net revenues
      for the year ended March 31, 2007 and 2006, respectively, and accounted for
      27%
      and 41% of total accounts receivable at March 31, 2007 and December 31, 2006,
      respectively.





During
      the
      three months ended March 31, 2007 and 2006, Andrea purchased a substantial
      portion of its finished goods from two suppliers. Purchases from these two
      suppliers amounted to 86% and 7% for the three months ended March 31, 2007
      and
      63% and 10% for the three months ended March 31, 2006, of total purchases.
      At
      March 31, 2007, the amounts due to these suppliers in accounts payable were
      $34,415 and $0, respectively. At December 31, 2006, the amounts due to these
      suppliers in accounts payable were $377,019 and $0 respectively.





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





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





March
                31, 2007
            
            December
                31, 2006Raw
                materials
            
            $
            37,137
            
            $
            40,237Finished
                goods
            
            
            1,406,213
            
            
            1,640,5211,443,350
            
            
            1,680,758Less:
                reserve for obsolescence
            
            
            (595,179
            )
            
            (591,980
            )$
            848,171
            
            $
            1,088,778




7


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




Intangible
      and Long-Lived Assets - Andrea
      accounts for its long-lived assets in accordance with SFAS No. 144 , “Accounting
      for the Impairment or Disposal of Long-Lived Assets” for purposes of determining
      and measuring impairment of its long-lived assets (primarily intangible assets)
      other than goodwill. Andrea’s policy is to periodically review the value
      assigned to its long-lived assets to determine if they have been permanently
      impaired by adverse conditions which may affect Andrea. If Andrea identifies
      a
      permanent impairment such that the carrying amount of Andrea’s long lived assets
      are not recoverable using the sum of an undiscounted cash flow projection (gross
      margin dollars from product sales), a new cost basis for the impaired asset
      will
      be established. This new cost basis will be net of any recorded impairment.





At
      March
      31, 2007, management compared the sum of Andrea’s undiscounted cash flow
      projections (gross margin dollars from product sales) of the Andrea DSP
      Microphone and Audio Software core technology to the carrying value of that
      technology. The results of this test indicated that there was no impairment.
      However, this process utilized probability weighted undiscounted cash flow
      projections which include a significant amount of management’s judgment and
      estimates as to future revenue. If these probability weighted projections do not
      come to fruition, the Company could be required to record an impairment charge
      in the near term and such impairment could be material.





Andrea
      amortizes its core technology, patents and trademarks on a straight-line basis
      over the estimated useful lives of its intangible assets that range from 15
      to
      17 years. For the three-month periods ended March 31, 2007 and 2006,
      amortization expense was $117,954 and $117,622, respectively.





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





Income
      Taxes - The
      provision for income taxes for the quarter ended March 31, 2007 is a result
      of
      certain licensing revenues that are subject to withholding of income tax as
      mandated by the foreign jurisdiction in which the revenues are earned. There
      is
      no provision for income taxes for the quarter ending March 31, 2006, as Andrea
      did not have revenue subject to these withholding taxes in this period. For
      all
      other income taxes, Andrea accounts for income taxes in accordance with SFAS
      No.
      109, “Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability
      approach for financial accounting and reporting for income taxes. The provision
      for income taxes is based upon income or loss after adjustment for those
      permanent items that are not considered in the determination of taxable income.
      Deferred income taxes represent the tax effects of differences between the
      financial reporting and tax bases of the Company’s assets and liabilities at the
      enacted tax rates in effect for the years in which the differences are expected
      to reverse. The Company evaluates the recoverability of deferred tax assets
      and
      establishes a valuation allowance when it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. If it becomes
      more likely than not that a tax asset will be used, the related valuation
      allowance on such assets would be reversed. Management makes judgments as to
      the
      interpretation of the tax laws that might be challenged upon an audit and cause
      changes to previous estimates of tax liability. In management’s opinion,
      adequate provisions for income taxes have been made for all years. If actual
      taxable income by tax jurisdiction varies from estimates, additional allowances
      or reversals of reserves may be necessary. Income tax expense consists of the
      tax payable for the period and the change during the period in deferred tax
      assets and liabilities. Effective January 1, 2007, the Company adopted the
      provisions of FIN 48. FIN 48 establishes for all entities a minimum threshold
      for financial statement recognition of the benefit of tax positions, and
      requires certain expanded disclosures. FIN 48 is effective for fiscal years
      beginning after December 31, 2006, and is to be applied to all open tax years
      as
      of the date of effectiveness. The adoption of FASB Interpretation No. 48 did
      not
      have a material effect on the Company’s condensed consolidated financial
      position or results of operations or cash flows (Note 9).





Stock-Based
      Compensation - At
      March 31, 2007, Andrea had three stock-based employee compensation plans, which
      are described more fully in Note 7. Effective, January 1, 2006, the Company
      adopted the provisions of SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R
      establishes accounting for stock-based awards exchanged for employee services.
      Under the provisions of SFAS No. 123R, share-based compensation cost is measured
      at the grant date, based on the fair value of the award, and is recognized
      as
      expense over the employee’s requisite service period (generally the vesting
      period of the equity grant). The Company amortizes stock-based compensation
      by
      using the straight-line method. The Company elected to adopt the modified
      prospective transition method as provided by SFAS No. 123R. In accordance with
      the requirements of the modified prospective transition method, condensed
      consolidated financial statements for prior year periods have not been restated
      to reflect the fair value method of expensing share-based compensation.
      Additionally, effective with the adoption of SFAS No. 123R excess tax benefits
      realized from the exercise of stock-based awards are classified in cash flows
      from financing activities. The result of adoption of this pronouncement was
      $59,699 of compensation expense for the three month period ended March 31,
      2007,
      $49,148 which is included in general, administrative and selling expenses,
      $10,077 is included in research and development expenses and $474 is included
      in
      cost of revenues in the accompanying condensed consolidated statement of
      operations. The result of adoption of this pronouncement was $3,725 of
      compensation expense for the three month period ended March 31, 2006, which
      is
      included in general, administrative and selling expenses in the accompanying
      condensed consolidated statement of operations.


8


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




Recently
      Issued Accounting Pronouncements





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





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





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





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




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





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


9


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




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





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





**Note
      3.**  **Series
      C Redeemable Convertible Preferred Stock**





On
      October
      10, 2000, Andrea issued and sold in a private placement $7,500,000 of Series
      C
      Redeemable Convertible Preferred Stock (the “Series C Preferred Stock”). Each of
      these shares of Series C Preferred Stock had a stated value of $10,000 plus
      $671.23 increase in the stated value, which sum is convertible into Common
      Stock
      at a conversion price of $0.2551. The Series C Preferred Stock currently has
      no
      dividends. Prior to the amendment there was a dividend of 5% per annum on the
      stated value. The additional amount of $671.23 represents the 5% per annum
      from
      October 10, 2000 through the amendment.





As
      of
      March 31, 2007, there were 100.701477 shares of Series C Preferred Stock
      outstanding, which were convertible into 4,607,252 shares of Common Stock and
      remaining accrued dividends of $168,296, which is included in other current
      liabilities in the accompany unaudited condensed consolidated balance
      sheet.





On
      April
      11, 2007, 10 shares of Series C Preferred Stock, together with related accrued
      dividends, were converted into 457,516 shares of Common Stock at a conversion
      price of $0.2551. As of May 10, 2007, there were 90.701477 shares of Series
      C
      Preferred Stock outstanding, which were convertible into 4,149,736 shares of
      Common Stock.





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





On
      February 17, 2004, Andrea entered into a Securities Purchase Agreement with
      certain holders of the Series C Preferred Stock and other investors
      (collectively, the “Buyers”) pursuant to which the Buyers agreed to invest a
      total of $2,500,000. In connection with this agreement, on February 23, 2004,
      the Buyers purchased, for a purchase price of $1,250,000, an aggregate of
      1,250,000 shares of a new class of preferred stock, the Series D Preferred
      Stock, convertible into 5,000,000 shares of Common Stock (an effective
      conversion price of $0.25 per share) and Common Stock warrants exercisable
      for
      an aggregate of 2,500,000 shares of Common Stock. The warrants are exercisable
      at any time after August 17, 2004 and before February 23, 2009 at an exercise
      price of $0.38 per share.





In
      addition, on June 4, 2004, the Buyers purchased for an additional $1,250,000,
      an
      additional 1,250,000 shares of Series D Preferred Stock convertible into
      5,000,000 shares of Common Stock (an effective conversion price of $0.25 per
      share) and Common Stock warrants exercisable for an aggregate of 2,500,000
      shares of Common Stock. The warrants are exercisable at any time after December
      4, 2004 and before June 4, 2009 at an exercise price of $0.17 per
      share.





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





From
      the
      time of issuance through June 4, 2009, the Company is required to maintain
      effective registration statements. Prior to 2007, there were 281,250 exercises
      of Series D Preferred Stock Warrants. On March 16, 2007, 25,000 shares of Series
      D Preferred Stock were converted into 100,000 shares of Common Stock at a
      conversion price of $0.25. As of March 31, 2007, there are 1,217,858 shares
      of
      Series D Preferred Stock and 5,158,344 related warrants outstanding, which
      are
      convertible and exercisable into 10,029,776 shares of Common Stock. There were
      no Series D Preferred Stock Warrant exercises during the quarter ended March
      31,
      2007.




On
      April
      11, 2007, 25,000 shares of Series D Preferred Stock were converted into 100,000
      shares of Common Stock at a conversion price of $0.25. As of May 10, 2007,
      there
      are 1,192,858 shares of Series D Preferred Stock and 5,158,344 related warrants
      outstanding, which are convertible and exercisable into 9,929,776 shares of
      Common Stock.


10


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


**Note
      5.**  **Licensing
      Agreements**





*Analog*


In
      November 2004, Andrea entered into a license agreement with Analog to integrate
      its EchoStop technology with certain Analog products for one of Analog’s
      customers (“EchoStop Licensed Products”). As consideration of this license,
      Analog will pay Andrea a royalty for each EchoStop Licensed Product shipped.
      During the first year of the agreement, Analog will pay Andrea a minimum of
      $100,000 in royalty payments, payable in payments of $25,000 per quarter. During
      the three months ended June 30, 2006 Andrea received the final $25,000 of the
      minimum royalty payment due under this agreement. Andrea will continue to
      receive royalty payments based on the number of EchoStop Licensed Products
      shipped until either party terminates the agreement per the terms of the
      agreement. During the three months ended March 31, 2007 and March 31, 2006,
      Andrea has recognized $41,513 and $25,000, respectively of licensing revenues
      related to this agreement.





In
      January
      2006, Andrea entered into a license agreement with Analog to integrate its
      DSDA
      and EchoStop technologies with certain of Analog products for specific Analog
      PC
      Original Equipment Manufacturer (“OEM”) customers (“DSDA/EchoStop Licensed
      Product”). In consideration of this license, Analog will pay Andrea a royalty
      for each DSDA/EchoStop Licensed Product shipped. During the three
      months ended March 31, 2007 and March 31, 2006, Andrea has recognized $26,941
      and $0, respectively, of revenues under this agreement. When the royalties
      paid
      to Andrea from DSDA/EchoStop Licensed Products amount to $500,000, no further
      payments will be required under this agreement.





*Marconi*


In
      December 2002, Andrea entered into a license agreement with Marconi
      Communications to provide and integrate a number of its proprietary audio
      software technologies into the Marconi ViPr Virtual Presence System (“ViPr”TM).
      The ViPr conference system is a new network appliance developed by Marconi
      that
      enables secure, high resolution, real-time, multimedia communications between
      people in geographically dispersed locations. The addition of our hands-free
      audio system includes an advanced stereo version of Andrea’s patented EchoStop,
      as well as its patented Digital Super Directional Array (“DSDAâ”) and PureAudio
      noise canceling algorithms, among others. The implementation of Andrea’s
      microphone array, which is embedded in the monitor of the ViPr system allows
      users to carry on discussions at normal conversation levels, even in a noisy
      environment. In 2006, Ericsson Inc. purchased certain assets and liabilities
      of
      Marconi Communication Inc. In conjunction with this purchase, Andrea, Marconi
      Communications Inc. and Ericsson Inc. executed a Novation Agreement in which
      the
      2002 license agreement is now between Ericsson and Andrea. During the three
      months ended March 31, 2007 and 2006 Andrea recorded $6,080 and $9,240 of
      license revenue related to this agreement, respectively.





*Creative*


In
      October
      2004 Andrea entered into a Production and Distribution Agreement with Creative
      Technology Ltd. (“Creative”). This agreement was modified in January 2005 to
      incorporate additional license rights. This agreement grants Creative a
      non-exclusive license to VoiceCenter, PureAudio and DSDA as well as the right
      to
      purchase and resell certain of its other products. VoiceCenter will be
      distributed with Creative’s Sound Blaster Live! ADVANCED MB, a simple online
      upgrade allowing PC users with motherboard audio produced by Dell to upgrade
      to
      Sound Blaster audio quality. The Sound Blaster Live! ADVANCED MB audio solution
      is available for PCs equipped with this configuration. The features of PureAudio
      and DSDA will be distributed in certain of Creative’s other products to enable
      optimized far-field voice input. In consideration of this agreement, Creative
      pays Andrea a royalty for each VoiceCenter license shipped with the Soundblaster
      Live and each webcam shipped with Andrea’s licensed technologies. During the
      three months ended March 31, 2007 and 2006, Andrea recorded $179,308 and $90,101
      of licensing revenue related to this agreement, respectively.





*Samsung*


In
      October
      2005, Andrea entered into a license agreement with Samsung Electronics Co.,
      LTD
      (“Samsung”) to integrate our DSDA and EchoStop technologies with certain
      notebook/laptop PC products incorporating directional microphone and speaker
      phone functions for use in conjunction with PC software voice driven
      applications. During the three months ended March 31, 2007 and 2006, Andrea
      recorded $13,430 and $0 of licensing revenue related to this agreement,
      respectively.


11


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


**Note
      6.**  **Commitments
      And Contingencies**





Leases





In
      March
      2005, Andrea entered into a lease for its corporate headquarters located in
      Bohemia, New York, where Andrea leases space for warehousing, sales and
      executive offices from an unrelated party. The lease is for approximately 11,000
      square feet and expires in October 2008. Rent expense under this operating
      lease
      was $19,873 and $19,294 , respectively for the three-month periods ended March
      31, 2007 and March 31, 2006.





As
      of
      March 31, 2007, the future minimum annual lease payments under this lease and
      all non-cancelable operating leases are as follows:





2007
                (April to December 31)
            
            $
            71,5152008
            
            
            90,3742009
            
            
            89,5572010
            
            
            29,171Total
            
            $
            280,617





Employment
      Agreements





In
      June
      2004, the Company entered into a one-year employment contract with the Chairman
      of the Board, Douglas J. Andrea, which automatically renewed for one additional
      one-year term and expired June 2006. Pursuant to this employment agreement,
      Mr.
      Andrea received an annual base salary of $225,000 per annum, a minimum annual
      prorated bonus of $50,000. Mr. Andrea was also entitled to a change in control
      payment equal to one time his base salary with continuation of health and
      medical benefits for one year in the event of a change in control and subsequent
      termination of employment other than for cause. In accordance with Amendment
      1
      of Mr. Andrea’s employment agreement, Mr. Andrea did not receive a $50,000 bonus
      for the periods ended December 31, 2005 and 2004, and instead is entitled to
      $100,000 bonus when the Company has positive cash flows. At Dec ember 31, 2006
      and March 31, 2007, the future minimum cash commitments under this agreement
      aggregate $115,000 and 100,000, respectively, (including the unpaid portion
      of
      Mr. Andrea’s 2005 and 2004 bonuses), and is included in other liabilities in the
      Company’s accompanying condensed balance sheet.





In
      November 2006, the Company entered into a new employment agreement with Mr.
      Andrea. The employment agreement expires July 31, 2008 and is subject to renewal
      as approved by the Compensation Committee of the Board of Directors. Pursuant
      to
      his employment agreement, Mr. Andrea will receive an annual base salary of
      $300,000 per annum. In addition, upon execution of the employment agreement,
      Mr.
      Andrea is entitled to a salary adjustment from August 1, 2006 through the date
      of the employment agreement. The employment agreement provides for quarterly
      bonuses equal to 25% of the Company’s pre-bonus net after tax quarterly earnings
      in excess of $25,000 for a total quarterly bonus amount not to exceed $12,500;
      and annual bonuses equal to 10% of the Company’s annual pre-bonus net after tax
      earnings in excess of $300,000. All bonuses shall be payable as soon as the
      Company's cash flow permits. All bonus determinations or any additional bonus
      in
      excess of the above will be made in the sole discretion of the Compensation
      Committee. On November 2, 2006, in accordance with his employment agreement,
      Mr.
      Andrea was granted 1,000,000 stock options. This grant provides for a three
      year
      vesting period, an exercise price of $0.12 per share, which was fair market
      value at the date of grant, and a term of 10 years. On November 16, 2006, in
      accordance with his employment agreement, Mr. Andrea was granted 1,000,000
      stock
      options. This grant provides for a three year vesting period, an exercise price
      of $0.12 per share, which was fair market value at the date of grant, and a
      term
      of 10 years. Mr. Andrea is also entitled to a change in control payment equal
      to
      two times his salary with continuation of health and medical benefits for two
      years in the event of a change in control. At March 31, 2007, the future minimum
      cash commitments under this agreement aggregate $400,000. At December 31, 2006,
      the future minimum cash commitments under this agreement aggregate $481,349,
      of
      which $6,349 is included in other liabilities at December 31, 2006.





Legal
      Proceedings





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





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





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




In
      1998,
      the Board adopted the 1998 Stock Option Plan (“1998 Plan”), which was
      subsequently approved by the shareholders. The 1998 Plan, as amended, authorizes
      the granting of awards, the exercise of which would allow up to an aggregate
      of
      6,375,000 shares of Andrea’s Common Stock to be acquired by the holders of those
      awards. The awards can take the form of stock options, stock appreciation
      rights, restricted stock, deferred stock, stock reload options or other
      stock-based awards. Awards may be granted to key employees, officers, directors
      and consultants. At December 31, 2006, there were 9,984 shares available for
      further issuance under the 1998 Plan.


12


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




In
      October
      2006, the Board adopted the Andrea Electronics Corporation 2006 Equity
      Compensation Plan (“2006 Plan”), which was subsequently approved by the
      shareholders. The 2006 Plan authorizes the granting of awards, the exercise
      of
      which would allow up to an aggregate of 10,000,000 shares of Andrea’s Common
      Stock to be acquired by the holders of those awards. The awards can take the
      form of stock options, stock appreciation rights, restricted stock or other
      stock-based awards. Awards may be granted to key employees, officers, directors
      and consultants. At March 31, 2007, there were 8,070,000 shares available for
      further issuance under the 2006 Plan.





In
      2006,
      pursuant to Andrea’s compensation policy for outside directors, Andrea granted
      166,668 shares of Common Stock with a fair market value of $0.12. Compensation
      expense related to these awards was $5,000 and $5,001 for the three-month period
      ended March 31, 2007 and 2006, respectively.





On
      August
      4, 2005, in accordance with his employment agreement, Mr. Andrea was granted
      250,000 stock options. This grant provides for a six month vesting period,
      an
      exercise price of $0.04 per share, which was fair market value at the date
      of
      grant, and a term of 10 years. The compensation expense related to the award
      was
      $0 and 1,333 for the three-month period ended March 31, 2007 and 2006,
      respectively.





On
      November 1, 2005, the Board granted 40,000 stock options to each chairperson
      on
      the Nominating and Audit Committees. The grants provide for a six-month vesting
      period, an exercise price of $0.05 per share, which was fair market value at
      the
      date of grant, and a term of 10 years. The compensation expense related to
      these
      awards was $0 and 2,000 for the three-month period ended March 31, 2007 and
      2006, respectively.





In
      November 2006, in accordance with his employment agreement, Mr. Andrea was
      granted 2,000,000 stock options. These grants provide for three year vesting,
      an
      exercise price of $0.12 per share, which was fair market value at the date
      of
      grant, and a term of 10 years. The compensation expense related to these awards
      was $36,648 and $0 for the three-month period ended March 31, 2007 and 2006,
      respectively.





During
      2006, the Board granted 400,000 stock options to the Vice President and Chief
      Financial Officer and 755,000 stock options to employees of the Company. Each
      option grant provides for vesting periods of up to three years, a weighted
      average exercise price of $0.12 per share, the exercise price of each option
      grant was equal to the fair market value at the date of grant, and a term of
      10
      years. The compensation expense related to these awards was $20,302 and $392
      for
      the three-month period ended March 31, 2007 and 2006, respectively.





On
      November 16, 2006, the Board granted 16,667 stock options to each chairperson
      on
      the Nominating and Compensation Committees and 41,667 stock options to the
      chairperson on the Audit Committee. The grants provide for an eighteen-month
      vesting period, an exercise price of $0.12 per share, which was fair market
      value at the date of grant, and a term of 10 years. The compensation expense
      related to these awards was $2,749 and $0 for the three-month period ended
      March
      31, 2007 and 2006, respectively.





Total
      compensation expense recognized related to stock option awards was $59,699
      and
      $3,725 for the three-month period ended March 31, 2007 and 2006, respectively.
      For the three month period ended March 31, 2007, $49,148 is included in general,
      administrative and selling expenses, $10,077 is included in research and
      development expenses and $474 is included in cost of revenues in the
      accompanying condensed consolidated statement of operations. For the three-month
      period ended March 31, 2006, the expense is included in general, administrative
      and selling expenses in the accompanying condensed consolidated statement of
      operations.





The
      fair
      values of the stock options granted were estimated on the date of grant using
      the Black-Scholes option-pricing model that uses the following weighted-average
      assumptions for the three months ended March 31,2006:





March
                31, 2006Expected
                life in years
            
            
            7Risk-free
                interest rates
            
            
            4.46
            %Volatility
            
            
            220
            %Dividend
                yield
            
            
            0
            %





There
      were
      no options granted during the three-month period ending March 31,
      2007.


13


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


Option
      activity during 2007 and 2006 is summarized as follows:





Options
                Outstanding
            
            Options
                ExercisableOptionsOutstanding
            
            Weighted
                AverageExercise
                Price
            
            Weighted
                Average RemainingContractual
                Life
            
            OptionsExercisable
            
            Weighted
                AverageExercise
                PriceAt
                January 1, 2006
            
            
            4,512,500
            
            
            1.71
            
            
            7.74
                years
            
            
            4,182,500
            
            $
            1.84Granted
            
            
            3,230,001
            
            
            0.12Cancelled
            
            
            (152,500
            )
            
            0.98At
                December 31, 2006
            
            
            7,590,001
            
            
            1.05
            
            
            8.01
                years
            
            
            4,397,500
            
            $
            1.72At
                March 31, 2007
            
            
            7,590,001
            
            
            1.05
            
            
            7.81
                years
            
            
            4,427,500
            
            $
            1.71








The
      following table is the summary of the Company’s nonvested shares as of March 31,
      2007 and 2006:





Options
                Outstanding andNonvested
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted
                Average
              Fair
                ValueNonvested
                at January 1, 2006
            
            
            330,000
            
            
            0.04
            
            
            0.04Granted
            
            
            3,230,001
            
            
            0.12
            
            
            0.12Vested
            
            
            (367,500
            )
            
            0.04
            
            
            0.04Nonvested
                at December 31, 2006
            
            
            3,192,501
            
            
            0.12
            
            
            0.12Vested
            
            
            (30,000
            )
            
            0.04
            
            
            0.04Nonvested
                at March 31, 2007
            
            
            3,162,501
            
            
            0.12
            
            
            0.12





The
      following table summarizes information about stock options outstanding at March
      31, 2007:





Options
                Outstanding
            
            
            
            Options
                ExercisableRange
                of Exercise Prices
            
            Number
              Outstanding
            
            Weighted-
              Average
              Remaining
              Contractual
                Life
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price$0.04to$0.06
            
            
            2,345,000
            
            
            8.29
            
            $
            0.05
            
            
            2,345,000
            
            $
            0.050.07to0.11
            
            
            265,000
            
            
            6.93
            
            
            0.09
            
            
            257,500
            
            
            0.100.12to0.17
            
            
            3,580,001
            
            
            9.34
            
            
            0.12
            
            
            425,000
            
            
            0.130.28to0.43
            
            
            35,000
            
            
            6.12
            
            
            0.34
            
            
            35,000
            
            
            0.340.44to0.65
            
            
            70,000
            
            
            5.70
            
            
            0.57
            
            
            70,000
            
            
            0.570.66to1.00
            
            
            342,500
            
            
            4.84
            
            
            0.69
            
            
            342,500
            
            
            0.691.52to2.28
            
            
            75,000
            
            
            4.03
            
            
            1.75
            
            
            75,000
            
            
            1.752.29to3.43
            
            
            10,000
            
            
            3.68
            
            
            3.30
            
            
            10,000
            
            
            3.305.17to7.75
            
            
            632,500
            
            
            2.05
            
            
            6.03
            
            
            632,500
            
            
            6.037.76to11.65
            
            
            40,000
            
            
            2.36
            
            
            8.25
            
            
            40,000
            
            
            8.2511.66to17.49
            
            
            195,000
            
            
            1.11
            
            
            14.28
            
            
            195,000
            
            
            14.28$0.04to$17.49
            
            
            7,590,001
            
            
            7.81
            
            $
            1.05
            
            
            4,427,500
            
            $
            1.71





As
      of
      March 31, 2007, there was $244,794 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      1998 and 2006 Plans. This unrecognized compensation cost is expected to be
      recognized over the next 3 years ($133,382 during the remaining period in 2007,
      $83,602 in 2008 and $27,810 in 2009).


14




**ANDREA
      ELECTRONICS CORPORATION AND SUBSIDIARIES**


NOTES
            TO
            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


**Note
      8.**  **Segment
      Information**





Andrea
      follows the provisions of SFAS No. 131, “Disclosures about Segments of an
      Enterprise and Related Information.” Reportable operating segments are
      determined based on Andrea’s management approach. The management approach, as
      defined by SFAS No. 131, is based on the way that the chief operating
      decision-maker organizes the segments within an enterprise for making operating
      decisions and assessing performance. While Andrea’s results of operations are
      primarily reviewed on a consolidated basis, the chief operating decision-maker
      also manages the enterprise in two segments: (i) Andrea DSP Microphone and
      Audio
      Software Products and (ii) Andrea Anti-Noise Products. Andrea DSP Microphone
      and
      Audio Software Products primarily include products based on the use of some,
      or
      all, of the following technologies: Andrea Digital Super Directional Array
      microphone technology (DSDA), Andrea Direction Finding and Tracking Array
      microphone technology (DFTA), Andrea PureAudio noise filtering technology,
      and
      Andrea EchoStop, an advanced acoustic echo cancellation technology. Our Andrea
      Anti-Noise Products include noise cancellation and active noise cancellation
      computer headset products and related computer peripheral products. The
      following represents selected unaudited condensed consolidated financial
      information for Andrea’s segments for the three-month periods ended March 31,
      2007 and 2006:





2007
                Segment Data
            
            Andrea
                DSPMicrophone andAudio Software Products
            
            Andrea
                Anti-
              Noise
                Products
            
            Total
                2007Net
                revenues from external customers
            
            $
            467,484
            
            $
            837,338
            
            $
            1,304,822License
                Revenues
            
            
            267,730
            
            
            -
            
            
            267,730(Loss)
                income from operations
            
            
            (2,257
            )
            
            24,119
            
            
            21,863Depreciation
                and amortization
            
            
            117,159
            
            
            4,646
            
            
            121,805Assets
            
            
            4,196,850
            
            
            1,575,515
            
            
            5,772,365Total
                long lived assets
            
            
            3,181,254
            
            
            173,616
            
            
            3,354,870




2006
                Segment Data
            
            
            Andrea
                DSPMicrophone and Audio Software Products
            
            
            Andrea
                Anti-
              Noise
                Products
            
            
            Total
                2006Net
                revenues from external customers
            
            $
            190,549
            
            $
            736,118
            
            $
            926,667License
                Revenues
            
            
            126,658
            
            
            -
            
            
            126,658(Loss)
                income from operations
            
            
            (149,442
            )
            
            95,798
            
            
            (53,644
            )Depreciation
                and amortization
            
            
            117,574
            
            
            6,325
            
            
            123,899Purchases
                of patents and trademarks
            
            
            -
            
            
            225
            
            
            225Assets
            
            
            4,623,460
            
            
            1,348,629
            
            
            5,972,089Total
                long lived assets
            
            
            3,629,786
            
            
            167,271
            
            
            3,797,057





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





Geographic
                Data
            
            March
                31, 2007
            
            March
                31, 2006Net
                revenues:United
                States
            
            $
            1,113,179
            
            $
            830,998Foreign(1)
            
            
            459,373
            
            
            222,327$
            1,572,552
            
            $
            1,053,325Accounts
                receivable:United
                States
            
            $
            285,204
            
            $
            491,978Foreign
            
            
            393,839
            
            
            143,085$
            679,043
            
            $
            635,063




(1)
            Net
                revenue to the People’s Republic of China and Singapore represented 13%
                and 12%, respectively of total net revenues for three months ended
                March
                31, 2007. Net revenues to any one foreign country did not exceed
                10% of
                total net revenues for the three months ended March 31,
                2006.





15


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


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





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





The
      Company has identified its federal tax return and its state tax return in New
      York as "major" tax jurisdictions, as defined in FIN 48. Based on the Company's
      evaluation, it has been concluded that there are no significant uncertain tax
      positions requiring recognition in the Company's financial statements. The
      Company's evaluation was performed for tax years ended 2003 through 2006, the
      only periods subject to examination. The Company believes that its income tax
      positions and deductions will be sustained on audit and does not anticipate
      any
      adjustments that will result in a material change to its financial position.
      In
      addition, the Company did not record a cumulative effect adjustment related
      to
      the adoption of FIN 48.





The
      Company's policy for recording interest and penalties associated with audits
      is
      to record such items as a component of income tax expense. There were no amounts
      accrued for penalties or interest as of or during the three months ended March
      31, 2007. The Company does not expect its unrecognized tax benefit position
      to
      change during the next twelve months. Management is currently unaware of any
      issues under review that could result in significant payments, accruals or
      material deviations from its position.





**Note
      10.**  **Subsequent
      Event**





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





On
      April
      11, 2007, 25,000 shares of Series D Preferred Stock were converted into 100,000
      shares of Common Stock at a conversion price of $0.25.


16




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




**Overview**





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





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




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




**Our
      Critical Accounting Policies**





Our
      unaudited condensed consolidated financial statements and the notes to our
      unaudited condensed consolidated financial statements contain information that
      is pertinent to management's discussion and analysis. The preparation of
      financial statements in conformity with accounting principles generally accepted
      in the United States requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosures of
      contingent assets and liabilities. Management bases its estimates on historical
      experience and on various other assumptions that are believed to be reasonable
      under the circumstances, the results of which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. On a continual basis, management reviews
      its estimates utilizing currently available information, changes in facts and
      circumstances, historical experience and reasonable assumptions. After such
      reviews, and if deemed appropriate, those estimates are adjusted accordingly.
      Actual results may vary from these estimates and assumptions under different
      and/or future circumstances. Our significant accounting policies are described
      in Note 2 of the Notes to Consolidated Financial Statements included in our
      Annual Report on Form 10-KSB for the year ended December 31, 2006. A discussion
      of our critical accounting policies and estimates are included in Management’s
      Discussion and Analysis or Plan of Operation in our Annual Report on Form 10-KSB
      for the year ended December 31, 2006. Management has discussed the development
      and selection of these policies with the Audit Committee of the Company’s Board
      of Directors, and the Audit Committee of the Board of Directors has reviewed
      the
      Company’s disclosures of these policies. There have been no material changes to
      the critical accounting policies or estimates reported in the Management’s
      Discussion and Analysis section of the audited financial statements for the
      year
      ended December 31, 2006 as filed with the Securities and Exchange
      Commission.





**Cautionary
      Statement Regarding Forward-Looking Statements**




Certain
      information contained in this Management’s Discussion and Analysis or Plan of
      Operation for the three months ended March 31, 2007 (the “2007 First Quarter”)
      compared to the three months ended March 31, 2006 (the "2006 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,” or 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:




17




**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 revenues and gross profit, if any,that we achieve
      in
      any particular fiscal period will not be significantly lower than in other
      fiscal periods. Our net revenues for the 2007 First Quarter were approximately
      $1,572,552 versus $1,053,325 for the 2006 First Quarter. Net income for the
      2007
      First Quarter was $489,or $0.00 per share on a basic and diluted basis, versus
      net loss of $53,786, or $0.00 per share on a basic and diluted basis for the
      2006 First Quarter. We continue to explore opportunities to grow sales in other
      business areas, we are also examining additional opportunities for cost
      reduction, production efficiencies and further diversification of our business.
      Although we have improved cash flows by reducing overall expenses and increasing
      sales, if our revenues decline we may not continue to generate positive cash
      flows and our net income or loss may be affected.





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




In
      order
      to be a viable entity we need to maintain and increase profitable operations.
      To
      continue to achieve profitable operations we need to maintain/increase current
      net revenues and continue to look for ways to control expenses. We might also
      need to sell additional assets or raise capital as a means of funding continued
      operations. In recent years, we have sustained significant operating losses.
      Since 1997, we have been unable to generate sufficient cash flow from operations
      to meet our operating needs and, correspondingly, from time to time during
      the
      past several years, we have raised additional capital from external sources.
      We
      may have to continue to raise additional capital from external sources. These
      sources may include private or public financings through the issuance of debt,
      convertible debt or equity, or collaborative arrangements. Such additional
      capital and funding may not be available on favorable terms, if at all.
      Additionally, we may only be able to obtain additional capital or funds through
      arrangements that require us to relinquish rights to our products, technologies
      or potential markets, in whole or in part, or result in our sale. As a result
      of
      past few years of performance, we believe that we have sufficient liquidity
      to
      continue our operations at least through March 2008, provided our net revenues
      do not decline and our operating expenses do not increase. Although we have
      revised our business strategies to reduce our expenses and capital expenditures,
      we cannot assure you that we will be successful in generating positive cash
      flows or obtaining access to additional sources of funding in amounts necessary
      to continue our operations. Failure to maintain sufficient access to funding
      may
      also result in our inability to continue operations.





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




Sales
      of a
      substantial number of shares of our common stock in the public market could
      have
      the effect of depressing the prevailing market price of our common stock. Of
      the
      200,000,000 shares of common stock presently authorized, 59,679,373 were
      outstanding as of May 10, 2007. The number of shares outstanding does not
      include an aggregate of 29,599,497 shares of common stock that are issuable.
      This number of issuable common shares is equal to 50% of the 59,679,373
      outstanding shares. These issuable common shares are comprised of: a) 7,440,001
      shares of our common stock reserved for issuance upon exercise of outstanding
      awards granted under our 1991 Performance Equity Plan, 1998 Stock Plan and
      2006
      Stock Plan; b) 9,984 shares reserved for future grants under our 1998 Stock
      Plan; c) 8,070,000 shares reserved for future grants under our 2006 Stock Plan;
      d) 4,149,736 shares of common stock that are issuable upon conversion of the
      Series C Preferred Stock; e) 4,771,432 shares of common stock issuable upon
      conversion of the Series D Preferred Stock; and f) 5,158,344 of common stock
      issuable upon exercise of warrants relating to the Series D Preferred
      stock.




18





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




As
      of May
      10, 2007, we had 90.701477 shares of Series C Preferred Stock, 1,192,858 shares
      of Series D Preferred Stock and 5,158,344 Common Stock warrants outstanding.
      The
      issuance of shares of common stock upon conversion of the Series C Preferred
      Stock is limited to that amount which, after given effect to the conversion,
      would cause the holder not to beneficially own in excess of 4.99% or, together
      with other shares beneficially own during the 60 day period prior to such
      conversion, not to beneficially own in excess of 9.99% of the outstanding shares
      of common stock. The issuance of common stock upon conversion of the Series
      D
      Preferred Stock and the related warrants also are limited to that amount which,
      after given effect to the conversion, would cause the holder not to beneficially
      own an excess of 4.99% of then outstanding shares of our common stock, except
      that each holder has a right to terminate such limitation upon 61 days notice
      to
      us. Beneficial ownership for purposes of calculation of such percentage
      limitations does not include shares whose acquisition is subject to similar
      limitations. If all shares of the Series C and Series D Preferred Stock and
      warrants, which are outstanding to be issued, are assumed to be converted into
      or exercised for shares of common stock, the number of new shares of common
      stock required to be issued as a result would aggregate 14,079,512 shares,
      which
      would represent 24% of the then outstanding shares of common stock.





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




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





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




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





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




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





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




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





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





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





19




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




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





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




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





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




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





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




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


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




We
      generate revenues to regions outside the United States, particularly in Asia.
      For the quarter ended March 31, 2007 and 2006, net revenues to customers outside
      the United States accounted for approximately 29% and 21%, respectively, of
      our
      net revenues. International revenues and operations are subject to a number
      of
      risks, including:




•  trade
      restrictions in the form of license requirements;




•  restrictions
      on exports and imports and other government controls;




•  changes
      in
      tariffs and taxes;




20




•  difficulties
      in staffing and managing international operations;




•  problems
      in establishing and managing distributor relationships;




•  general
      economic conditions; and




•  political
      and economic instability or conflict.




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





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




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





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




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





**Results
      Of Operations**




***Quarter
      ended March 31, 2007 compared to Quarter ended March 31,
      2006.***




Net
      Revenues




Net
      Revenues for the 2007 First Quarter were $1,572,552, an increase of 49% from
      net
      revenues of $1,053,325 for the 2006 First Quarter. This increase in net revenues
      reflects a 132% increase in net revenues of Andrea DSP Microphone and Audio
      Software Products to $735,214, or 47% of total net revenues and a 14% increase
      in net revenues of Andrea Anti-Noise Products to $837,338, or 53% of total
      net
      revenues. The increase in net revenues for the quarter ended March 31, 2007
      of
      Andrea DSP Microphone and Audio Software Products primarily relates to low
      margin product shipments to one of our OEM customers as well as to increases in
      net revenues recognized related to our license agreements with Analog and
      Creative. The increase in revenues of Andrea Anti-Noise Headset Products is
      primarily due to increased shipments to one of our OEM customers.




Cost
      of
      Revenues




Cost
      of revenues as a
      percentage of revenues for the 2007 First Quarter increased to 50% from 47%
      for
      the 2006 First Quarter. The cost of revenues as a percentage of net revenues
      for
      the 2007 First Quarter for Andrea Anti-Noise Products is 61% compared to 58%
      for
      the 2006 First Quarter. The cost of revenues as a percentage of net revenues
      for
      the 2007 First Quarter for Andrea DSP Microphone and Audio Software Products
      is
      37% compared to 21% for the 2006 First Quarter. These increases primarily
      reflect the impact of the changes in the composition of our net revenues as
      described under “Revenues” above.




21





Research
      and Development




Research
      and development expenses for the 2007 First Quarter increased 29% to $172,759
      from $133,535 for the 2006 First Quarter. This increase relates to adoption
      of
      the provisions of SFAS No. 123R as well employee compensation and related
      benefit costs related to a dedicated employee focused on product development.
      The substantial level of research and development is a reflection of our efforts
      to develop and commercialize DSP Microphone and Audio Software technologies,
      coupled with, to a lesser extent, Andrea Anti-Noise headset products. For the
      2007 First Quarter, the Andrea DSP Microphone and Audio Software Technology
      efforts were $123,172, or 71% of total research and development expenses and
      Andrea Anti-Noise Headset Product efforts were $49,587, or 29% of total research
      and development expenses. With respect to DSP Microphone and Audio Software
      technologies, research efforts are primarily focused on the pursuit of
      commercializing a natural language-driven human/machine interface by developing
      optimal far-field microphone solutions for various voice-driven interfaces,
      incorporating Andrea’s digital super directional array microphone technology,
      and certain other related technologies such as noise suppression and stereo
      acoustic echo cancellation. We believe that continued research and development
      spending should provide Andrea with a competitive advantage.




General,
      Administrative and Selling Expenses




General,
      administrative and selling expenses increased approximately 24% to $588,761
      for
      the 2007 First Quarter from $476,077 for the 2006 First Quarter. This increase
      is a result of Andrea’s adoption of the provisions of SFAS No. 123R as well as
      the new employment agreement entered into with the Company’s President and Chief
      Executive Officer in November 2006. For the 2007 First Quarter, the increase
      reflects a 15% increase in our Andrea DSP Microphone and Audio Software
      Technology efforts to $339,623, or 58% of total general, administrative and
      selling expenses and a 38% increase in our Andrea Anti-Noise Headset Product
      efforts to $249,138, or 42% of total general, administrative and selling
      expenses.




Other
      expense




Other
      expense for the 2007 First Quarter was $1,172 compared to other expense of
      $147
      for the 2006 First Quarter.




Provision
      for Income Taxes




The
      provision for income taxes for the quarter ended March 31, 2007 is a result
      of
      certain licensing revenues that are subject to withholding of income tax as
      mandated by the foreign jurisdiction in which the revenues are earned. There
      is
      no provision for income taxes for the quarter ending March 31, 2006, as Andrea
      did not have revenue subject to these withholding taxes in this period. 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 unaudited 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. Effective
      January 1, 2007, the Company adopted the provisions of Financial Accounting
      Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      establishes for all entities a minimum threshold for financial statement
      recognition of the benefit of tax positions, and requires certain expanded
      disclosures. FIN 48 is effective for fiscal years beginning after December
      31,
      2006, and is to be applied to all open tax years as of the date of
      effectiveness. The adoption of FASB Interpretation No. 48 did not have a
      material effect on the Company’s condensed consolidated financial position or
      results of operations or cash flows (Note 9).




Net
      Income / (Loss)




Net
      income
      for 2007 First Quarter was $489 compared to a net loss of $53,786 for the 2006
      First Quarter. The net income for the 2007 First Quarter principally reflects
      the factors described above.




Off-Balance
      Sheet Arrangements




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




**Liquidity
      And Capital Resources**




Andrea’s
      principal sources of funds 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, investors and potential industry partners. At March 31, 2007,
      we
      had cash and cash equivalents of $700,183 compared with $303,678 at December
      31,
      2006. The balance of cash and cash equivalents at March 31, 2007 is primarily
      a
      result of our cash provided from operations during the 2007 First
      Quarter.




22




Working
      capital balance at March 31, 2007 was $1,749,076 compared to a working capital
      balance of $1,562,083 at December 31, 2006. The increase in working capital
      reflects a decrease in total current assets of $194,845 coupled with a decrease
      in total current liabilities of $381,838. The decrease in total current assets
      reflects an increase in cash and cash equivalents of $396,505, a decrease in
      accounts receivable of $160,556, a decrease in inventory of $240,607, and a
      decrease in prepaid expenses and other current assets of $190,187. The decrease
      in total current liabilities reflects a decrease in trade accounts payable
      of
      $413,482, a decrease in the current portion of capital lease of $2,778, and
      an
      increase of $34,422 in other current liabilities. The increase in cash and
      cash
      equivalents of $396,505 reflects $399,283 of net cash provided by operating
      activities and $2,778 of net cash used in financing activities.




The
      cash
      provided by operating activities of $399,283, excluding non-cash charges, is
      attributable to the $489 net income from operations for the quarter ended March
      31, 2007, a $160,634 decrease in accounts receivable, a $237,408 decrease in
      inventory, a $190,187 decrease in prepaid expenses and other current assets,
      a
      $413,482 decrease in accounts payable, and a $34,422 increase in other current
      and long-term liabilities. The changes in receivables, inventory, prepaid
      expenses and accounts payable primarily reflect differences in the timing
      related to both the payments for and the acquisition of inventory as well as
      for
      other services in connection with ongoing efforts related to Andrea’s various
      product lines.




The
      net
      cash used in financing activities of $2,778 reflects payment of our capital
      leases associated with communication related equipment.




We
      plan to
      continue to improve our cash flows during 2007 by aggressively pursuing 1)
      existing sales opportunities in our Andrea Anti-Noise Headset Products market,
      2) existing and prospective opportunities to sell our Superbeam Array Microphone
      generated through our co-marketing efforts with Analog Devices in the personal
      computing market, 3) opportunities in the video and audio conferencing market
      and 4) the automotive (in-vehicle computing) market. However, there can be
      no
      assurance that we will be able to successfully execute the aforementioned plans.
      As of May 10, 2007, Andrea has approximately $540,000 (unaudited) of cash and
      cash equivalents. During 2006, we utilized approximately $115,000 in cash.
      We
      believe that we have sufficient liquidity available to continue in operation
      through at least March 2008. To the extent that we do not generate sufficient
      cash flows from our operations in 2007, additional financing might be required.
      Although we have improved cash flows by reducing overall expenses, if our
      revenues decline, these reductions may impede our ability to be cash flow
      positive and our net income or loss may be disproportionately affected. We
      have
      no commitment for additional financing and may experience difficulty in
      obtaining additional financing on favorable terms, if at all. Any financing
      we
      obtain may contain covenants that restrict our freedom to operate our business
      or may have rights, preferences or privileges senior to our common stock and
      may
      dilute our current shareholders’ ownership interest in Andrea. We cannot assure
      that demand will continue for any of our products, including future products
      related to our Andrea DSP Microphone and Audio Software technologies, or, that
      if such demand does exist, that we will be able to obtain the necessary working
      capital to increase production and provide marketing resources to meet such
      demand on favorable terms, or at all.





Recently
      Issued Accounting Pronouncements





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





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





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





23




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





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





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





**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**




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




Limitations
      on the Effectiveness of Controls




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




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




24




**PART
      II**  **OTHER
      INFORMATION**




**ITEM
      1.**  **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.




See
      "Part
      I 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 6 to the unaudited condensed consolidated
      financial statements in this quarterly report for a discussion of the legal
      proceedings of Andrea.




**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.




**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**




None.




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




None.




**ITEM
      5.**  **OTHER
      INFORMATION**




None.




**ITEM
      6.**  **EXHIBITS**




**a)**
            **Exhibits**




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




Exhibit
      32
      - Section 1350 Certifications







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







Date:
      May
      14, 2007


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


25