<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

(X)      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002

                                       OR

( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
         ____________ to ____________

                          Commission file number 1-4324

                                   --------

                         ANDREA ELECTRONICS CORPORATION
                      -------------------------------------

             (Exact name of registrant as specified in its charter)

                     New York                           11-0482020
        --------------------------------    ------------------------------------
         (State or other jurisdiction of    (I.R.S. employer identification no.)
        incorporation or organization)

    45 Melville Park Road, Melville, New York                   11747
    -------------------------------------------             -------------
      (Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:         631-719-1800
                                                         ------------------

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

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 13, 2002, there are
18,199,200 common shares outstanding

<PAGE>


ITEM 1.       FINANCIAL STATEMENTS

                 ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       March 31,      December 31,
                                                                                         2002             2001
                                                                                      (unaudited)       (audited)
                                                                                    ---------------   --------------
<S>                                                                                  <C>              <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                          $   3,400,096    $    3,724,130
  Accounts receivable, net of allowance for doubtful accounts of $141,348 and
  $176,292                                                                               4,924,505         2,094,146
  Inventories                                                                            3,249,075         3,389,729
  Prepaid expenses and other current assets                                                585,222           547,892
                                                                                     --------------   --------------
    Total current assets                                                                12,158,898         9,755,897

PROPERTY AND EQUIPMENT, net                                                                736,720           811,392
DEFERRED INCOME TAXES                                                                    1,806,615         1,806,615
GOODWILL                                                                                12,458,872        12,317,843
OTHER INTANGIBLE ASSETS                                                                  8,143,060         8,467,616
OTHER ASSETS                                                                               899,082           860,296
                                                                                     --------------   --------------
    Total assets                                                                     $  36,203,247    $   34,019,659
                                                                                     ==============   ==============
      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Trade accounts payable                                                             $   1,015,488    $    1,147,160
  Current portion of long-term debt                                                        116,799           158,802
  Accrued Restructuring Charges                                                            437,121           499,724
  Deferred Revenue                                                                       1,666,680           258,221
  Other current liabilities                                                              2,179,822         2,061,075
                                                                                     --------------   --------------
    Total current liabilities                                                            5,415,910         4,124,982

LONG-TERM DEBT                                                                              31,902            37,619
DEFERRED REVENUE                                                                         3,325,101           741,779
OTHER LIABILITIES                                                                           39,826            41,5O9
                                                                                     --------------   --------------
    Total liabilities                                                                    8,812,739         4,945,889
                                                                                     --------------   --------------
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par
  value; authorized: 1,000 shares, issued and outstanding: 172 and 249 shares,
  respectively; liquidation value: $1,720,000 and $2,490,000, respectively               1,674,681         2,421,009
                                                                                     --------------   --------------
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par
  value; authorized: 1,500 shares, issued and outstanding: 750 shares; liquidation
  value: $7,5O0,OOO                                                                      7,370,812         7,364,011
                                                                                     --------------   --------------
SHAREHOLDERS' EQUITY:

  Preferred stock, $.01 par value; authorized: 4,997,500 shares; none issued and
    outstanding                                                                                  -                 -
  Common stock. $.50 par value; authorized: 70,000,000 shares; issued and
    outstanding: 18,199,200 and 16,308,968 shares, respectively                          9,099,600         8,154,484
  Additional paid-in capital                                                            55,869,297        55,754,228
  Deferred stock compensation                                                             (194,660)          (52,334)
  Accumulated deficit                                                                  (46,429,222)      (44,567,628)
                                                                                     --------------   --------------
      Total shareholders' equity                                                        18,345,O15        19,288,750
                                                                                     --------------   --------------
      Total liabilities and shareholders' equity                                     $  36,203,247    $   34,019,659
                                                                                     ==============   ==============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>

                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       For the Three Months Ended
                                                                                 March 31,
                                                                    --------------------------------
                                                                         2002             2001
                                                                    --------------    --------------

<S>                                                                  <C>              <C>
NET SALES                                                            $ 1,799,291       $ 2,615,639

COST OF SALES                                                          1,165,793         1,919,354
                                                                    --------------    --------------
         Gross profit                                                    633,498           696,285

RESEARCH AND DEVELOPMENT EXPENSES                                        905,822           998,900

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES                           1,498,865         2,313,343
                                                                    --------------    --------------
         Loss from operations                                         (1,771,189)       (2,615,958)
                                                                    --------------    --------------
OTHER INCOME (EXPENSE):

    Interest income                                                       28,888            88,723
    Interest expense                                                     (10,128)          (15,003)
    Other                                                                 14,937            (4,249)
                                                                    --------------    --------------
                                                                          33,697            69,471
                                                                    --------------    --------------
LOSS BEFORE PROVISION FOR INCOME TAXES                                (1,737,492)       (2,546,487)

PROVISION FOR INCOME TAXES                                                  -                 -
                                                                    --------------    --------------
         Net loss                                                    $(1,737,492)      $(2,546,487)
                                                                    ==============    ==============
PREFERRED STOCK DIVIDENDS                                                124,102           146,285

         Net loss attributable to common shareholders                $(1,861,594)      $(2,692,772)
                                                                    ==============    ==============

PER SHARE INFORMATION:

Net Loss Per Share - Basic and Diluted                               $      (.11)      $      (.18)
                                                                    ==============    ==============

Shares used in computing net loss per share - Basic and Diluted       17,250,869        14,624,788
                                                                    ==============    ==============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      -2-

<PAGE>

                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                    For the Three Months Ended March 31, 2002

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         Additional   Deferred                          Total
                                                Shares       Common       Paid-In       Stock        Accumulated     Shareholders'
                                              Outstanding     Stock       Capital    Compensation      Deficit         Equity
                                            ------------ ------------ -------------  ------------  ---------------  --------------
<S>                                          <C>          <C>          <C>            <C>           <C>              <C>
BALANCE, December 31, 2001                   16,308,968   $8,154,484   $55,754,228    $ (52,334)    $(44,567,628)    $19,288,750
  Conversions of Series B Redeemable
  Convertible Preferred Stock, net of
   related costs                              1,552,732      776,366        54,319         -                -            830,685
Preferred stock dividends                          -            -             -            -            (124,102)       (124,102)
Employee Stock Grant, net of related
 current year amortization                      337,500      168,750        60,750     (173,540)            -             55,960
Amortization of deferred stock
 compensation                                      -            -             -          31,214             -             31,214
Net loss                                           -            -             -            -          (1,737,492)     (1,737,492)
                                            ------------ ------------ -------------  ------------  ---------------  --------------
BALANCE, March 31, 2002                      18,199,200   $9,099,600   $55,869,297    $(194,660)    $(46,429,222)    $18,345,015
                                            ============ ============ =============  ============  ===============  ==============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      -3-

<PAGE>

                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              For the Three Months Ended
                                                                       March 31,
                                                              ---------------------------
                                                                  2002           2001
                                                              -------------  ------------
<S>                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                      $(1,737,492)   $(2,546,487)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
        Non-cash stock compensation expense                         87,174           -
        Depreciation and amortization                              534,977        927,126
        (Increase) Decrease in:
          Accounts receivable, net                              (2,830,359)     1,669,796
          Inventories                                              140,654       (245,939)
          Prepaid expenses and other current assets               (159,544)      (438,242)
          Other assets                                            (105,123)      (194,317)
        Increase (Decrease) in:
          Trade accounts payable                                  (131,672)      (729,387)
          Accrued Restructuring Charges                            (62,603)          -
          Deferred Revenue                                       3,991,781           -
          Other current and long-term liabilities                   84,120       (226,508)
                                                              -------------  ------------
            Net cash used in operating activities                 (188,087)    (1,783,958)
                                                              -------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property, plant and equipment                        (88,227)       (22,869)
                                                              -------------  ------------
            Net cash used in investing activities                  (88,227)       (22,869)
                                                              -------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Payments of debt obligations                                      (47,720)          -
                                                              -------------  ------------
            Net cash used in financing activities                  (47,720)          -
                                                              -------------  ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                         (324,034)    (1,806,827)
                                                              =============  ============

CASH AND CASH EQUIVALENTS, beginning of period                   3,724,130      9,151,835
                                                              -------------  ------------

CASH AND CASH EQUIVALENTS, end of period                       $ 3,400,096    $ 7,345,008
                                                              ============   ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Non-cash investing and financing activities:

  Conversion of Series B Redeemable Convertible
     Preferred Stock and related accrued dividends into
     common stock                                              $   830,685    $ 1,548,153
                                                              =============  ============
  Stock grant to employees                                     $   229,500    $     -
                                                              =============  ============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      -4-

<PAGE>

                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

         The consolidated financial statements have been prepared in accordance
         with generally accepted accounting principles for interim financial
         reporting. Accordingly, they do not include all of the information and
         footnotes required by generally accepted accounting principles for
         complete financial statements. In the opinion of management, all
         adjustments (consisting of normal recurring accruals) considered
         necessary for a fair presentation have been included. The results of
         operations for any interim period are not necessarily indicative of the
         results to be expected for the fiscal year. For further information,
         refer to the consolidated financial statements and accompanying
         footnotes included in Andrea's annual report on Form 10-K for the year
         ended December 31, 2001.

2.       Earnings Per Common Share - Basic net loss per common share is computed
         by dividing net loss by the weighted-average number of common shares
         outstanding. Diluted net loss per common share is computed by dividing
         net loss by the weighted-average number of common shares and dilutive
         common share equivalents and convertible securities then outstanding.

         The following chart provides a reconciliation of information used in
         calculating the per share amounts:

<TABLE>
<CAPTION>
                                                      For the Three Months Ended
                                                                March 31,
                                                     ------------------------------
                                                          2002             2001
                                                     ------------      ------------
<S>                                                  <C>               <C>
Numerator:
  Net loss                                           $ (1,737,492)     $ (2,546,487)
  Preferred stock dividends                               124,102          146,285
                                                     ------------      ------------

    Net loss attributable to common shareholders     $ (1,861,594)     $ (2,692,772)
                                                     ============      ============

Denominator:
  Weighted-average common shares outstanding -
  Basic and Diluted *                                  17,250,869        14,624,788
                                                     ============      ============

Net loss per share - Basic and Diluted
                                                     $       (.11)     $       (.18)
                                                     ============      ============
</TABLE>

*  The effect of dilutive securities (stock options, Redeemable Convertible
   Preferred Stock and warrants) have not been included herein as their
   inclusion would be anti-dilutive.

3.       Comprehensive Income - Andrea follows the provisions of SFAS No.  130,
         "Reporting Comprehensive Income", which requires companies to report
         all changes in equity during a period, except those resulting from
         investment by owners and distribution to owners, in a financial
         statement for the period in which they are recognized.  Comprehensive
         income is the total of net income (loss) and all other non-owner
         changes in equity (or other comprehensive income) such as unrealized
         gains/losses on securities available-for-sale, foreign currency
         translation adjustments and minimum pension liability adjustments.
         Comprehensive and other comprehensive income must be reported on the
         face of the annual financial statements or, in the case of interim
         reporting, in the footnotes to the financial statements.  For the
         three months ended March 31, 2002 and 2001,

                                      -5-

<PAGE>

         Andrea's operations did not give rise to items includible in
         comprehensive loss, which were not already included in net loss.
         Accordingly, Andrea's comprehensive loss is the same as its net loss
         for all periods presented.

4.       Derivative Instruments - The Financial Accounting Standards Board
         issued SFAS No. 133, "Accounting for Derivative Instruments and
         Hedging Activities" (FAS 133).  This statement establishes accounting
         and reporting standards for derivative instruments, including certain
         derivative instruments embedded in other contracts, and for hedging
         activities.  FAS 133 was effective for Andrea on January 1, 2001, and
         requires the recognition of all derivative instruments as either
         assets or liabilities in the balance sheet measured at fair value.
         Derivative instruments will be recognized as gains or losses in the
         period of change.  If certain conditions are met where the derivative
         instrument has been designated as a fair value hedge, the hedge items
         may also be marked to market through earnings, thus creating an
         offset.  If the derivative is designed and qualifies as a cash flow
         hedge, the changes in fair value of the derivative instrument may be
         recorded in comprehensive income.  While Andrea operates in
         international markets, it does so presently without the use of
         derivative instruments.

5.       In July 2001, the Financial Accounting Standards Board issued
         Statements of Financial Accounting Standards No. 141, "Business
         Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible
         Assets" ("FAS 142").  FAS 141 requires all business combinations
         initiated after June 30, 2001 to be accounted for using the purchase
         method.  Under FAS 142, goodwill and intangible assets with indefinite
         lives are no longer amortized but are reviewed annually (or more
         frequently if impairment indicators arise) for impairment.  Separable
         intangible assets that are not deemed to have indefinite lives will
         continue to be amortized over their useful lives (but with no maximum
         life).  Andrea has adopted this standard effective January 1, 2002,
         and accordingly, those intangible assets that continue to be
         classified as goodwill or as other intangibles with indefinite lives
         are no longer amortized.  Other intangible assets, which do not have
         indefinite lives (such as core technology - Note 10), continue to be
         amortized.  Andrea has made an assessment of its intangible assets to
         identify goodwill separately from other identifiable intangibles.  No
         adjustment was deemed necessary, although the intangible asset
         "Workforce in Place" is reclassified as goodwill pursuant to FAS 142.
         In accordance with the FAS 142, intangible assets, including purchased
         goodwill, is evaluated periodically for impairment.  Based upon the
         results of Andrea's impairment testing, there was no material impact
         on the combined financial results related to Andrea's intangible
         assets or purchased goodwill for the period ending March 31, 2002.
         Amortization of goodwill and other intangible assets, relating to the
         assets that are no longer amortized, would have been approximately
         $282,047 for the first quarter ended March 31, 2001.  The following
         table presents pro forma net loss and net loss per share data restated
         to include the retroactive impact of the adoption of FAS 142:

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                     March 31,
                                                        ---------------------------------
                                                              2002              2001
                                                        ---------------   ---------------

<S>                                                       <C>               <C>
Reported Net Loss attributable to common shareholders     $ (1,861,594)     $ (2,692,772)
Add back: Goodwill Amortization                                      -           282,047
                                                          ------------      ------------
Adjusted Net Loss                                         $ (1,861,594)     $ (2,410,725)
                                                          ============      ============

Net Loss Per Share - Basic and Diluted                    $       (.11)     $       (.18)
Goodwill Amortization                                                -               .02
                                                          ------------      ------------
Pro Forma Net Loss Per Common Shareholder                 $       (.11)     $       (.16)
                                                          ============      ============

Weighted-average common shares outstanding - Basic
and Diluted                                                 17,250,869        14,624,788
                                                          ============      ============
</TABLE>

                                      -6-

<PAGE>

6.       In August 2001, the FASB issued SFAS No. 144 "Accounting for the
         Impairment or Disposal of Long-Lived Assets". This statement supersedes
         SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
         for Long-Lived Assets to Be Disposed Of" and Accounting Principles
         Board Opinion No. 30 "Reporting Results of Operations - Reporting the
         Effects of Disposal of a Segment of a Business, and Extraordinary,
         Unusual and Infrequently Occurring Events and Transactions". The
         Statement retains the fundamental provisions of SFAS No. 121 for
         recognition and measurement of impairment, but amends the accounting
         and reporting standards for segments of a business to be disposed of.
         The provisions of this statement are required to be adopted no later
         than fiscal years beginning after December 31, 2001. The impact of
         adopting this standard was not material to the financial statements.

7.       Restructuring Accrual - During the fourth quarter of fiscal 2001,
         Andrea recorded restructuring charges in connection with exiting a PC
         headset channel, or customer-type, within the Anti-Noise Product
         segment.  The restructuring charge was recorded as accrued
         restructuring charges or as a reduction of assets, as applicable.
         During the first quarter of fiscal 2002, we made payments of $62,603,
         which reduced the restructuring liability that had been established
         during the fourth quarter of fiscal 2001.  Currently, Andrea expects
         to settle all of its remaining obligations related to the
         restructuring by the end of fiscal 2002.  As of March 31, 2002, there
         were no material revisions to the plan, exit costs, or the anticipated
         timing of our plan's execution.

8.       Series B Redeemable Convertible Preferred Stock - On June 22, 1999,
         Andrea issued and sold in a private placement $7,500,000 of Series B
         Redeemable Convertible Preferred Stock (the "Series B Preferred
         Stock"), and a warrant covering 75,000 shares of Andrea's Common
         Stock. Each of the 750 shares of Series B Preferred Stock (par value
         $0.01 per share) has a stated value of $10,000 plus dividends of 4%
         per annum, which sum is convertible into Common Stock (par value $0.50
         per share) at a conversion price equal to the lower of $8.775 (the
         "Maximum Conversion Price") and the average of the two lowest closing
         bid prices of the Common Stock during the 15 consecutive trading days
         immediately preceding a conversion date (the "Market Price"), subject
         to certain adjustments, including anti-dilution. The 4% dividends may,
         at the option of Andrea, be paid in cash.  The warrant has an exercise
         price of $8.775 per share and expires on June 18, 2004.

         All of the Series B Preferred Stock is currently convertible into
         Andrea's Common Stock, and Andrea has reserved 5,372,900 shares of
         Common Stock for issuance upon conversion.

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

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

         In the three-month period ending March 31, 2002, the following number
         of shares of Series B Preferred Stock, together with related accrued
         dividends, were converted:

                                      -7-

<PAGE>

                      Number of Series                         Number of
    Date of             B Preferred         Conversion          Common
   Conversion         Stock Converted         Price              Shares
----------------      ---------------       ----------         ---------
January 11, 2002            40                 $0.59             747,657
March  15, 2002             37                 $0.51             805,075


Total                       77                                 1,552,732
                            ==                                 =========

         The original value of the warrants upon issuance was $348,457. As of
         March 31, 2002, the Series B Preferred Stock is recorded net of the
         unaccreted present value of the warrants of $45,319. Due to the
         redemption features described above, the Series B Preferred Stock is
         presented outside of stockholders' equity in the accompanying
         consolidated balance sheets.

9.       Series C Redeemable Convertible Preferred Stock - On October 10, 2000,
         Andrea issued and sold in a private placement $7,500,000 of Series C
         Redeemable Convertible Preferred Stock (the "Series C Preferred
         Stock"). Each of the 750 shares of Series C Preferred Stock (par value
         $0.01 per share) has a stated value of $10,000 plus dividends of 5%
         per annum, which sum is convertible into Common Stock (par value $0.50
         per share) at a conversion price which was initially equal to $7.0565
         or 110% of the average of the two lowest closing bid prices of the
         Common Stock during the 5 consecutive trading days immediately
         preceding the issuance date, for the first nine months. The conversion
         price is reset every six months thereafter to the lesser of the then
         existing conversion price or the average of the two lowest closing bid
         prices of the Common Stock during the 5 consecutive trading days
         immediately preceding the six-month reset dates or, for the period
         beginning on the day two years after the initial issuance and ending
         on the maturity of the Series C Preferred Stock, the least of: (i) the
         then existing conversion price, (ii) the average of the two lowest
         closing bid prices of the Common Stock during the 15 consecutive
         trading days immediately preceding such two year date or (iii) the
         closing bid price on the day of conversion, subject in each case to
         certain adjustments.  The current conversion price is $0.765.  The 5%
         dividend amount may, at the option of Andrea, be paid in cash or in
         shares of Andrea's Common Stock. The Series C Preferred Stock is
         convertible or redeemable at maturity by Andrea, based upon certain
         circumstances at that time, and is redeemable by the holder upon
         certain events. Andrea has reserved 10,890,411 shares of Common Stock
         for issuance upon conversion of the shares of the Series C Preferred
         Stock.  Andrea has the right to require the conversion of the Series C
         Preferred Stock after one year upon the satisfaction of certain
         conditions.

         In accordance with EITF Issue 00-27, "Application of EITF Issue No.
         98-5 to Certain Convertible Instruments", in the third quarter of 2001,
         Andrea recorded a one time non-cash charge of $7,500,000 to accumulated
         deficit. This pronouncement values the economic benefit of the
         contingent beneficial conversion feature that the holders of the Series
         C Preferred Stock received when the conversion price of the Series C
         Preferred Stock was reset from $7.0565 to $1.44 in July 2001. This
         charge represents the maximum charge under this standard and,
         accordingly, there will be no additional charges to equity at later
         reset dates.

         The original value of the deal costs upon issuance was $175,000. As of
         March 31, 2001, the Series C Preferred Stock is recorded net of the
         unaccreted present value of the deal costs of $129,188. Due to the
         redemption features discussed above, the Series C Preferred Stock is
         presented outside of stockholders' equity in the accompanying
         consolidated balance sheet.

         Upon the announcement of a major transaction or upon certain triggering
         events, as defined, the investors have the right to require Andrea to
         redeem all or a portion of the investors' Series C Preferred Shares at
         a redemption price equal to the greater of (i) 120% of the Liquidation
         Value, as defined, or (ii) the product of the applicable conversion
         rate in effect on the date of the major transaction or the triggering
         event and the closing bid price of the Common Stock of Andrea on the
         trading day immediately preceding the major transaction or triggering
         event or the closing bid price of Andrea's Common Stock on the date the
         holder's delivery to Andrea of notice. In addition, if Andrea is unable
         to effect such redemption (i) interest will accumulate on the value of

                                      -8-

<PAGE>

         the Series C Preferred Shares that Andrea is unable to redeem at the
         rate of 2% per month and (b) the holders of the Series C Preferred
         Stock are entitled to void their redemption notices and receive a reset
         of their applicable conversion price.

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

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

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

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

10.      Acquisition Of Business - On May 5, 1998, Andrea acquired all of the
         outstanding shares of capital stock of Lamar (the "Acquisition").  The
         consideration paid by Andrea for the Acquisition was approximately
         1,800,000 shares of restricted common stock, $1,000,000 in cash and
         $2,000,000 in notes payable. The cash was recorded at stated value.
         Both the notes payable and the shares issued were discounted to
         reflect the appropriate value of the consideration paid taking into
         account the underlying restrictions, arriving at values of

                                      -9-

<PAGE>

         $1,615,000 and $23,129,532, respectively.  Of the approximately
         1,800,000 shares issued to the sellers, one-third became freely
         transferable on the first anniversary of the closing; an additional
         one-third became transferable on the second anniversary; and the last
         one-third on the third anniversary. Of the aggregate cash
         consideration to be paid by Andrea, $1,500,000, $500,000 and $500,000
         was paid during 1998, 1999 and 2000, respectively, and the remaining
         $500,000 was paid on the thirty-six month anniversary of the closing
         (May 5, 2001). The Acquisition was accounted for under the purchase
         method of accounting and, accordingly, the operating results of Lamar
         have been included in the consolidating operating results since the
         date of acquisition.  The purchase, for total aggregate consideration
         of $27.6 million, including costs associated with the acquisition of
         Lamar of $1.4 million, resulted in intangible assets of $27.3 million.
         The goodwill and other intangibles, together with their respective
         useful lives consist of the following as of March 31, 2002:

                                        Net Value at             Estimated
                                       March 31, 2002           Useful Life
                                     -----------------         -------------

Goodwill                                 $  12,458,872             N/A
                                         =============

Other Intangible Assets -
       Core Technology                   $   8,143,060           15 years
                                         =============

         See Note 5 regarding new accounting pronouncement which relates to the
         amortization for Goodwill and Other Intangible Assets and is effective
         for financial statement periods beginning January 1, 2002.

11.      In December 2001 and March 2002, we entered into two agreements with
         Analog Devices, Inc. to be their provider of noise canceling
         technologies for use with certain of their computer audio product
         offerings.  These license agreements relate to Andrea Electronics'
         high performance noise canceling technologies that enable clear voice
         communications and high-performance audio in small home-office and
         regular office environments.  Under our agreements with Analog
         Devices, they are obligated to pay us a total of $5 million in license
         fees during calendar 2002.  Through the first quarter of 2002, and in
         accordance with our agreements, we have received $1 million of these
         license fees.  The license agreements, as amended, are recorded as an
         account receivable and deferred revenue ($1,666,680 of which is
         classified as current and $3,325,101 classified as long-term) in the
         accompanying consolidated balance sheets.  All license revenues will
         be recognized on a straight-line basis over their respective
         three-year periods.

12.      Segment Information - Andrea follows the provisions of SFAS No.  131,
         "Disclosures about Segments of an Enterprise and Related Information"
         ("FAS 131"). Reportable operating segments are determined based on
         Andrea's management approach.  The management approach, as defined by
         FAS 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 three
         segments: (i) Andrea Anti-Noise Products, (ii) Aircraft Communications
         Products, and (iii) Andrea DSP Microphone and Software Products.  The
         following represents selected consolidated financial information for
         Andrea's segments for the three months ended March 31, 2002, and 2001:

                                      -10-

<PAGE>

<TABLE>
<CAPTION>
                                                                       Andrea DSP
                                                      Aircraft         Microphone
                                Andrea Anti-       Communications     and Software       March 31,
      Segment Data              Noise Products       Products           Products           2002
----------------------------    --------------     --------------     -------------   ----------------
<S>                               <C>               <C>               <C>               <C>
Net sales                         $  589,594        $  1,094,691      $   115,006       $  1,799,291
Income (loss) from operations       (268,031)            288,852       (1,792,010)        (1,771,189)
Depreciation                          43,844              27,420           91,636            162,900
</TABLE>

<TABLE>
<CAPTION>
                                                                       Andrea DSP
                                                      Aircraft         Microphone
                                Andrea Anti-       Communications     and Software       March 31,
      Segment Data              Noise Products       Products           Products           2001
----------------------------    --------------     --------------     -------------   ----------------
<S>                               <C>               <C>                <C>              <C>
Net sales                         $  1,320,926      $  1,026,916       $   267,797      $  2,615,639
Income (loss) from operations         (654,607)          302,317        (2,263,668)       (2,615,958)
Depreciation                           104,297            24,390            72,800           201,487
</TABLE>

         International revenues are based on the country in which the end-user
         is located. For the three months ended March 31, 2002 and 2001, sales
         and accounts receivable by geographic area are as follows:

                                          March 31,          March 31,
  Geographic Data                           2002               2001
------------------------                --------------    --------------

Sales:
  United States                         $   1,432,781      $   2,005,384
  Europe                                       98,476            120,915
  Other foreign                               268,034            489,340
                                        --------------    --------------
                                        $   1,799,291      $   2,615,639
                                        ==============    ==============
Accounts receivable:
  United States                         $   4,772,803      $   1,482,011
  Europe                                       60,106             88,129
  Other foreign                                91,596            263,777
                                        --------------    --------------
                                        $   4,924,505      $   1,833,917
                                        ==============    ==============

         Approximately $4 million, or 81% of total accounts receivable is due
         from Analog Devices, Inc. at March 31, 2002. (Note 11)

         The assets and liabilities of Andrea are managed centrally and are
         reported internally in the same manner as the consolidated financial
         statements, thus no additional information is produced for the Chief
         Executive or included herein.

13.      Legal Proceedings - As previously reported in "Item 3. Legal
         Proceedings" in Andrea's Annual Report on Form 10-K for the year ended
         December 31, 2001, Andrea is presently engaged in a lawsuit filed in
         the U.S.  District Court for the Eastern District of New York by NCT
         Group, Inc. ("NCT") and its subsidiary NCT Hearing Products, Inc.  NCT
         alleges that we: engaged in unfair competition by misrepresenting the
         scope our patents, specifically, U.S.  Pat.  Nos. 5,732,143, 5,825,897
         and 6,061,456 thereby tortuously interfering with prospective
         contractual rights between NCT and its existing and potential
         customers; made false and disparaging statements about NCT and its
         products; and falsely advertised Andrea's ANR products.  The complaint
         requests a declaration that these patents are invalid and
         unenforceable and that NCT's products do not infringe upon these
         patents and seeks to enjoin Andrea from engaging in these alleged
         activities and seeks compensatory damages of not less than $5 million,
         punitive damages of not less than $50 million and plaintiffs' costs
         and attorneys' fees.

                                      -11-

<PAGE>

         Andrea has filed and served an answer to the NCT complaint, denying the
         allegations and asserting affirmative defenses and counterclaims. Our
         counterclaims, as amended, allege that NCT has willfully infringed the
         above mentioned patents, and that NCT has engaged in trademark
         infringement, false designation of origin, and unfair competition. The
         counterclaims seek injunctive relief with respect to the allegations of
         patent infringement, trademark infringement, false designation of
         origin and unfair competition. Andrea is also seeking exemplary and
         punitive damages, prejudgment interest on all damages, costs,
         reasonable attorneys' fees and expenses.

         During the third quarter of 2001, the court held a "Markman Hearing" to
         determine the meaning of the claims in the three Andrea patents. Andrea
         is unable to anticipate when the Court will issue a decision on this
         question. If this suit is ultimately resolved in favor of NCT, Andrea
         could be materially adversely affected. Andrea believes, however, that
         NCT's allegations are without merit and intend to vigorously defend
         itself and to assert against NCT the claims described above. This
         litigation has been dormant from its inception until the present time.

         In addition to the litigation noted above, Andrea is from time to time
         subject to routine litigation incidental to its business. While it is
         not feasible to predict or determine the final outcome of the claims
         against Andrea, management believes that the results of the above noted
         litigation and other pending legal proceedings will not have a material
         adverse effect on Andrea 's financial condition, results of operations
         or liquidity.

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

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

OVERVIEW OF OUR PRODUCTS, TECHNOLOGIES AND MARKETS

         We design, develop and manufacturer state-of-the-art microphone
technologies and products for enhancing speech-based applications software and
communications that require high quality, clear voice signals. Our technologies
eliminate unwanted background noise to enable the optimum performance of any
speech-based application.

         Andrea's products and technologies optimize the performance of
speech-based applications in markets such as:

         .        voice communication over the Internet;

         .        speech recognition for use with desktop, laptop and hand-held
                  computers;

         .        audio/video conferencing;

         .        computer-based automobile monitoring and control systems for
                  use by drivers and passengers;

         .        military and commercial aircraft communications systems;

         .        call centers;

         .        electronic equipment for incorporation into home appliances
                  and industrial and commercial office equipment that is
                  activated and controlled by voice; and

                                       -12-

<PAGE>

         .        interactive games where one or more players participate over
                  the Internet.

         Our patented and patent-pending digital technologies enable a speaker
to be several feet from the microphone, and free the speaker from having to
hold the microphone (we refer to this capability as "far-field" microphone
use). Our DSDA and DFTA microphone products convert sound received by an array
of microphones in a product into digital signals that are then processed to
cancel background noise from the signal to be transmitted. These two adaptive
technologies represent the core technologies within our portfolio of far-field
technologies. In addition to DSDA and DFTA, Andrea has developed and
commercialized several other digital microphone technologies, including, among
others, Andrea EchoStop, a high-quality acoustic echo canceller, and Andrea
PureAudio, a leading technology for canceling unwanted stationary noises. All
of our digital, far-field technologies can be tailored and embedded into
various form factors, for example, into the monitor of a PC, a rear view
mirror, or a personal digital assistant, and can be used individually or
combined depending on particular customer requirements. We are currently
targeting our far-field microphone technologies at the desktop computing
market, the market for personal computers designed for use in automobiles,
trucks and buses to control satellite-based navigation systems and other
devices within vehicles, and mobile devices such as a personal digital
assistants, among others. Our digital technologies and related products
comprise our Andrea Digital Signal Processing (DSP) Microphone and Software
line of business, and sales of such technologies and products during the First
Quarter 2002 and the First Quarter 2001 approximated 6% and 10%, respectively,
of our total net revenues. We dedicate the majority of our marketing and
research and development resources to this business segment, as we believe that
communication products will increasingly require high performance, untethered
(hands-free and headset-free) microphone technology.

         In May 1998, we acquired Lamar Signal Processing, Ltd., an Israeli
corporation engaged in the development of scalable, digital signal
processing-based directional, noise cancellation microphone technologies. We
believe that the acquired technologies, together with the research staff at
Lamar, provide Andrea with noise filtering capabilities and performance that is
superior to other DSP-based technologies in the marketplace, and unattainable
in traditional mechanical-based microphone solutions.

         Our Active Noise Cancellation microphone and patented Active Noise
Reduction earphone technologies help to ensure clear speech in personal
computer and telephone headset applications. Active Noise Cancellation
microphone technology uses electronic circuits that distinguish a speaker's
voice from background noise in the speaker's environment and then cancels the
noise from the signal to be transmitted by the microphone. Active Noise
Reduction earphone technology uses electronic circuits that distinguish the
signal coming through an earphone from background noise in the listener's
environment and then reduces the noise heard by the listener. Together with our
lower-end noise canceling headset products, these technologies and related
products comprise our Andrea Anti-Noise line of business.

         During the fourth quarter 2001, we recorded restructuring charges
relating to repositioning our business plan for our Andrea Anti-Noise Product
business segment as part of our overall effort to drive high margin product
sales and become profitable. The restructuring focused on exiting from an
increasingly unprofitable PC headset channel within Andrea's Anti-Noise Headset
product segment. This was primarily a result of the increasing competitive
nature of the PC headset market, coupled with Andrea's ongoing strategic
efforts to focus on being primarily a leading supplier of high-end,
digital-based, far-field microphone technologies. This PC headset channel
primarily purchased our lower-end, low margin headset products, and required
substantial support which, when combined with decreasing volumes realized
during 2001, became unprofitable. During the First Quarter 2002 and the First
Quarter 2001 our Andrea Anti-Noise Product segment approximated 33% and 51%,
respectively, of our total net revenues.

         For several decades prior to our entry into the voice-activated
computing market in the 1990's, our primary business was selling intercom
systems for military and industrial use. We refer to this line of business as
our Aircraft Communications line of business, and sales of such products during
the First Quarter 2002 and First Quarter 2001 approximated 61% and 39%,
respectively, of our total net revenues.

         We are incorporated under the laws of the State of New York and have
been engaged in the electronic communications industry since 1934.

                                       -13-

<PAGE>
         The interim results of operations of Andrea presented in this report
are not necessarily indicative of the actual sales or results of operations to
be realized for the full year.

OUR CRITICAL ACCOUNTING POLICIES

         Our consolidated financial statements and the notes to our
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. We believe the following critical accounting policies, in
addition to estimating allowances for doubtful accounts and inventory
obsolescence as well as the recording and presentation of our convertible
preferred stock, involve additional management judgment due to the sensitivity
of the methods, assumptions, and estimates necessary in determining the related
asset and liability amounts:

         Statement of Financial Accounting Standards, or SFAS, No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" supersedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion
No. 30 "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be disposed
of. The provisions of this statement require management judgments regarding the
future operating and disposition plans for marginally performing assets, and
estimates of expected realizable values for assets to be sold. The impact of
adopting this standard was not material to the financial statements.

         Statements of Financial Accounting Standards, or SFAS, No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets" requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). Andrea has
adopted this standard effective January 1, 2002, and, accordingly, those
intangible assets that continue to be classified as goodwill or as other
intangibles with indefinite lives are no longer amortized. The adoption of this
pronouncement resulted in a $282 thousand decrease in amortization expense for
the first quarter of 2002 over the same period in the prior year. Other
intangible assets, which do not have indefinite lives, continue to be
amortized. Andrea has made an assessment of its intangible assets to identify
goodwill separately from other identifiable intangibles. No adjustment was
deemed necessary, although the intangible asset "Workforce in Place" is
reclassified as goodwill pursuant to SFAS No. 142. In accordance with the SFAS
No. 142, intangible assets, including purchased goodwill, will be evaluated
periodically for impairment.

         We have recorded a valuation reserve against our deferred tax assets
related to net operating loss carryforwards. The realization of a portion of
our reserved deferred tax assets, if and when realized, will not result in a
tax benefit in the consolidated statement of operations, but will result in an
increase in additional paid in capital as they are related to tax benefits
associated with the exercise of stock options. We will be continually
re-assessing our reserves on deferred income tax assets in future periods on a
quarterly basis. The determination as to the realization of additional reserves
is, and will be, based on Andrea's expectations of future earnings.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 Certain information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three months ended March
31, 2002 (the "2002 First Quarter") compared to the three months ended March
31, 2001 (the "2001 First Quarter") are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The words
"anticipates," "believes," "estimates," "expects," "intends," "plans," "seeks,"
variations of such words, and similar expressions are intended to identify
forward-looking statements. We have based these forward-looking statements on

                                       -14-

<PAGE>

our current expectations, estimates and projections about our business and
industry, our beliefs and certain assumptions made by our management. Investors
are cautioned that matters subject to forward-looking statements involve risks
and uncertainties including economic, competitive, governmental, technological
and other factors that may affect our business and prospects. These statements
are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. In order to obtain
the benefits of these "safe harbor" provisions for any such forward-looking
statements, we wish to caution investors and prospective investors about the
following significant factors, which, among others, have in some cases affected
our actual results and are in the future likely to affect our actual results
and could cause them to differ materially from those expressed in any such
forward-looking statements. These factors include the following:

BECAUSE OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION,
PERIOD-TO-PERIOD COMPARISONS OF OUR OPERATING RESULTS MAY NOT NECESSARILY BE
MEANINGFUL AND YOU SHOULD NOT RELY ON THEM AS INDICATIONS OF OUR FUTURE
PERFORMANCE.

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

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

         -        the cost of development of our products under our
                  collaborative development arrangements;

         -        the mix of products we sell;

         -        the mix of distribution channels we use;

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

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

         -        general economic conditions.

         We cannot assure that the level of sales and gross profit, if any,
that we achieve in any particular fiscal period will not be significantly lower
than in other fiscal periods. Our revenues for the 2002 First Quarter, were
approximately $1.8 million compared to approximately $2.6 million in the 2001
First Quarter. Net loss applicable to common shareholders for the 2002 First
Quarter was approximately $1.9 million, or $0.11 per share on a diluted basis,
versus net loss applicable to common shareholders of approximately $2.7
million, or $0.18 per share on a diluted basis, for the First Quarter 2001. In
response to significant declines in our sales of Andrea Anti-Noise Products as
a result of increased competition with respect to a specific customer channel,
as well as our overall shift in strategic direction to deliver digital,
far-field microphone solutions, during the fourth quarter of 2001, we recorded
restructuring charges of approximately $4.5 million. This restructuring is
expected to result in further decreases in sales during the remainder of fiscal
2002. We are examining additional opportunities for cost-reduction, production
efficiencies and further diversification of our business. But to remain
competitive, we intend to continue incurring substantial research and
development, marketing and general and administrative expenses. We may not be
able to easily and quickly reduce these expenses if our sales revenue falls
below our expectations and, therefore, our net income or loss may be
disproportionately affected by any reduction in sales revenue. Furthermore, our
acquisition in 1998 of Lamar Signal Processing, Ltd. resulted in a substantial
amount of goodwill and other intangible assets. The amortization of these
intangible assets has had, and will continue to have, a negative, non-cash
impact on our results of operations (other than goodwill). As a result of these
factors, we expect to continue to accumulate losses and the market price of our
common stock could decline.

                                       -15-

<PAGE>

IF WE FAIL TO OBTAIN ADDITIONAL CAPITAL OR MAINTAIN ACCESS TO FUNDS SUFFICIENT
TO MEET OUR OPERATING NEEDS, WE MAY BE REQUIRED TO SIGNIFICANTLY REDUCE, SELL,
OR REFOCUS, OUR OPERATIONS AND OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE MATERIALLY AND ADVERSELY EFFECTED, AND COULD
RESULT IN OUR DELISTING ON THE AMERICAN STOCK EXCHANGE OR INABILITY TO CONTINUE
OPERATIONS.

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

WE FACE THE RISK THAT ANDREA COULD BE REQUIRED TO REDEEM THE SERIES B
REDEEMABLE CONVERTIBLE PREFERRED STOCK

         On June 22, 1999, Andrea issued and sold in a private placement
$7,500,000 of Series B Redeemable Convertible Preferred Stock (the "Series B
Preferred Stock"), and a warrant covering 75,000 shares of Andrea's Common
Stock. Each of the 750 shares of Series B Preferred Stock (par value $0.01 per
share) has a stated value of $10,000 plus dividends of 4% per annum, which sum
is convertible into Common Stock (par value $0.50 per share) at a conversion
price equal to the lower of $8.775 (the "Maximum Conversion Price") and the
average of the two lowest closing bid prices of the Common Stock during the 15
consecutive trading days immediately preceding a conversion date (the "Market
Price"), subject to certain adjustments, including anti-dilution. The 4%
dividends may, at the option of Andrea, be paid in cash. The warrant has an
exercise price of $8.775 per share and expires on June 18, 2004.

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

WE FACE THE RISK THAT ANDREA COULD BE REQUIRED TO REDEEM THE SERIES C
REDEEMABLE CONVERTIBLE PREFERRED STOCK

         On October 10, 2000, Andrea issued and sold in a private placement
$7,500,000 of Series C Redeemable Convertible Preferred Stock (the "Series C
Preferred Stock"). The Series C Preferred Stock is convertible or redeemable at
maturity by Andrea, based upon certain circumstances at that time, and is
redeemable by the holder upon certain events, including the announcement of a
major transaction, as defined in the Certificate of Amendment, or upon certain
other triggering events. On March 25, 2002, Andrea announced that a triggering
event had occurred and that Andrea was seeking a waiver from the Series C
Preferred Stock holders. A final agreement regarding the waiver arrangement was
reached on March 28, 2002. The waiver related to the existing triggering event,
as well as certain possible future triggering events, however, the waiver will
be null and void upon the earlier of April 7, 2007, the first date on which
Andrea fails to comply in any material respect with the terms of the waiver and
related documents, and the first date on which Andrea is insolvent.

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

         Given that the waiver granted by the Series C Preferred Stock holder
does not cover all triggering events that could require the redemption of the
Series C Preferred Stock, and that the waiver will be null and void in the
event Andrea fails to comply in any material respect with the terms of the
agreements relating to the waiver, among other things, there is a risk that the
Series C Preferred Stock holder could declare a triggering event that would
trigger the redemption rights. If such redemption rights are triggered and
Andrea has insufficient funds to satisfy the redemption, Andrea will be
requested to obtain a new waiver from the holder of the Series C Preferred
Stock. If no such waiver can be obtained, Andrea's ability to continue its
current operations will be materially adversely affected and if Andrea

                                       -16-

<PAGE>

has insufficient funds to redeem the Series C Preferred Stock, it could result
in Andrea's inability to meet its operating obligations and, consequently,
delisting from the American Stock Exchange.

SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE AN ADVERSE EFFECT ON MARKET PRICE;
YOU MAY EXPERIENCE SUBSTANTIAL DILUTION.

         Sales of a substantial number of shares of our common stock in the
public market could have the effect of depressing the prevailing market price
of our common stock. Of the 70,000,000 shares of common stock presently
authorized, 18,199,200 were outstanding as of May 13, 2002. This does not
include 5,732,375 shares of our common stock reserved for issuance upon
exercise of outstanding awards granted under our 1991 Performance Equity Plan
and 1998 Stock Plan, and shares of our common stock reserved for further awards
under the 1998 Stock Plan. In addition, this does not include 16,263,311 shares
of common stock reserved for issuance upon conversion of the Series B and
Series C convertible preferred stock and exercise of related warrants.
Furthermore, in May 1998, we issued 1,800,000 shares of common stock as part of
the consideration for our acquisition of Lamar Signal Processing, Ltd. Trading
restrictions on these 1,800,000 shares have expired and are subject to demand
and piggyback registration rights. To date, 920,880 of the 1,800,000 shares
have been registered for sale under the Securities Act of 1933.

CONVERSIONS OF OUR SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C
CONVERTIBLE PREFERRED STOCK MAY RESULT IN SUBSTANTIAL DILUTION TO OTHER HOLDERS
OF OUR COMMON STOCK.

         As of May 13, 2002, we had 172 shares of Series B convertible
preferred stock and 750 shares of Series C convertible preferred stock
outstanding. Both the Series B convertible preferred stock and the Series C
convertible preferred stock are convertible into shares of common stock,
subject to ownership limitations that prohibit the holders of the preferred
stock from owning more than 4.99% of the outstanding shares of common stock at
the time of conversion or 9.99% over the sixty day period prior to the
conversion. These restrictions do not prevent purchasers from converting and
selling some of their holdings and then later converting the rest of their
holdings.

AS THE PRICE OF OUR COMMON STOCK DECREASES, THE NUMBER OF SHARES OF COMMON
STOCK ISSUABLE UPON CONVERSION OF OUR SERIES B CONVERTIBLE PREFERRED STOCK AND
SERIES C CONVERTIBLE PREFERRED STOCK INCREASES.

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

         The following table illustrates the varying amounts of shares of
common stock issuable upon conversion of all 172 shares of Series B Convertible
Preferred Stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 4% additional amount is paid
in cash:

                    Number of Shares of Common      Percentage of Outstanding
Conversion Price       Stock Issuable Upon              Common Stock/(2)/
                          Conversion/(1)/
----------------  ------------------------------  ----------------------------
     $0.50                  3,440,000                         16%
     $1.50                  1,146,667                          6%
     $2.50                    688,000                          4%
     $3.50                    491,429                          3%
     $4.50                    382,222                          2%
     $5.50                    312,727                          2%
     $6.50                    264,615                          1%
     $7.50                    229,333                          1%

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

                                       -17-

<PAGE>

(2)  Based on 18,199,200 shares of common stock outstanding as of May 13, 2002.

         The following table illustrates, as of any reset date and assuming the
conversion price indicated is lower than the then applicable conversion price
on that date, the varying amounts of shares of common stock that would be
issuable upon conversion of all outstanding 750 shares of Series C convertible
preferred stock at the indicated conversion prices (without regard to any
limitations on conversion) and assuming that the 5% additional amount is paid
in cash:

                  Number of Shares of Common
Conversion Price      StockIssuable Upon         Percentage of Outstanding
                       Conversion/(1)/               Common Stock/(2)/
----------------  --------------------------   --------------------------
     $0.40               18,750,000                         51%
     $0.50               15,000,000                         45%
     $0.60               12,500,000                         41%
     $0.65               11,538,462                         39%
     $0.70               10,714,286                         37%
     $0.75               10,000,000                         35%
     $0.765               9,803,922                         35%

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

(2)  Based on 18,199,200 shares of common stock outstanding as of May 13, 2002.

         The following table illustrates the varying amounts of shares of
Common Stock that would be issuable upon conversion of all 172 outstanding
shares of Series B convertible preferred stock and all 750 outstanding shares
of Series C convertible preferred stock at the indicated conversion prices
(without regard to any limitations on conversion) and assuming that all
additional amounts are paid in cash:

                   Number of Shares of Common
Conversion Price       Stock Issuable Upon           Percentage of Outstanding
                    Conversion/(1)//(2)//(3)/            Common Stock/(4)/
----------------  --------------------------------  --------------------------
     $0.50                 18,440,000                          50%
     $0.65                 14,184,615                          44%
     $0.765                12,052,288                          40%
     $1.50                 10,950,588                          38%
     $2.50                 10,491,922                          37%
     $3.50                 10,295,350                          36%
     $4.50                 10,186,144                          36%
     $5.50                 10,116,649                          36%
     $6.50                 10,068,537                          36%

(1)  The calculation assumes that the conversion price of the Series B and
     Series C convertible preferred stock are the same at the assumed conversion
     prices of $ .50, $ .65 and $ .765. This could only occur if the market
     price of Andrea's Common Stock declines, and at a future reset date, the
     conversion price of the Series C adjusts to the then prevailing market
     price (the current fixed conversion price of the Series C is $ .765, and
     such conversion price is fixed unless adjusted downward at a future reset
     date).

(2)  The calculation assumes that for any conversion of the Series B convertible
     preferred stock when the prevailing market price is above $ .765, the
     Series C would still be converted at its maximum conversion price of $
     .765.

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

                                       -18-

<PAGE>

(4)  Based on 18,199,200 shares of common stock outstanding as of May 13, 2002.

SALES OF AN INCREASED NUMBER OF SHARES OF COMMON STOCK ISSUED UPON CONVERSION
OF THE SERIES B CONVERTIBLE PREFERRED STOCK AND THE SERIES C CONVERTIBLE
PREFERRED STOCK RESULTING FROM A DECLINING MARKET PRICE FOR OUR COMMON STOCK
CAN CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE FURTHER.

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

SHORT SALES OF OUR COMMON STOCK MAY BE ATTRACTED BY OR ACCOMPANY CONVERSIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C CONVERTIBLE PREFERRED STOCK,
WHICH SALES MAY CAUSE DOWNWARD PRESSURE UPON THE PRICE OF OUR COMMON STOCK.

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

IF WE FAIL TO MARKET AND COMMERCIALIZE OUR ANDREA DSP MICROPHONE AND SOFTWARE
AND ANDREA ANTI-NOISE PRODUCTS, OUR REVENUES MAY NOT INCREASE AT A HIGH ENOUGH
RATE TO IMPROVE OUR RESULTS OF OPERATIONS OR AT ALL.

         Our business, results of operations and financial condition depend on
successful commercialization of our Andrea DSP Microphone and Software and
Andrea Anti-Noise products and technologies. Since we began sales of the
initial Andrea Anti-Noise products in 1995, we have been expanding the number
of products in this line. We introduced our first Andrea Digital Super
Directional Array products in 1998 and we are initially targeting these and our
other Andrea DSP Microphone and Software products at the desktop computer
market, the market for computer-based automobile monitoring and control systems
for use by drivers and passengers, and the mobile device market. 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
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 Anti-Noise, Andrea DSP
Microphone and Software and our Aircraft Communication 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

                                       -19-

<PAGE>

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.

         In the markets for Aircraft Communications Products, we often compete
with major defense electronics corporations as well as smaller manufacturing
firms, which specialize in supplying products and technologies for specific
military initiatives.

         Further, the markets for our products and technologies are
characterized by evolving industry standards and specifications that may
require us to devote substantial time and expense to adapt our products and
technologies. We may not successfully anticipate and adapt our products and
technologies in a cost effective and timely manner to changes in technology and
industry standards or to introductions of new products and technologies by
others that render our then existing products and technologies obsolete.

IF OUR MARKETING COLLABORATORS DO NOT EFFECTIVELY MARKET THOSE OF THEIR
PRODUCTS WITH WHICH OUR PRODUCTS ARE INCLUDED OR INCORPORATED, OUR SALES GROWTH
COULD BE ADVERSELY AFFECTED.

         We have entered into several collaborative and distribution
arrangements with software publishers and computer hardware manufacturers
relating to the marketing and sale of Andrea Anti-Noise products and Andrea DSP
Microphone and 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 those of
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.

IF WE FAIL TO MAINTAIN SALES OF AIRCRAFT COMMUNICATION PRODUCTS TO THE U.S.
GOVERNMENT, WE WOULD EXPERIENCE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

         We are substantially dependent on product sales to the U.S.
Government.  During the First Quarter 2002, the U.S. Government accounted for
27% of our net sales. The U.S. Government is not obligated to continue to
purchase these products and is free to purchase similar products from our
competitors. Our failure to maintain sales of Aircraft Communication Products
to the U.S.  Government would have a material adverse effect on our business,
results of operations and financial condition.

SHORTAGES OF, OR INTERRUPTIONS IN, THE SUPPLY OF MORE SPECIALIZED COMPONENTS
FOR OUR ANDREA ANTI-NOISE PRODUCTS AND ANDREA DSP MICROPHONE PRODUCTS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR SALES OF THESE PRODUCTS.

         We conduct assembly operations at our facilities in New York and
Israel and through subcontractors using purchased components. Some specialized
components for the Andrea Anti-Noise and Andrea DSP Microphone products, such
as microphones and digital signal processing boards, are available from a
limited number of suppliers and subject to long lead times. We may not be able
to continue to obtain sufficient supplies of these more specialized components,
particularly if our sales of Andrea Anti-Noise and Andrea DSP microphone
products increase substantially or market demand for these components otherwise
increases.

                                       -20-

<PAGE>

IF OUR SUBCONTRACTOR FAILS TO MEET OUR PRODUCTION AND SHIPMENT SCHEDULES, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY AND
ADVERSELY AFFECTED.

         We conduct assembly operations at our facilities in New York and
Israel and through subcontracting. During initial production runs of Andrea
Anti-Noise and Andrea DSP Microphone products, we perform assembly operations
at our New York facility from purchased components. As sales of any particular
product increase, assembly operations are primarily transferred to a
subcontractor in Asia.

OUR ABILITY TO COMPETE MAY BE LIMITED BY OUR FAILURE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY OR BY PATENTS GRANTED TO THIRD PARTIES.

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

AN UNFAVORABLE RULING IN ANY CURRENT LITIGATION PROCEEDING OR FUTURE PROCEEDING
MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.

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

         We are presently engaged in a lawsuit filed in the U.S. District Court
for the Eastern District of New York by NCT Group, Inc. ("NCT") and its
subsidiary NCT Hearing Products, Inc. NCT alleges that we: engaged in unfair
competition by misrepresenting the scope our patents, specifically, U.S. Pat.
Nos. 5,732,143, 5,825,897 and 6,061,456 thereby tortuously interfering with
prospective contractual rights between NCT and its existing and potential
customers; made false and disparaging statements about NCT and its products;
and falsely advertised Andrea's ANR products. The complaint requests a
declaration that these patents are invalid and unenforceable and that NCT's
products do not infringe upon these patents and seeks to enjoin Andrea from
engaging in these alleged activities and seeks compensatory damages of not less
than $5 million, punitive damages of not less than $50 million and plaintiffs'
costs and attorneys' fees.

         We have filed and served an answer to the NCT complaint, denying the
allegations and asserting affirmative defenses and counterclaims. Our
counterclaims, as amended, allege that NCT has willfully infringed the above
mentioned patents, and that NCT has engaged in trademark infringement, false
designation of origin, and unfair competition. The counterclaims seek
injunctive relief with respect to the allegations of patent infringement,
trademark infringement, false designation of origin and unfair competition. We
are also seeking exemplary and punitive damages, prejudgment interest on all
damages, costs, reasonable attorneys' fees and expenses.

         During the third quarter of 2001, the court held a "Markman Hearing"
to determine the meaning of the claims in the three Andrea patents. We are
unable to anticipate when the Court will issue a decision on this question. If
this suit is ultimately resolved in favor of NCT, we could be materially
adversely effected. We believe, however, that

                                       -21-

<PAGE>

NCT's allegations are without merit and we intend to vigorously defend Andrea
and to assert against NCT the claims described above.

CHANGES IN ECONOMIC AND POLITICAL CONDITIONS OUTSIDE THE UNITED STATES COULD
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

         We have been seeking to increase our sales to regions outside the
United States, particularly in Europe and areas in the Americas and Asia. For
the three months ended March 31, 2002, sales to customers outside the United
States accounted for approximately 20% of our net sales. International sales
and operations are subject to a number of risks, including:

         .        trade restrictions in the form of license requirements;

         .        restrictions on exports and imports and other government
                  controls;

         .        changes in tariffs and taxes;

         .        difficulties in staffing and managing international
                  operations;

         .        problems in establishing and managing distributor
                  relationships;

         .        general economic conditions; and

         .        political and economic instability or conflict.

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

WE FACE RISK FROM OPERATING IN ISRAEL

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

IF WE ARE UNABLE TO ATTRACT AND RETAIN THE NECESSARY MANAGERIAL, TECHNICAL AND
OTHER PERSONNEL NECESSARY FOR OUR BUSINESS, THEN OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WILL BE HARMED.

         Our performance is substantially dependent on the performance of our
executive officers and key employees. The loss of the services of any of these
executive officers or key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future success
depends on our continuing ability to attract and retain additional 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

                                       -22-

<PAGE>

RESULTS OF OPERATIONS

         Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31,
         2001

Sales
-----

         Sales for the 2002 First Quarter were $1,799,291, a decrease of 31%
from sales of $2,615,639 for the 2001 First Quarter. The decrease in sales for
the 2002 First Quarter reflects an approximate 55% decrease in sales of Andrea
Anti-Noise Products to $589,594, or 33% of total sales, offset by an
approximate 7% increase in sales of our Aircraft Communications Products, to
$1,094,691, or 61% of total sales, and an approximate 57% decrease of Andrea
DSP Microphone and Software Products to $115,006, or 6% of total sales.

         The primary reason for the decrease of Andrea Anti-Noise Product is
due to our decision, during the fourth quarter 2001, to exit from an
unprofitable PC headset channel within Andrea's Anti-Noise Headset product
segment. This customer channel included IBM, and for the First Quarter 2002,
sales to IBM and certain of IBM's affiliates, such sales representing
contractual obligations which we accepted during 2001, accounted for
approximately 10% of our total sales, or $184,702. This reflects an approximate
67% decrease from $553,564 for the First Quarter 2001.

         The increase in our Aircraft Communication Product revenues is
primarily a result of increased sales and marketing activities. For the 2002
First Quarter, sales of our Aircraft Communication Products to the U.S.
Government accounted for approximately 27% of our total sales.

Cost of Sales
-------------

         Cost of sales as a percentage of sales for the 2002 First Quarter
decreased to 65% from 73% for the 2001 First Quarter. This decrease primarily
reflects the impact of the significant change in the composition of our
revenues as described under "Sales" above, and, to a lesser extent, slight
variations in margins for each segment.

Research and Development
------------------------

         Research and development expenses for the 2002 First Quarter decreased
9% to $905,822 from $998,900 for the 2001 First Quarter. This decrease is due
primarily to cost reduction efforts, offset, to an extent, by a reallocation of
resources from general and administrative activities to research and
development during the 2002 First Quarter. DSP Microphone and Software
Technology efforts were $755,939, or 83% of total research and development
expenses, Aircraft Communications technology efforts were $94,972, or 11% of
total research and development expenses and Andrea Anti-Noise Product efforts
were $54,911, or 6% of total research and development expenses. With respect to
DSP Microphone and 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 ("DSDA") and certain other related
technologies obtained through the acquisition of Lamar in May 1998. We believe
that the acquisition of Lamar significantly reinforces our position in digital
signal processing by extending the our marketing programs to other high-growth
industries, including automotive telematics, mobile device markets, the
business videoconferencing market and Internet telephony, among others.
Specifically, the core technology acquired produces noise filtering
capabilities that management believes is preferred to other known DSP-based
technologies in the market, and is unattainable in products using traditional
mechanical solutions. In addition, the nature of a DSP-based solution, together
with the people acquired supporting our technology, offers a solution that is
highly scalable and embeddable, and therefore enables the technology to be
integrated into many different applications and form factors. We believe that
continued research and development spending will provide Andrea with a
competitive advantage.

General, Administrative and Selling Expenses
--------------------------------------------

         General, administrative and selling expenses for the 2002 First
Quarter decreased 35% to $1,498,865 from $2,313,343 for the 2001 First Quarter.
This decrease is primarily due to cost reduction efforts, as well as our
adoption, on January 1, 2002, of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets"

                                       -23-

<PAGE>

("FAS"). Under FAS No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed for impairment from time to
time. The adoption of this pronouncement resulted in an approximate $282
thousand decreased in amortization expense for the 2002 First Quarter compared
to the same period in the prior year. Notwithstanding the beneficial impact of
this pronouncement to our 2002 First Quarter, goodwill and intangible assets
which are no longer subject to periodic amortization will be reviewed for
impairment from time to time, and such reviews may result in adjustments that
would negatively impact future operating results.

Other Income (Expense)
----------------------

         Other income for the 2002 First Quarter was $33,697 compared to other
income of $69,471 for the 2001 First Quarter. The decline in the 2002 First
Quarter compared to the 2001 First Quarter is a result of unfavorable market
conditions for our invested cash balances (which were also lower) experienced
in the 2002 First Quarter.

Provision for Income Taxes
--------------------------

         We did not record income tax expense for either the 2002 or 2001 First
Quarter in light of the net loss recorded for the periods. Furthermore, the
realization of a portion of our reserved deferred tax assets, if and when
realized, will not result in a tax benefit in the consolidated statement of
operations, but will result in an increase in additional paid in capital as they
are related to tax benefits associated with the exercise of stock options. We
will be continually re-assessing its reserves on deferred income tax assets in
future periods on a quarterly basis. The determination as to the realization of
additional reserves is, and will be, based on Andrea's expectations of future
earnings. To the extent we believe that, more likely than not, previously
reserved deferred tax assets will be realized, we will reduce the reserve
accordingly. With respect to our ongoing efforts to raise capital, certain
transactions may occur in the future which could change our determination of the
amount of our valuation allowance.

Net Income (Loss)
-----------------

         Net loss for the 2002 First Quarter was $1,737,492 compared to a net
loss of $2,546,487 for the 2001 First Quarter. The net loss for the 2002 First
Quarter principally reflects the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

         Andrea's principal sources of funds have historically been, and are
expected to continue to be, gross cash flows from operations and proceeds from
the sale of convertible notes, preferred stock or other securities to certain
financial institutions and potential industry partners. At March 31, 2002, we
had cash and cash equivalents of $3,400,096 compared with $3,724,130 at
December 31, 2001. The balance of cash and cash equivalents at March 31, 2002
is primarily a result of the issuance and sale in a private placement of
$7,500,000 of our Series C Redeemable Convertible Preferred Stock (the "Series
C Preferred Stock") and our recently executed license transactions with Analog
Devices, Inc.  We are using the net proceeds from the issuance of the Series C
Preferred Stock and the license transactions primarily for costs associated
with:

         1)       research and development,

         2)       creating and maintaining strategic alliances, which includes,
                  among other things, sales and marketing salaries, substantial
                  travel costs to market our products and technologies, product
                  fulfillment costs and technical assistance, and other general
                  support costs for existing and potential partners,

         3)       payment of certain debt obligations,

         4)       professional fees, and

         5)       general working capital requirements.

                                       -24-

<PAGE>

         Working capital at March 31, 2002, was $6,742,988 compared to
$5,630,915 at December 31, 2001. The increase in working capital reflects
increases in total current assets and total current liabilities of $2,403,001,
and $1,290,928, respectively. The increase in total current assets reflects a
decrease in cash and cash equivalents of $324,034, an increase in accounts
receivable of $2,830,359 (such increase is primarily a result of our license
agreements with Analog Devices, Inc.), a decrease in inventory of $140,654, and
an increase in prepaid expenses and other current assets of $37,330. The
increase in current liabilities reflects a decrease in trade accounts payable
of $131,672, a decrease in current portion of long-term debt of $42,003, a
decrease of $62,603 in accrued restructuring charges, an increase of
$1,408,459 in deferred revenue and an increase of $118,747 in other current
liabilities.

         The decrease in cash from December 31, 2001 to the period ending March
31, 2002 of $324,034 reflects $188,087 of net cash used in operating
activities, $88,227 of cash used in investing activities and $47,720 of cash
used in financing activities.

         The cash used in operating activities, excluding non-cash charges, is
attributable to the $1,737,492 net loss for the 2002 First Quarter, a
$2,830,359 increase in accounts receivable, a $140,654 decrease in inventory, a
$159,544 increase in prepaid and other current assets, a $105,123 increase in
other assets, a $131,672 decrease in accounts payable, a $62,603 decrease in
accrued restructuring charges, a $3,991,781 increase in deferred revenue and a
$84,120 increase in other current and long-term liabilities. The increase in
accounts receivable and deferred revenue reflects the impact of our license
agreements with Analog Devices, Inc. The increase in prepaid expenses and other
current assets primarily includes the recognition of increased premiums for
prepaid property taxes and insurance, as well as increases in other service
costs related to the remainder of 2002. The decrease in accounts payable as
well as the decrease in inventory primarily reflect differences in the timing
related to both the payments for and the acquisition of raw materials as well
as for other services in connection with ongoing efforts related to Andrea's
various product lines.

         The cash used in investing activities is attributable to capital
expenditures consisting of manufacturing dies and molds and, to a lesser
extent, upgrades in our existing computer systems.

         We believe that it will be necessary to raise additional working
capital to support operations. In December 1995, April 1996, August 1996 and
June 1998, Andrea raised working capital through the issuance of convertible
subordinated debentures. In June 1999, Andrea raised $7.5 million through the
issuance and sale of Series B Preferred Stock. In October 2000, Andrea raised
$7.5 million through the issuance and sale of Series C Preferred Stock. Andrea
has incurred significant losses in each of the last three fiscal years. In the
year ended December 31, 2001, Andrea incurred losses from operations, excluding
the impact of restructuring charges, of $9.3 million, and used $4.5 million in
cash from its operating activities. Management expects that operating losses
and negative cash flows will continue at least through Fiscal 2002 as Andrea
continues to market its products and technologies. Notwithstanding, in December
2001 and March 2002, we entered into two agreements with Analog Devices, Inc
whereby Analog Devices is obligated to pay us a total of $5 million in license
fees during calendar 2002. As of March 31, 2002, and in accordance with our
agreements, we received $1 million of these license fees. If Andrea fails to
develop revenues from sales of its products to generate adequate funding from
operations or fails to obtain additional financing through capital or funding,
it will be required to either further reduce its operating expenses and/or
operations or may result it relinquishing its products, technologies or
markets.  Such financing may not be available on acceptable terms, or at all.
We cannot assure that demand will continue for any of our products, including
future products related to our Andrea Digital Signal Processing Microphone and
Software Technologies, or, that if such demand does exist, that we will be able
to obtain the necessary working capital to increase production and marketing
resources to meet such demand on favorable terms, or at all.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our principal source of financing activities is the issuance of convertible
debt with financial institutions. We are affected by market risk exposure
primarily through any amounts payable in stock, or cash by us under convertible
securities. A significant rise in interest rates could materially adversely
affect our financial condition and results of operations. We do not utilize
derivative financial instruments to hedge against changes in interest rates or
for any other purpose. In addition, substantially all transactions by us are
denominated in U.S. dollars. As such, we have shifted

                                       -25-

<PAGE>

foreign currency exposure onto our foreign customers. As a result, if exchange
rates move against foreign customers, we could experience difficulty collecting
unsecured accounts receivable, the cancellation of existing orders or the loss
of future orders.  The foregoing could materially adversely affect our
business, financial condition and results of operations.

                           PART II. OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS

         See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Cautionary Statement Regarding
Forward-Looking Statements--An unfavorable ruling in any current litigation
proceeding or future proceeding may adversely affect our business, results of
operations and financial condition" and Note 13 to the unaudited financial
statements in this quarterly report for a discussion of the legal proceedings
of Andrea.

         ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 25, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8K, we reported that we executed a letter of understanding with HTFP
Investment LLP ("HFTP"), the holder of all of Andrea's Series B and Series C
Convertible Preferred Stock, whereby HFTP would provide Andrea with a waiver,
among other things, of certain redemption rights under the terms of the Series
C Preferred Stock until April 1, 2007, in exchange for a security interest in
all of the assets of Andrea. The letter of understanding and the term sheet
were filed in exhibits to the Form 8-K.

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         None.

         ITEM 5.  OTHER INFORMATION

         None.

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         None

(b)      Reports on Form 8-K

On March 25, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8K, we reported that we executed a letter of understanding with HTFP
Investment LLP ("HFTP"), the holder of all of Andrea's Series B and Series C
Convertible Preferred Stock, whereby HFTP would provide Andrea with a waiver,
among other things, of certain redemption rights under the terms of the Series
C Preferred Stock until April 1, 2007, in exchange for a security interest in
all of the assets of Andrea. The letter of understanding and the term sheet
were filed in exhibits to the Form 8-K.

                                       -26-

<PAGE>

                                   SIGNATURES

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

ANDREA ELECTRONICS CORPORATION

/s/ Christopher P. Sauvigne   Chief Executive Officer and President May 14, 2002
----------------------------
Christopher P. Sauvigne

/s/ Richard A. Maue           Executive Vice President, Chief       May 14, 2002
---------------------------
Richard A. Maue                  Financial Officer, and Secretary

                                       -27-