SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                   FORM 10-Q

(Mark One)

( X )    QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
         ACT OF  1934  For  the  quarterly  period  ended  September  30,  1998
         
               OR

(   )    TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
         ACT OF 1934 
         For the transition period from ____________ to _______________


                         Commission file number 1-4324

                                   --------

                         ANDREA ELECTRONICS CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              New York                                  11-0482020
     -------------------------------       ----------------------------------
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
       incorporation or organization)


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


                                1-800-442-7787
              --------------------------------------------------
             (Registrant's telephone number, including area code)


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

         Yes X    No  __

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 11,105,730

<PAGE>


ITEM 1 - FINANCIAL STATEMENTS

                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
ASSETS                                                              September 30,     December 31,
                                                                        1998              1997
                                                                   --------------    -------------
                                                                     (unaudited)        (audited)
CURRENT ASSETS:
<S>                                                                 <C>              <C>           
  Cash and cash equivalents                                         $  8,155,496     $  2,059,338
  Marketable securities                                                        -          102,717
  Accounts receivable, net                                             4,289,676        4,568,433
  Inventories, net                                                     8,017,441        5,766,927
  Deferred income taxes                                                  909,569          909,569
  Prepaid expenses and other current assets                            1,548,697        1,023,661
                                                                    ------------     ------------
                                                                                
               Total current assets                                   22,920,879       14,430,645

PROPERTY, PLANT AND EQUIPMENT, net                                     1,177,659        1,022,342
DEFERRED INCOME TAXES                                                    897,046          897,046
OTHER ASSETS                                                           2,049,818        1,439,151
INTANGIBLE ASSET                                                      26,845,616                -
                                                                    ------------     ------------


                  Total assets                                       $53,891,018      $17,789,184
                                                                    ============     ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Trade accounts payable                                         $  1,527,209     $    966,783
     Current portion of long term debt                                 1,051,518                -
     Other current liabilities                                         2,202,725          483,731
     Convertible notes - current portion                                                1,193,472
                                                                    ------------     ------------


                  Total current liabilities                            4,781,452        2,643,986

CONVERTIBLE NOTES, net                                                10,116,088                -
LONG TERM DEBT                                                         1,104,457                -
OTHER LIABILITIES                                                                          38,500
                                                                    ------------     ------------
                                                                                

                  Total liabilities                                   16,001,997        2,682,486
                                                                    ------------     ------------

SHAREHOLDERS' EQUITY:
     Common stock, $.50 par value; authorized: 15,000,000
        shares; issued and outstanding: 11,105,730 and     
        8,706,692 shares, respectively                                 5,552,865        4,353,346
     Additional paid-in capital                                       34,595,924        9,881,915
     Retained earnings (deficit)                                      (2,259,768)         871,437
                                                                    ------------     ------------
                  Total shareholders' equity                          37,889,021       15,106,698
                                                                    ------------     ------------

                  Total liabilities and shareholders' equity         $53,891,018      $17,789,184
                                                                    ============     ============
</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         For the Nine Months Ended
                                                               September 30,                     September 30,
                                                     ---------------------------------- ---------------------------------
                                                           1998             1997              1998             1997
                                                     ----------------- ---------------- ----------------- ---------------

<S>                                                     <C>              <C>               <C>             <C>          
SALES                                                   $   5,341,719    $   7,210,911     $  14,187,148   $  18,676,055

COST OF SALES                                               3,466,280        4,247,121         9,040,435      11,022,262
                                                        -------------    -------------     -------------   -------------

         Gross Profit                                       1,875,439        2,963,790         5,146,713       7,653,793

RESEARCH AND DEVELOPMENT EXPENSES                             369,806          189,798         1,359,905         431,431

GENERAL, ADMINISTRATIVE AND SELLING                         3,302,466        1,679,168         8,592,915       4,478,410 
                                                        -------------    -------------     -------------   ------------- 
EXPENSES                                                                                                                 
                                                                                                                         
                                                                                                                         
         Income (loss) from operations                     (1,796,833)       1,094,824        (4,806,107)      2,743,952 
                                                        -------------    -------------     -------------   -------------           
                                                                                                                         
                                                                                                        
OTHER INCOME (EXPENSE)                                                                                  
     Interest income                                          113,554           10,889           186,870          52,173          
     Interest expense                                        (326,816)         (71,314)         (436,935)       (198,221)         
     Rent and miscellaneous income                                 -            62,940         1,924,967         178,723 
                                                        -------------    -------------     -------------   ------------- 


                                                             (213,262)           2,515         1,674,902          32,675          
                                                        -------------    -------------     -------------   -------------
                                                                                
                                                                                

INCOME (LOSS) BEFORE INCOME TAX BENEFIT                    (2,010,095)       1,097,339        (3,131,205)      2,776,627

INCOME TAX (PROVISION) BENEFIT                               (329,043)         471,000                 -          76,189 
                                                        -------------    -------------     -------------   -------------  
                                                                                             
                                                                                             

         NET INCOME (LOSS)                              $  (1,681,052)   $   1,568,339     $  (3,131,205)  $   2,852,816
                                                        =============    =============     =============   =============

PER SHARE INFORMATION:

Net income (loss) per share
     Basic                                              $        (.15)   $         .19     $        (.31)  $         .36
                                                        =============    =============     =============   =============
     Diluted                                            $        (.15)   $         .17     $        (.31)  $         .33
                                                        =============    =============     =============   =============
Shares used in computing net income (loss) per share:
     Basic                                                 11,105,730        8,212,850        10,130,198       7,992,196
                                                        =============    =============     =============   =============
     Diluted                                               11,105,730        9,244,113        10,130,198       8,708,335
                                                        =============    =============     =============   =============

</TABLE>

                 See Notes to Consolidated Financial Statements






<PAGE>


                ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                  (UNAUDITED)


<TABLE>
<CAPTION>

                                 ----------------- ---------------- ----------------- ------------------ ---------------
                                                                                           Retained            Total
                                      Shares                            Additional         Earnings        Shareholders'
                                   Outstanding      Common Stock     Paid-In Capital       (Deficit)          Equity              
                                 ----------------- ---------------- ----------------- ------------------ ---------------

<S>                                  <C>              <C>              <C>               <C>              <C>         
BALANCE, December 31,                 $ 8,706,692      $ 4,353,346      $  9,881,915      $   871,437      $ 15,106,698
     1997                                                            

Exercise of stock options, net            343,000          171,500           915,541                -         1,087,041
of related costs                                                                                       

Issuance of common stock for
acquisition, net of
related costs                           1,818,000          909,000        22,519,781                -        23,428,781

Conversion of Convertible
Debentures                                238,038          119,019         1,278,687                -         1,397,706


Net Loss                                        -                -                 -       (3,131,205)       (3,131,205)
                                     ------------      -----------      ------------      -----------      ------------

BALANCE, September 30,
1998 (Unaudited)                     $ 11,105,730      $ 5,552,865      $ 34,595,924      $(2,259,768)     $ 37,889,021
                                     ============      ===========      ============      ===========      ============
</TABLE>


                 See Notes to Consolidated Financial Statements














<PAGE>

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

<TABLE>
<CAPTION>
                                                                               --------------------------------------
                                                                                     For the Nine Months Ended
                                                                                           September 30,
                                                                               --------------------------------------
                                                                                     1998               1997
                                                                               -------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>               <C>              
Net income (loss)                                                                  $ (3,131,205)      $  2,852,816
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
                  Depreciation and amortization                                       3,149,619            261,568
                  Gain on sale of building                                           (1,864,767)                 -
                  Deferred income taxes                                                       -            (84,615)

                  Non-cash interest on convertible debt                                 315,018            198,221
         Changes in assets and liabilities, excluding effects of acquisition:
                  Accounts receivable                                                   299,974         (2,784,762)
                  Inventories                                                        (2,221,891)          (863,996)

                  Prepaid expenses and other current assets                          (2,509,517)          (508,412)
                  Other assets                                                         (610,667)                 -
                  Trade accounts payable                                                459,489          1,074,745
                  Other current and long term liabilities                               500,382            (65,022)
                                                                                    -----------        -----------

                           Net cash provided by (used in) operating activities       (5,613,565)            80,543
                                                                                    -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
           Purchases of property, plant and equipment, net                             (773,400)          (102,844)
           Proceeds from sale of building                                             2,282,563                  -
           (Purchases) maturities of investment securities                              102,717             97,427
           Acquisition of business, net of cash acquired                               (947,276)
                                                                                    -----------        -----------
                                                                                                                 -
                           Net cash used in investing activities                        664,604             (5,417)
                                                                                    -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
           Net proceeds from convertible debentures                                  10,000,000                  -
           Payments on long term debt                                                   (41,922)                 -
           Exercise of stock options                                                  1,087,041          1,963,881
                                                                                    -----------        -----------

                           Net cash provided by financing activities                 11,045,119          1,963,881
                                                                                    -----------        -----------


NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                 6,096,158          2,039,007

CASH AND CASH EQUIVALENTS - beginning of period                                       2,059,338            921,065
                                                                                    -----------        -----------

CASH AND CASH EQUIVALENTS - end of period                                           $ 8,155,496        $ 2,960,072
                                                                                    ===========        ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         Conversion of debt into common stock                                       $ 1,397,706        $   434,636
         Issuance of notes payable for acquisition                                  $ 1,564,000                  -
</TABLE>
                 

                 See Notes to Consolidated Financial Statements



<PAGE>



Notes to Consolidated Financial Statements

I. Basis of Presentation.  The accompanying  consolidated  financial statements
include the accounts of the Company and its subsidiaries (collectively, "Andrea
Electronics" or the "Company"). 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
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

II.  Stock  Split.  On  September  2, 1997,  the  Company's  Board of Directors
authorized  a  two-for-one  stock  split  effected  in the form of a 100% stock
dividend that was  distributed on September 17, 1997 to  shareholders of record
on  September  10,  1997.  All  share  and  per  share  data  included  in  the
accompanying financial statements have been restated to reflect the stock split
for all periods presented.

III.  Earnings Per Common  Share.  Effective  December  31,  1997,  the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per  Share".  Basic net income per common  share  ("Basic  EPS") is computed by
dividing  net  income  by  the  weighted   average   number  of  common  shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing  net  income by the  weighted  average  number of  common  shares  and
dilutive common share equivalents and convertible  securities then outstanding.
SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the
face of the consolidated  statements of operations.  The impact of the adoption
of this statement was not material to all previously reported EPS amounts.

The  following  chart  provides  a   reconciliation   of  information  used  in
calculating the per share amounts for the three months ended September 30, 1998
and 1997:


<TABLE>
<CAPTION>
                                                          Net Income                      Net Income (Loss) Per
                                                            (Loss)           Shares               Share
                                                        ---------------    -----------   -----------------------         
<S>                                                      <C>               <C>          <C>           <C>       
     1998
         Net loss                                          ($1,681,052)     11,105,730   Basic         $    (.15)
         Effect of dilutive employee stock options                                   -                         -
                                                                            ----------                 ---------
                                                                            11,105,730   Diluted       $    (.15)
                                                                            ==========                 ========= 
     1997
         Net Income                                         $1,568,339       8,212,850   Basic         $     .19
         Effect of dilutive employee stock options                           1,031,263                      (.02)
                                                                            ----------                 ---------    
                                                                             9,244,113   Diluted       $     .17
                                                                            ==========                 =========
</TABLE>

The  following  chart  provides  a   reconciliation   of  information  used  in
calculating  the per share amounts for the nine months ended September 30, 1998
and 1997:

<TABLE>
<CAPTION>

                                                           Net Income                      Net Income (Loss) Per
                                                             (Loss)          Shares               Share
                                                        ---------------    -----------   ------------------------
<S>                                                      <C>               <C>          <C>           <C>       
     1998
         Net loss                                          ($3,131,205)     10,130,198   Basic         $    (.31)
         Effect of dilutive employee stock options
                                                                                     -                         -
                                                                            ----------                 ---------
                                                                            10,130,198   Diluted       $    (.31)
                                                                            ==========                 ========= 
     1997
         Net Income                                         $2,852,816       7,992,196   Basic         $     .36
         Effect of dilutive employee stock options                             716,139                      (.03)
                                                                            ----------                 ---------    
                                                                             8,708,335   Diluted       $     .33
                                                                            ==========                 =========
</TABLE>



IV.  Comprehensive  Income - In the first quarter of 1998, the Company  adopted
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  and all other  nonowner  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 1997, and for the
quarters ended  September 30, 1998 and 1997,  the Company's  operations did not
give rise to items  includible in  comprehensive  income which were not already
included in net income (loss).  Therefore,  the Company's  comprehensive income
(loss) is the same as its net income (loss) for all periods presented.

V. Derivatives - In June 1998, the Financial  Accounting Standards Board issued
SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging Activities".
The Statement  establishes  accounting and reporting  standards  requiring that
every derivative instrument (including certain derivative  instruments embedded
in other  contracts)  be recorded  in the  balance  sheet as either an asset or
liability  measured at its fair value.  The statement  requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge  accounting  criteria are met. Special  accounting for qualifying  hedges
allows a derivative's  gains and losses to offset related results on the hedged
item in the  income  statement,  and  requires  that a  company  must  formally
document,  designate, and assess the effectiveness of transactions that receive
hedge accounting.  This Statement is effective for fiscal years beginning after
June 15, 1999. A company may also  implement  the Statement as of the beginning
of any fiscal quarter after issuance (that is, fiscal  quarters  beginning June
16, 1998 and thereafter).  SFAS No. 133 cannot be applied  retroactively.  SFAS
No.  133  must  be  applied  to (a)  derivative  instruments  and  (b)  certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or  substantively  modified after December 31, 1997. While the Company operates
in international  markets,  it does so presently without the use of derivatives
and therefore this new pronouncement is not applicable.

VI. Debt  Financing.  On  September  23, 1997,  the Company  entered into an $8
million credit facility with a financial institution  consisting of a revolving
loan based on eligible  accounts  receivable  and  inventory,  as defined.  The
facility,  together with the Company's availability under commercial letters of
credit,  approximates  $10 million.  The agreement  automatically  renews on an
annual basis unless  terminated by either party,  as provided in the agreement.
The  facility  is subject to normal  banking  terms and  conditions,  including
financial  covenant  compliance,  and  at  September  30,  1998,  there were no
outstanding amounts under the agreement.

VII.  Procurement  Agreement.  In August  1997,  the  Company  entered  into an
agreement with International  Business Machines and its subsidiaries ("IBM") to
produce and procure certain products,  as defined.  The agreement  continues in
full force and effect unless  terminated  earlier for material breach by either
party,  as defined.  For the three and nine month periods ending  September 30,
1998, sales of the Company's  computer headsets and related products to IBM and
certain of IBM's affiliates, distributors, licensees, and integrators accounted
for approximately 58% and 55%, respectively, of the Company's total net sales.

VIII.  Convertible  Notes. On June 10, 1998,  the Company  issued and sold in a
private placement, $10.753 million aggregate principal amount of 6% Convertible
Notes ("Notes") due June 10, 2000. The Notes will be convertible into shares of
the  Company's  common stock at a conversion  price equal to the average of the
two lowest  closing  prices of the  Common  Stock  during  the 30 trading  days
preceding  any date of  conversion,  subject to a maximum  conversion  price of
$16.125 per share.  The Notes became  convertible  on the earlier of October 8,
1998 and the effectiveness of a registration statement under the Securities Act
of 1933, as amended, covering the sale of the shares of Common Stock into which
the Notes are convertible,  which registration statement was declared effective
on October 8, 1998.  At the option of the  Company,  interest is payable in the
form of cash or shares of Common Stock at the conversion  price then in effect.
The maximum number of shares issuable upon conversion is 2,100,000 shares.  The
Company is using the $10 million in net proceeds from the issuance of the Notes
for costs  associated with  technology  acquisition  and  development,  tooling
costs,  relocation  costs,  a new  management  information  system and  general
working capital requirements. As of November 11, 1998, $1,753,000 of the Notes,
together  with related  accrued  interest,  was  converted  into  approximately
397,000 shares of the Company's common stock.

IX.  Acquisition - On May 5, 1998, the Company  acquired all of the outstanding
shares of capital stock of Lamar Signal Processing,  Ltd. ("Lamar"), an Israeli
corporation engaged in the development of digital signal processing (DSP) noise
cancellation  microphone solutions for voice-driven  interfaces covering a wide
range of audio and acoustic applications. The consideration paid by the Company
for the  acquisition of Lamar was 1,800,000  shares of restricted  common stock
and $3,000,000.  Of the 1,800,000 shares, one-third becomes freely transferable
on the first anniversary of the closing, an additional  one-third on the second
anniversary and the last one-third on the third  anniversary.  Of the aggregate
cash  consideration  to be paid by the Company,  $1,000,000  was paid on May 5,
1998,  $500,000 was paid on November 5, 1998,  and the  remainder is payable in
three equal  installments  on each of the twelve,  twenty-four  and  thirty-six
month anniversaries of the closing. 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  acquisition  resulted  in goodwill  of  approximately  $27.6
million,   which  is  included  in  intangible   assets  in  the   accompanying
consolidated balance sheet and is being amortized over a 15-year period.


The pro forma  results  listed below,  for the nine months ended  September 30,
1998, reflect purchase price accounting  adjustments,  consisting  primarily of
amortization  of  goodwill  using a 15-year  amortization  period and  interest
expense on the discounted  value of the $2 million in notes  payable,  assuming
the acquisition  occurred at the beginning of each period presented.  Pro forma
sales amounts would not be materially  different  from the  historical  results
reported herein:


<TABLE>
<CAPTION>
           
                                                               1997                    1998
                                                           ------------            -------------
<S>                                                        <C>                     <C>         
 Net Income (loss)                                          $   951,368             $(3,829,244)

 Net Income (loss) per share:
       Basic                                                $       .10             $      (.35)
       Diluted                                              $       .09             $      (.35)
           
 Shares used in computing net income (loss) per share:
       Basic                                                  9,810,196              10,962,615
       Diluted                                               10,526,335              10,962,615
           
</TABLE>

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




<PAGE>


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

OVERVIEW

Andrea  Electronics   Corporation's  mission  is  to  provide  state-of-the-art
communications  products  for  the  voice-activated,  natural  language-driven,
"human/machine   interface"   markets  that  are  rapidly   emerging  from  the
convergence  of the  telecommunications  and computer  industries,  and for the
defense  electronics  markets that are requiring  increasingly  higher  quality
voice communication  products. The Company's strategy for serving these markets
is to leverage its expertise in audio communications technology,  including its
patented  Andrea  Anti-Noise/Registered Trademark/  Active  Noise  Cancellation
("ANC")  and  Andrea Anti-Noise/Registered Trademark/  Active  Noise  Reduction
("ANR") technologies, and to continue developing, manufacturing and marketing a
line of Andrea  Anti-Noise/ Registered Trademark/ headsets, handsets  and other
communication devices to cost-effectively enhance  voice communications for end
users of the growing number of new, voice-based computer and computer telephony
applications and interfaces.  In addition, to extend the Company's  position in
technology  enhancing  communications,  the  Company has  begun to develop  its
Andrea DSP products based on digital signal processing technology.  In order to
complement internal  efforts surrounding DSP  development, on  May 5, 1998, the
Company   acquired  Lamar   Signal  Processing,   Ltd.  ("Lamar"),  an  Israeli
corporation  engaged in the development  of DSP noise  cancellation  microphone
solutions  for  voice-driven  interfaces covering  a wide  range  of audio  and
acoustic applications.

Examples  of the  applications  and  interfaces  for  which Andrea  Anti-Noise/
Registered  Trademark/ products provide  benefit  include:  Internet and  other
computer-based  speech;  telephony  communications;  multi-point  conferencing;
multi-player  Internet  and  CD  ROM  interactive  games;  speech  recognition;
multimedia; military and industrial communications; and other applications  and
interfaces  that incorporate natural  language processing. The Company believes
that end users of these applications and  interfaces  will require high quality
microphone and earphone products that enhance voice transmission,  particularly
to and from noisy environments,  for use with personal computers,  business and
residential  telephones,   military  headsets,   cellular  and  other  wireless
telephones, personal communication systems and avionics communications systems.
High  quality  audio  communication  technologies  will  also  be  required for
emerging  "far field"  voice  applications,   ranging  from  continuous  speech
dictation,  to multiparty video teleconferencing and collaboration,  to natural 
language-driven  interfaces  for automobiles,  home and office  automation  and 
other  machines  and  devices  into which  voice-controlled microprocessors are 
expected to be introduced during the next several years.

An important  element of the  Company's  strategy for expanding the channels of
distribution  and  broadening  the base of users for its products is its set of
collaborative arrangements with software publishers, distributors and retailers
actively  engaged in the various  markets in which the Company's  products have
application,  and with hardware  OEMs.  Under some of these  arrangements,  the
Company  supplies its products for sale by the  collaborative  partners.  Under
others,  the  collaborative  partners supply the Company with software that the
Company includes with its products. In addition, the Company is also increasing
its own direct marketing efforts.

The  Company  outsources  the  manufacturing  of  Andrea Anti-Noise /Registered 
Trademark/products for its OEM, consumer and commercial customers.  The Company 
also  manufactures and distributes  intercom systems and related components for 
military  applications  and  industrial  applications   ("Traditional  Military
Products").   In  contrast  to  the  outsourced  manufacturing  of  its  Andrea
Anti-Noise/ Registered Trademark/products  for  the non-military  markets,  the
Company  continues to manufacture  its Traditional Military Products in its own
facility.  To the extent that the Company succeeds  in developing a new line of
products for military use that incorporates ANC and ANR  technology, management
anticipates  that it will  manufacture these new military products through both
outsourcing and self-manufacturing.

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




<PAGE>


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 and nine months
ended  September  30, 1998 (the "1998 Third  Quarter"  and the "1998 First Nine
Months") 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 "believe", "expect",  "anticipate",
and similar expressions identify forward-looking statements. In order to obtain
the benefits of these "safe  harbor"  provisions  for any such  forward-looking
statements,  the Company wishes to caution investors and prospective  investors
about the following  significant  factors,  which,  among others,  have in some
cases  affected the  Company's  actual  results and are in the future likely to
affect the Company's  actual results and could cause them to differ  materially
from those  expressed in any such  forward-looking  statements.  These  factors
include:

         First,   the  rate  at  which  the   Company's   Anti-Noise/Registered
         Trademark/  technology  is accepted by the diverse  range of users and
         applications   within  the  global   communications   and  informatics
         marketplace;

         Second, the ability of the Company to maintain a competitive  position
         for its Andrea  Anti-Noise/Registered Trademark/ products in terms  of
         technical specifications, quality,  price, reliability and service and
         to develop  similarly competitive  Andrea DSP products,  which ability
         will  require  the  Company  to have  sufficient  funds to  expend  on
         research  and  development;

         Third,  the ongoing  ability of the Company to enter into and maintain
         collaborative  relationships  with larger  companies  in the fields of
         telecommunications,   computer  manufacturing,   software  design  and
         publishing,    Internet   and   online    services,    defense-related
         manufacturers  and system  providers,  and retail and direct marketing
         distributors; and

         Fourth, in the event that the Company experiences  continued growth in
         demand for its Anti-Noise/Registered Trademark/technology, the ability
         of the  Company  to  raise  sufficient  external  capital  to fund the
         working capital requirements for meeting such demand.

The failure of the Company to surmount the challenges  posed by any one or more
of these factors could have a material adverse effect on the Company's  results
of operations and growth.

RESULTS OF OPERATIONS

    Sales

Sales for the first  three  months  ended  September  30, 1998 (the "1998 Third
Quarter")  were  $5,341,719,  a  decrease  of 26% over the three  months  ended
September  30, 1997 (the "1997 Third  Quarter").  Sales for the 1998 First Nine
Months were $14,187,148, a decrease of 24% over the Nine Months ended September
30, 1997 (the "1997 First Nine Months"). These decreases in sales over both the
three-month and nine-month  periods primarily reflect a shift in product mix to
lower-priced  and  lower-margin  products to original  equipment  manufacturers
(OEMs).  On a per unit sales basis, the Company realized a 7% increase from the
1997 Third Quarter;  this was offset,  however,  by the aforementioned  product
mix,  reflecting an  approximate  32% decrease in per unit sales prices for the
same period.  The decrease in sales during the 1998 Third Quarter  reflected an
approximate  30% decrease in sales of Andrea  Anti-Noise/Registered  Trademark/
products to $4,334,137,  or 81% of total sales,  and an approximate 4% decrease
in sales of the Company's Traditional Military Products, to $1,007,582,  or 19%
of total  sales.  The  decrease  in sales  during the 1998  First  Nine  Months
reflected an approximate 28% decrease in sales of Andrea  Anti-Noise/Registered
Trademark/  products to $10,971,971,  or 77% of total sales, and an approximate
5%  decrease  in  sales  of the  Company's  Traditional  Military  Products  to
$3,215,177,  or 23% of total sales. During the 1998 First Nine Months, sales of
the  Company's  computer  headsets  to IBM and  certain  of  IBM's  affiliates,
distributors,  licensees and integrators accounted for approximately 55% of the
Company's total sales.




<PAGE>


Management  believes  that the general  slowing of PC sales growth rates during
the 1998 First Nine  Months contributed to the weaker demand  for the Company's
products.  In  addition,  increases in  investments in both time and money have
been required to not only gain entry for the Company's microphone products into
retail outlets, but also to maintain a positive retail sell-through position of
these products.  Management expects,  however,  that  the Company will continue
increasing its presence among the top  office/computer superstores  during  the
fourth  quarter  of 1998  through  increased  product offerings  among existing
stores.  Since the fourth quarter of 1997, the Company has  established product
presence in  five  of  its  targeted  superstores  including  CompUSA, Staples,
Computer City and, most recently, OfficeMax. During the 1998 First Nine Months,
total  sales  to  retailers  approximated  8% of  Andrea  Anti-Noise/Registered
Trademark/ products.  Retail  sales  during the  1997 First  Nine  Months  were
nominal.

    Cost of Sales

Cost of sales as a percentage  of sales for the 1998 Third Quarter and the 1998
First Nine  Months  increased  to 65% from 64% over the 1997 Third  Quarter and
1997 First Nine Months.  These  increases  in cost of sales  related to product
sales  during  the 1998  Third  Quarter  and the 1998  First  Nine  Months  are
primarily a result of the shift in product mix described above in "Sales".

     Research and Development

Research  and  development  expenses  increased  to $369,806 for the 1998 Third
Quarter  from  $189,798  for the  1997  Second  Quarter.  These  increases  are
primarily a result of the Company's  continuing  efforts to develop its digital
signal  processing  technology,  coupled  with  efforts  in  computer/telephony
headset  technologies,  which  efforts  are  anticipated  to  result in six new
computer/telephony  products by the end of 1998.  In  addition,  the 1998 First
Nine Months  included  research and  development  activities  at the  Company's
wholly-owned  subsidiary,   Andrea  Digital  Technologies  ("ADT"),  which  was
established  during the second  quarter  of 1998.  Research  efforts at ADT 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    the   digital
super-directional  array microphone  technology  ("DSDA")  obtained through the
recent acquisition of Lamar Signal  Processing,  Ltd. ("Lamar") in early May of
1998. Correspondingly,  the activities of Lamar, since the date of acquisition,
accounted for  approximately  22% and 10% of the total research and development
expenses  for  the  1998  Third   Quarter  and  the  1998  First  Nine  Months,
respectively.  Management  believes that the acquisition of Lamar significantly
reinforces the Company's  position in digital  signal  processing by broadening
its  exposure to other  industries,  including  the  consumer  electronics  and
professional  audio markets,  among others.  Considering  all of the foregoing,
through  the 1998  Third  Quarter,  total  research  and  development  expenses
approximate  123% of the entire  research  and  development  expense for fiscal
1997.  Management  anticipates  continued  significant research and development
expenses as the year  progresses,  with  particular  emphasis on digital signal
processing efforts.

     General, Administrative and Selling Expenses

General,  administrative  and selling expenses  increased 97% to $3,302,466 for
the 1998 Third Quarter from  $1,679,168  for the 1997 Third  Quarter.  General,
administrative  and selling  expenses  increased 92% to $8,592,915 for the 1998
First  Nine  Months  from  $4,478,410  for the 1997 First  Nine  Months.  These
increases,  primarily  attributable to the ANC/ANR product lines and the recent
acquisition  of  Lamar,  reflect  significant  increased  business  development
expenses relating to existing and prospective  collaborative  arrangements with
hardware OEMs, software publishers and developers,  distributors and retailers.
The Company also incurred increased  promotional,  marketing and sales expenses
to promote  product  awareness  and  acceptance of the ANC/ANR  product  lines,
particularly in the retail marketplace,  and incurred significant expenses with
developing global expansion efforts.  Also included in general,  administrative
and selling  expenses for the 1998 Third  Quarter and 1998 First Nine Months is
goodwill  amortization of  approximately  $460,000 and $750,000,  respectively,
related to the acquisition of Lamar.

     Other Income (Expense)

Other  income for the 1998 First Nine Months was  $1,674,902  compared to other
income of $32,675  for the 1997 First Nine  Months.  This  change is  primarily
attributable  to  the  net  gain  on  the  sale  of  the  Company's   corporate
headquarters  during  the 1998  First  Nine  Months  of  $1,864,767,  offset by
interest expense of $436,935, primarily related to the convertible notes issued
and sold on June 10, 1998.


     Provision for Income Taxes

The income tax benefit of $329,043 in the 1998 Third Quarter results in neither
a provision  nor a benefit for the full  nine-month  period,  due to the normal
assessment  of the  Company's  deferred  tax assets and related  reserves.  The
Company will be continually  re-assessing  its reserves on deferred  income tax
assets  as the  year  progresses.  The  realization  of most  of the  remaining
reserved deferred tax assets (excluding those generated and partially  reserved
in the 1998 First Nine Months), 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.

     Net Income (Loss)

Net loss for the 1998 Third Quarter was  $1,681,052,  compared to net income of
$1,568,339 for the 1997 Third Quarter.  Net loss for the 1998 First Nine Months
was  $3,131,205,  compared to net income of $ 2,852,816 for the 1997 First Nine
Months.  The levels of net loss for the 1998 Third  Quarter and 1998 First Nine
Months principally reflect the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The  Company's  principal  sources of funds  have  historically  been,  and are
expected to continue to be, cash flow from  operations and borrowings  provided
by certain financial institutions.  At September 30, 1998, the Company had cash
and cash  equivalents  of $8,155,496  compared with  $2,059,338 at December 31,
1997. The significant increase since December 31, 1997 is primarily a result of
the Company's  issuance and sale,  in a private  placement,  of $10.75  million
aggregate  principal  amount of 6% Convertible  Notes ("Notes"). The Company is 
using the $10 million in net proceeds from the  issuance of the Notes for costs
associated  with  technology   acquisition  and  development,   tooling  costs,
relocation  costs,  a new  management  information  system and general  working
capital  requirements.  In  connection with the  acquisition  of Lamar,  of the
aggregate cash consideration to be  paid by the Company, $1,000,000 was paid on
May 5, 1998, the closing date, $500,000 was paid on November 5,  1998,  and the
remainder is  payable in  three  equal installments  on  each  of  the  twelve,
twenty-four  and  thirty-six  month anniversaries of the closing.

Working capital at September 30, 1998 was  $18,139,427  compared to $11,786,659
at December 31, 1997. The increase in working  capital  reflects an increase in
total  current  assets of  $8,490,234,  offset by an increase in total  current
liabilities  of $2,137,466.  The increase in total current  assets  reflects an
increase  in cash  of  $6,096,158,  a  decrease  in  marketable  securities  of
$102,717,  a decrease  in  accounts  receivable  of  $278,757,  an  increase in
inventory  of  $2,250,514  and an increase of $525,036 in prepaid  expenses and
other current assets. The increase in current  liabilities  reflects a $560,426
increase in trade accounts payable,  an increase in the current portion of long
term debt of $1,051,518, a $1,193,472 decrease in convertible debentures (which
debentures  were  converted  to equity  during  the 1998 First  Quarter)  and a
$1,718,994 increase in other current liabilities.

The  increase in cash of  $6,096,158  reflects  $5,613,565  of net cash used in
operating activities, $664,604 of net cash provided by investing activities and
$11,045,119  of  cash  provided  by  financing  activities.  The  cash  used in
operating activities,  excluding non-cash charges, is primarily attributable to
the $3,131,205 net loss in the 1998 First Nine Months, coupled with an increase
in inventory of the Company's Anti-Noise/Registered Trademark/computer headsets
in anticipation of future sales. Other  contributing  factors include increases
in prepaid expenses and other assets. The cash provided by investing activities
is  primarily  attributable  to the  sale of the  Company's  primary  operating
facility in Long Island City, New York, offset by the cash  consideration  paid
upon closing of the acquisition of Lamar.  Also contributing to the offset were
increases  in  capital  expenditures  consisting  of  the  ongoing  upgrade  of
manufacturing  dies  and  molds  for  Andrea  Anti-noise/Registered  Trademark/
products and  investments in the Company's  existing  information  systems.  In
connection  with the sale of the Company's  primary  operating  facility,  rent
expense  associated with the new leased facility will approximate  $550,000 per
year,  notwithstanding  cost of living  adjustments.  The net cash  provided by
financing  activities  resulted from the issuance and sale of the Notes and the 
exercise of employee stock options.

The decrease in accounts  receivable  primarily  reflects the decrease in sales
during the 1998 First Nine Months coupled  with rigorous collection procedures.
Generally, the Company collects receivables from sales within three months.

The increase in prepaid  expenses and other current assets  primarily  includes
the recognition of increased premiums for prepaid property taxes and insurance,
prepaid moving costs,  increased  fulfillment  costs  associated with expansion
efforts as well as increases in other service costs related to future quarters.
The increase in other assets represents increases in patent and trademark costs
associated  with  the  Company's  proprietary   technology,   as  well  as  the
establishment of an escrow account in connection with the sale of the Company's
primary operating facility.

The increase in trade accounts payable and other current liabilities  primarily
reflects  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 the Andrea Anti-Noise/Registered Trademark/ products
and recently  acquired DSDA technology.  The increase in the current portion of
long term debt  represents the current  portion of debt recorded as a result of
the  acquisition  of Lamar.  The  majority of this  balance is  comprised of $1
million in cash consideration due on the six and twelve month  anniversaries of
the  closing.  The  remaining  $1 million  in  cash  consideration  due  on the 
twenty-four and thirty-six month anniversaries of the closing  are  recorded as 
long term debt on the accompanying consolidated balance sheet.

Demand for Andrea  Anti-Noise/Registered  Trademark/ products has required the
Company  to  raise  additional  working  capital  to  support  its  production
operations.  In addition, the acquisition of Lamar will require the Company to
provide  working  capital  to  support  Lamar in order to enable it to pay its
obligations as they become due. In December 1995,  April 1996 and August 1996,
the  Company  raised  additional  working  capital  through  the  issuance  of
convertible subordinated debentures. On June 10, 1998, as described above, the
Company  raised $10 million  through the  issuance  and sale of the Notes.  In
addition,  the Company entered into a revolving  credit agreement in September
1997 that provides  maximum  borrowings of up to $10 million based on eligible
accounts   receivable  and   inventory,   as  defined.   Notwithstanding   the
significance  of sales of  Andrea  Anti-Noise/Registered  Trademark/  products
during the 1998 First Nine Months,  no assurance can be given that demand will
continue for these products or any of the Company's other products,  including
future  products  related  to  the  recently  acquired  DSDA  technology,   if
developed,  or, that if such demand does exist,  that the Company 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.

YEAR 2000 COMPLIANCE PLAN

In  anticipation  of the year 2000,  the  Company  has  developed  and begun to
implement  a plan to  ensure  that all of its information systems  are  able to
properly  recognize and  handle dates  after December 31, 1999.  The  Company's
significant  management  information  systems  consist  of  its  financial  and
inventory systems.  These systems are currently  being upgraded with a recently
acquired  software  package,  with  a scheduled  implementation date of January
1999. All of the Company's material hardware,  including its AS/400  mainframe,
telephone systems and networks are being  tested for year 2000  compliance.  In
addition,  the  Company  is  in  the  process  of  contacting all  of its major
customers,  suppliers  and vendors to inquire about year 2000 compliance.  With
respect  to  significant  future system  hardware or  software purchases and/or
modifications,    the   Company  will   conduct   similar   testing   prior  to
implementation in an effort  to  ensure  year 2000 compliance.   Currently, the
Company does not anticipate any material deficiencies  and,  further,  does not
anticipate  difficulty  or  significant additional  expense in  achieving  full
year  2000  capability.  The cost of  the upgrade to the  Company's  management
information  systems is not  expected to exceed $1 million,  which upgrade will
achieve several  objectives,  including, among others, satisfaction of the year
2000 computing requirements.

Although the Company  believes  that it will have its own systems  compliant in
January, 1999 there can be no assurances that it will be able to do so, nor can 
there  be  any  assurances  that, even  if the Company  completes its year 2000
compliance plan in a timely manner, the systems,  when actually  implemented in
full, will work properly  independently  or in conjunction  with the systems of
any business partner. In addition,  the Company would continue to bear the risk
of  a  material  adverse  affect  if  any  of  its  business  partners  do  not
appropriately  address  their own  year 2000 compliance  issues.  Although  the 
Company  believes  that its  major customers will be year 2000  compliant,  the 
Company  is  still in the  process  of  reviewing  the  compliance  programs of
suppliers  and  service  vendors.  There can  be no  assurance  that such other
companies will achieve year 2000  compliance  or that any  conversions  by such
companies  to  become  year  2000  compliant  will be made in a timely  manner.
Failure  of  these companies to  become  year 2000 compliant in a timely manner
could have a material  adverse effect on  the Company's financial  condition or
results of operations. If the Company's suppliers and vendors are not year 2000
compliant,  the  Company may  have to arrange for alternative sources of supply
for  inventory procurement  and contract  manufacturers  in the fall of 1999 in
preparation for the year 2000. The Company does not have any other  contingency
plans  with respect  to other  problems that  could arise  in its business as a
result of the year 2000.  Any of  these could have a material adverse effect on
the Company's financial condition or results of operations.

<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits.

Exhibit
Number          Description

3           Amended By-Laws of the Registrant

27          Financial Data Schedule


(b) Reports on Form 8-K.

     During the three-month period ended September 30, 1998, the registrant
filed the following Current Reports on Form 8-K on the indicated dates: (i) on
July 17, 1998, the registrant amended its Current Report on Form 8-K dated May
8, 1998 (the "Report") to include the financial statements and pro forma
financial information which were omitted from the Report, as initially filed,
in accordance with Item 7(a)(4) of Form 8-K; and (ii) on August 4, 1998, for
the purpose of announcing that the registrant released financial information
with respect to the three and six month periods ended June 30, 1998, and for
the purpose of announcing the sale of the registrant's 6% Convertible Notes due
June 10, 2000.

<PAGE>


                                   SIGNATURES

         In  accordance  with the  requirements  of Section 13 and 15(d) of the
Exchange Act, the  Registrant  caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.


ANDREA ELECTRONICS CORPORATION

/s/ John N. Andrea              Co-President                   November 13, 1998
---------------------------
    John N. Andrea

/s/ Patrick D. Pilch            Executive Vice President,      November 13, 1998
---------------------------
    Patrick D. Pilch            and Chief Financial Officer

<PAGE>