SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  ----------

                                   FORM 10-K/A

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(Mark One)

X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 2000

                                      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              (I.R.S.  employer identification no.)
 of 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
                                                       ------------------------

Securities registered pursuant to
Section 12(b) of the Act:
                                                Name of each exchange on
          Title of each class                         which registered
--------------------------------------   --------------------------------------
Common Stock, par value $.50 per share           American Stock Exchange


Securities registered under Section 12(g) of the Exchange Act:    None

     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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )

         As of March 26, 2001, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $25,934,510 (based
on the closing sale price on the American Stock Exchange).

         The number of shares outstanding of the registrant's Common Stock as
of March 26, 2001, was 14,759,357.

                      DOCUMENTS INCORPORATED BY REFERENCE

         The information required in Part III by Items 10, 11, 12, and 13 is
incorporated by reference to the registrant's proxy statement in connection
with the annual meeting of shareholders to be held on or about June 28, 2001,
which will be filed by the registrant within 120 days after the close of its
fiscal year.

                       EXHIBIT INDEX APPEARS IN ITEM 14


                               TABLE OF CONTENTS

TITLE PAGE

                  PART I

ITEM 1.  BUSINESS.............................................................1

ITEM 2.  PROPERTIES..........................................................11

ITEM 3.  LEGAL PROCEEDINGS...................................................12

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................13

                  PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.................................................13

ITEM 6.  SELECTED FINANCIAL DATA.............................................13

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.................................14

ITEM 7A. QUANTATATIVE AND QUALATATIVE DISCLOSURE ABOUT MARKET RISK...........28

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................28

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE...............................................29

         PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................29

ITEM 11. EXECUTIVE COMPENSATION..............................................29

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......29

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................29

         PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....30


ITEM 1.  BUSINESS

Overview

     Andrea Electronics designs, develops and manufacturers state-of-the-art
microphone technologies and equipment for enhancing speech-based applications
software and communications that require high performance and high quality
voice input.

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

     o    voice communication over the Internet;

     o    speech recognition and dictation to desktop, laptop and hand-held
          computers;

     o    audio/video conferencing;

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

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

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

     Our patented Active Noise Cancellation microphone and 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 cancelling headset products, these technologies and
related products comprise our Andrea Anti-Noise line of business.

     Our patented and patent-pending Andrea Digital Super Directional Array
and Andrea Direction Finding and Tracking Array technologies enable the person
speaking to be several feet from the microphone, and frees 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 the array of microphones in the product into digital signals that are then
processed to cancel background noise from the signal to be transmitted. These
two technologies represent the core technologies within our portfolio of
far-field technologies. We are initially targeting our far-field microphone
technologies at the market for personal computers designed for use in
automobiles, trucks and buses to control sound systems, mobile telephones,
satellite-based navigation systems, and other devices within vehicles. These
technologies and related products comprise our Andrea Digital Signal
Processing (DSP) Microphone and Software line of business.

     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,
which included primarily DSDA and DFTA. The consideration paid by Andrea for
Lamar was approximately 1,800,000 shares of restricted common stock,
$1,000,000 in cash and $2,000,000 in notes payable. We recorded the cash at
stated value. We discounted the value of the notes payable to $1,615,000 to
reflect Andrea's borrowing rate as well as the time value of the payments on
the notes, and we discounted the value of the shares to $23,129,532 to
reflect, among other things, trading restrictions on the shares. 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.

     We are incorporated under the laws of the State of New York and have been
engaged in the electronic communications industry since 1934. 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 Aircraft Communications.
We are seeking to apply our knowledge of the military and industrial markets
to develop applications of our Andrea DSP Microphone and Software
technologies.

Industry Background

     Our mission is to provide the emerging "voice interface" markets with
state-of-the-art microphone and communication products. The idea underlying
these markets is that natural language spoken by the human voice will become
an important means by which to control many types of computing devices and
other appliances and equipment that contain microprocessors. We are designing
and marketing our products and technologies to be used for these "natural
language, human/machine" interfaces with:

     o    desktop, laptop and hand-held computers and mobile personal
          computing devices;

     o    military and commercial aircraft systems;

     o    cellular and other wireless communication devices; and

     o    automotive communication systems.

     We believe that end users of these applications and interfaces will
require high quality microphone and earphone products that enhance voice
transmission, particularly in noisy environments.

     High quality audio communication technologies is also required for
emerging applications for microphones located several feet from the person
speaking, or far-field microphone technology. Applications in this area range
include:

     o    continuous speech dictation to personal computer and personal data
          assistants;

     o    multiparty video teleconferencing and software that allows
          participants to see and jointly edit documents, spreadsheets and
          other information; and

     o    natural language-driven interfaces for automobiles, home and office
          automation.

     We believe that an increasing number of these devices will be introduced
during the next several years.

Our Strategy

     Our strategy is to

     o    maintain and extend our market position with our Andrea Anti-Noise
          products;

     o    broaden our Andrea Anti-Noise product lines and Andrea DSP
          Microphone and Software product lines through internal research and
          development and, from time to time, strategic acquisitions;

     o    design our products to satisfy specific end-user requirements
          identified by our collaborative partners; and

     o    outsource manufacturing of some of our products in order to achieve
          economies of scale.

     An important element of our strategy for expanding the channels of
distribution and broadening the base of users for our products is our
collaborative arrangements with manufacturers of computing and communications
equipment, software publishers, and distributors and retailers actively
engaged in the various markets in which our products have application. In
addition, we have been increasing our own direct marketing efforts.

     The success of our strategy will depend on our ability to, among other
things,

     o    increase sales of our line of existing Andrea Anti-Noise products
          and Andrea DSP Microphone and Software products.

     o    contain costs,

     o    manage growth,

     o    introduce additional Andrea Anti-Noise products and Andrea DSP
          Microphone and Software products,

     o    maintain the competitiveness of our technologies through successful
          research and development, and

     o    achieve widespread adoption of our products and technologies.

     We cannot assure that we will be able to accomplish these objectives.
During 1999 and 1998, our computer manufacturing customer base shifted their
purchases to lower-priced Andrea Anti Noise products in order to remain cost
competitive in the personal computer marketplace. This shift forced us to
reduce the selling prices of our less expensive products in order to remain
competitive in the personal computer microphone marketplace. During 2000, in
addition to the aforementioned price pressure, unit sales of Andrea Anti-Noise
products to our computer-manufacturing customers declined significantly.

Our Technologies

     We design our Andrea Anti-Noise products and Andrea DSP Microphone and
Software products to transmit voice signals with the high level of quality,
intelligibility, and reliability required by the broad range of emerging
voice-based applications in computing and telecommunications. We achieve this
through the use of several audio technologies. Several of these technologies
employ software processes that we believe are proprietary to us. Software
processes of this type are commonly referred to as algorithms.

     Andrea Anti-Noise Products

     Noise Cancellation ("NC") Microphone Technology. This technology is based
on the use of pressure gradient microphones to reduce the transmission of noise
from the speaker's location. Instead of using electronic circuitry to reduce
noise, pressure gradient microphones rely on their mechanical and accoustic
design to do so. Our NC microphones are a less costly alternative to our ANC
microphones and are well-suited for applications in which there is less
background noise in the speaker's environment.

     Active Noise Cancellation ("ANC") Microphone Technology. This technology
is based on analog signal processing circuits that electronically cancel the
transmission of noise from the speaker's location. ANC is particularly
well-suited for those environments in which the speaker is surrounded by high
levels of ambient background noise. Our ANC and NC microphones are most
effectively used in "near-field" applications where the microphone is next to,
or very close to, the speaker's mouth.

     Active Noise Reduction ("ANR") Earphone Technology. This technology is
based on analog signal processing circuits that electronically reduce the
amount of noise in the listener's environment that the listener would
otherwise hear in the earphone. Our ANR earphones improve the quality of
speech and audio heard by a listener in extremely noisy environments,
particularly those characterized by low frequency sounds, such as those in
aircraft, automobiles, trucks and other ground transportation equipment,
machine rooms and factories.

     Andrea DSP Microphone and Software Technology

     This set of technologies is generally based on the use of an array of
microphones from which the analog signals are converted to digital form and
then processed using digital electronic circuitry to eliminate unwanted noise
in the speaker's environment. Our Andrea DSP Microphone and Software Products
provide clear acoustic and audio input performance where the desired audio
signal is at a distance from the microphone. An example of this is a person
driving an automobile who wants to control various systems in the car or
communicate through a wireless telephone. We have also engineered our Andrea
DSP Microphone and Software Products to be compatible with Universal Serial
Bus, or USB, computer architecture. USB is a relatively new industry standard
for connecting peripherals, such as microphones, earphones, headsets,
keyboards, mice, joysticks, scanners and pointers to personal computers. We
believe that our Andrea DSP Microphone and Software technology achieve
far-field microphone performance previously unattainable through NC-type
microphones based on mechanical acoustic designs and ANC-type microphones based
on analog signal processing. Our Andrea DSP Microphone and Software Products
are based on the use of the following technologies:

     Digital Super Directional Array (DSDA(TM)) Microphone Technology. Our
patented DSDA microphone technology enables high quality far-field
communications by centering microphone sensitivity on a user's voice and
canceling noise outside of that signal. DSDA continuously samples the
continually changing acoustic properties within an environment and adaptively
identifies interfering noises that are extraneous to the voice signal,
resulting in increased intelligibility of communications.

     Direction Finding and Tracking (DFTA(TM)). Our patent-pending DFTA
technology utilizes an array of microphones, unique software algorithms and
digital signal processing to detect the presence of a user's voice, determine
the direction of the voice and track the speaker when he or she moves.

     PureAudio(TM). Our patent-pending PureAudio is a noise canceling
algorithm that enhances applications that are controlled by speech by sampling
the ambient noise in an environment and attenuating the noise from sources
near or around the desired speech signals, thus delivering a clear audio
signal. Designed specifically to improve the signal-to-noise ratio, PureAudio
is effective in canceling stationary noises such as tires, computer fans, and
engines.

     SuperBeam(TM). Our patent-pending SuperBeam is a highly accurate digital
algorithm that forms an acoustic beam that extends from the microphone to the
speech source in an environment. We believe SuperBeam provides a fixed noise
reduction microphone solution for the typical acoustic environment found in
room environments in which speech is used, such as in offices and homes. The
microphone beam is generated by processing multiple microphone samples through
pre-established digital filters and adding the outputs. The result is an
optimum speech enhancement and noise reduction solution to a predefined
setting. Because the beam is able to adapt to changes in the acoustic
environment, this technology is sometimes called adaptive beamforming.

     EchoStop(TM). Patent-pending EchoStop is an advanced acoustic echo
canceller developed for use with conferencing systems such as group audio and
videoconferencing systems and cellular car phone kits. EchoStop allows true
two-way communication (often referred to as full duplex) over a conferencing
system, even when the system is used in large spatial environments that may be
vulnerable to extensive reverberation. EchoStop incorporates noise reduction
algorithms to reduce the background noise of both the microphone input and the
loudspeaker output, thus preventing the accumulation of interfering noise over
conferencing systems that allow communication among multiple sites.

Our Products and their Markets and Applications

     Our Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products have been designed for applications that are controlled by or depend
on speech across a broad range of hardware and software platforms. These
products incorporate our NC, ANC, ANR and DSP microphone technologies, and are
designed to cancel background noise in a range of increasingly noisy
environments, such as homes, offices and factories. We also manufacture a line
of accessories for these products. For the consumer and commercial markets, we
have designed our Andrea Anti-Noise Products and Andrea DSP Microphone and
Software Products for the following applications:

     -    Speech recognition for word processing, database, and similar
          applications

     -    Distance Learning (education through the use of Internet-based
          lessons as training information)

     -    Internet telephony and Voice Chat

     -    Voice-activated interactive games

     -    Cellular and other wireless telecommunications

     -    Hands-free car phone kits

     -    Speech enabled global positioning systems (GPS)

     -    Telematics (the use of computer-controlled systems in automobiles
          and trucks)

     -    Audio/videoconferencing

     -    Professional audio systems

     -    Home networking automation systems

     -    Hand-held and other personal assistant devices


     We market and sell our products directly to end users through computer
product distributors, through value-added resellers, to original equipment
manufacturers and to software publishers. We began commercial sales of our
Andrea Anti-Noise Products in 1995 with the introduction of the ANC-100. Since
that time, a substantial amount of our revenue from Andrea Anti-Noise Products
has been from the sale of our NC microphone products, particularly under
collaborative arrangements with other companies who bundle our products with
theirs. For more information about these collaborative arrangements, please
refer to the information under the caption "Collaborative Arrangements".

     Andrea Anti-Noise Products

     Our Andrea Anti-Noise Products include a line of headsets, handsets and
related accessories that incorporate our NC, ANC and ANR technologies. Our
headsets are mostly differentiated by the various designs of their headband,
microphone boom and earphone components, and are available in both single
earphone monaural and dual earphone stereo models.

     NC Products. Several of our NC models are sold at retail, with suggested
retail prices ranging from $12.95 to $39.95. Other NC models are sold only to
original equipment manufacturers for incorporation into their products. One of
our NC headsets has a dual function microphone: when the headset is worn, the
microphone is used in the near field mode; when the headset is placed on the
desktop mount, the microphone is used in the far field mode. In some models,
customers have the unique ability to mix and match microphone boom and
headband components to meet their specific application and user comfort
preferences. The speaker-housing unit in these models can be used for digital,
CD-quality sound. By removing the speaker-housing unit, we can offer this
headset for simple speech applications at a lower price.

     ANC Products. All of our ANC products are sold at retail, with suggested
retail prices ranging from $39.95 to $169.95. Two of our ANC products are
handsets consisting of a high fidelity earphone and ANC microphone system that
closely resembles the traditional telephone handset. These ANC-200 also offers
features such as near field and far field use and an "on/mute" function.
Several of our higher end ANC headsets incorporate a newly developed speaker
housing design that optimizes the acoustic performance of the earphone's
digital sound capabilities with tenor and base attributes that are set, or
pre-equalized, at the time of manufacture. We also offer a higher end stereo
headset model that incorporate both our ANC and ANR technologies and that is
equipped with a small audio amplifier.

     We have developed and manufacture a line of accessories for our Andrea
Anti-Noise Products.

     Andrea ConnectSolutions(TM) - Personal Computer Telephone Interface
("PCTI"). The PCTI is a comprehensive desktop device that integrates computer
applications controlled by speech and traditional telephony applications by
connecting headset users to the telephone, to the computer, or to both
simultaneously. Users can alternately or simultaneously conduct telephone
conversations and use speech recognition to enter data or dictate into the PC,
without having to pause or toggle between connectivity devices. The suggested
retail price of the PCTI is $149.95.

     Andrea Wireless VoiceSolutions(TM) AWS-100. The AWS-100 is a simple
head-mounted microphone system that incorporates infrared (IR) wireless
microphone technology, as well as a unique, untethered design to allow
increased mobility and high-quality voice transmission. The suggested retail
price of the AWS-100 is $149.95.

     Andrea APS-100 Auxiliary Power Supply. The APS-100 is used when the
computer microphone input on a user's computer has either no power or
insufficient power for correct microphone operation. The suggested retail
price of the APS-100 is $19.95.

     Andrea APS-100 Auxiliary Power Supply. The Andrea MC-100 Multimedia Audio
Controller connects a PC headset or handset with a PC multimedia speaker
system thereby allowing a user to conveniently switch between the
headset/handset and the speaker system. The suggested retail price of the
MC-100 is $29.95.

     Andrea DSP Microphone and Software Products

     Our Andrea DSP Microphone and Software Products include the following
products:

     Andrea AutoArray(TM) Microphone ("AutoArray"). The AutoArray is a
digital, high performance microphone system designed for computing
applications in vehicles such as automobiles and trucks. We believe it is
the first super-directional audio input device designed specifically for
Auto PCs, global positioning systems (GPS) and cellular car phone kits. The
AutoArray incorporates DSDA technology. The suggested retail price of the
AutoArray is $199.95.

     Andrea DesktopArray(TM) Microphone ("DesktopArray"). Similar to the
AutoArray, the DesktopArray incorporates DSDA technology. The DesktopArray is
designed for natural, far-field desktop speech recognition and
audio/videoconferencing computing. This is our most advanced desktop
microphone, allowing for clear speech in untethered, hands-free applications.
The suggested retail price of the DesktopArray is $149.95.

     Andrea USB Microphone Array. Andrea's USB Microphone Array consists of
advanced software algorithms that enable enhanced, noise-free speech using
adaptive beamforming. It utilizes an array of microphones and unique system
design to adaptively control multiple acoustic signals. The system, which
plugs directly into a USB port, utilizes Andrea's proprietary digital audio
driver technology that benefits users running applications in Microsoft
Windows 98. These combined properties allow the user to achieve new levels of
microphone performance for hands-free, untethered, superior quality voice
input for speech applications. Relevant applications include command and
control for office and home automation systems, Internet telephony, Voice over
Internet Protocol and audio/videoconferencing systems.

     Andrea Sound Card Array(TM). With the Andrea Sound Card Array, multiple
streams of audio are captured by an array of microphones located in a small
desktop device, providing four channels or paired and summed into two channels
and passed to the sound card line input and converted for the host processor
to enable DSDA processing. The Sound Card Array is currently available for
applications controlled by speech running Microsoft Windows 98/Second
Edition or Microsoft Windows 2000 and supported by Andrea Electronics' partner
products.

     Andrea PureAudio(TM). Andrea's PureAudio speech enhancement noise
reduction software uses advanced algorithms to sample existing audio and
subtract background noise that is repetitive in nature, such as embedded
electrical and ambient environmental noise. PureAudio enhances the performance
of speech applications such as speech recognition, voice over Internet
protocol, Internet voice chat and videoconferencing applications by reducing
noise that would interfere with a clear voice signal. The suggested retail
price of PureAudio is $9.95.

     Andrea AudioCommander(TM). Offering an audio interface for controlling PC
multimedia applications, AudioCommander includes controls to operate noise
cancellation features, thereby enhancing microphone performance. The software
also includes an audio wizard that sets microphone levels to optimize PC audio
for speech-enabled applications including speech recognition, Internet
telephony and command and speech control functions. AudioCommander is offered
free through Andrea Electronics' e-commerce website.

Our Aircraft Communication Products

     For the industrial and military markets, our intercom systems and related
components are designed primarily for avionics applications. The related
components include intercoms, headsets, amplifiers, electronic control boxes
and panels, and wiring harnesses. The prices of these components range from
$100 to $5,000. Unfilled orders under government prime contracts and
subcontracts for these products may be terminated at the convenience of the
government under the provisions of statutes or regulations applicable to
defense procurement contracts. In the event of such termination, we are
entitled to reimbursement for costs incurred plus a percentage of profit.
Sales under defense procurement contracts are also subject, in certain
instances, to price redetermination proceedings. We believe that such
proceedings, if any, would not have a material effect upon our earnings.

Our Collaborative Arrangements

     An important element of our strategy is to promote widespread adoption of
our Andrea Anti-Noise technology by collaborating with large enterprises and
market and technology leaders in telecommunications, computer manufacturing,
and software publishing. For example, we have entered into such arrangements
and/or relationships with International Business Machines Corporation ("IBM"),
Microsoft Corporation ("Microsoft"), Intel Corporation and Clarion Corporation
of America. We are currently discussing additional arrangements with other
companies, but we cannot assure that any of these discussions will result in
any definitive agreements.

     IBM Procurement Agreement. In June 1995, we entered into a two-year
procurement agreement with IBM covering the sale to IBM of Andrea Anti-Noise
products for inclusion with IBM's personal computers. In 1996, we entered into
an additional agreement with IBM for the sale to IBM of Andrea Anti-Noise
computer headsets for inclusion with all shrink-wrapped copies of IBM's
speech-enabled OS/2 "Merlin" software product. In 1997, we expanded our
relationship with IBM by signing a procurement agreement to supply several
models of Andrea Anti-Noise PC headsets, handsets and microphones to IBM for
packaging with a full line of IBM's speech recognition software programs. We
anticipate that our relationship with IBM will continue, but we cannot assure
that this will happen. During 2000, 1999 and 1998, sales of our computer
headsets to IBM and certain of its affiliates, distributors, licensees, and
integrators accounted for 44%, 49%, and 61%, respectively, of our total sales.

     Microsoft Procurement Agreement. In January 1999, we entered a
procurement agreement with Microsoft covering the sale by us to Microsoft of
our patented NC-8 headset for inclusion in Microsoft Encarta Interactive
English Learning software programs for various markets in various languages.
This agreement also covers the inclusion of Andrea product brochures in the
packaging for these and related Microsoft products. During 2000 and 1999,
sales of our computer headsets to Microsoft approximated $500,000 and
$300,000, respectively.

     Clever Devices Procurement Agreement. In March 2001, we entered a
procurement agreement with Clever Devices to be the microphone supplier for
its SpeakEasy II(TM) mass transit bus communication system. The integrated
communication system utilizes Andrea Electronics' high performance digital
microphone system to enable the clear voice communications in high noise, mass
transit environments. Andrea Electronics' digital microphone array,
incorporating its DSDA 2.0 algorithm and PureAudio 2.0(TM) noise reduction
algorithm, reduces mass transit noises such as tire, engine and wind noise, as
well as interfering passenger voices. As part of the agreement, Andrea is also
providing Clever Devices with a proprietary digital signal processor reference
design and a patented microacoustic mechanical design to be integrated with
the SpeakEasy(TM) II communication system. Under our procurement agreement
with Clever Devices, Clever Devices is not obligated to procure any minimum
quantity of product from us, and as of the date of this annual report has not
ordered any products from us.

Patents, Trademarks, and Other Intellectual Property Rights

     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 disclosure of our proprietary
information, and other measures to protect our intellectual property and
proprietary rights. We cannot assure, however, that these measures will
protect our intellectual property or prevent misappropriation or circumvention
of our intellectual property.

     Andrea has been granted a total of 21 patents in the United States
covering claims to its Andrea Anti-Noise and digital line of products
technology and products. Counterparts of certain of these patents have been
granted in other jurisdictions. Our utility patents cover various method and
apparatus claims to our ANC, ANR, DSDA(TM) technology and products. These
method and apparatus patents expire at various dates, ranging from 2010 to
2018. Our design patents cover claims to the design of various types of
headsets and handsets, including a combined boom microphone headset and stand,
a boom microphone headset, two tethered media/communications handsets with
controls, and an untethered communications/media handset. These design patents
expire at various dates, ranging from 2010 to 2013. One of the utility patents
was granted to our Lamar Signal Processing subsidiary and expires in 2016. In
addition, we have other U.S. and non-U.S. patent applications currently
pending. We cannot assure that patents will be issued with respect to these
applications or any other patent applications filed by us in the future.

     Numerous patents have already been granted in the fields of noise
cancellation, noise reduction, digital signal processing, computer voice
recognition and adaptive interference cancelling. 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. Moreover, the laws of other countries do not protect our
intellectual property rights to the same extent as the laws of the United
States. We cannot assure that any patents issued to us will provide
competitive advantages or will not be infringed, challenged, invalidated, or
circumvented by others, that the patents or proprietary rights of others will
not have an adverse effect on our ability to do business, that we will be able
to obtain licenses to patents of others, if needed, on terms acceptable to us
or at all, or that we will be able to develop additional patentable technology
that may be needed to commercialize successfully our existing technologies. We
are also subject to the risk of adverse claims 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 favorable to us. See "Part I - Item 3 - Legal
Proceedings" for information concerning the litigation involving our ANR
patents and trademark.

Research and Development

     We consider our technology to be of substantial importance to our
competitiveness. To maintain this competitiveness, we have organized our
research and development efforts using a "market and applications" approach
for meeting the requirements of new and existing customers. Consistent with
this approach, our engineering staff interacts closely with our sales and
marketing personnel and, frequently, directly with customers. The engineering
staff is responsible for the research and development of new products and the
improvement of existing products. Since 2000, substantially all of our
research and development has been in support of developing Andrea DSP
Microphone and Software Products and Technologies. Research and development
expenses for 2000 increased 38% to $4,694,116 from $3,399,666 for 1999. We
expect research and development expenses to increase as the Company seeks to
broaden its line of Andrea Microphone Array Products and Technologies. No
assurance can be given that our research and development efforts will succeed.
See "Part II - Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations".

Sales and Marketing

     We employ a sales staff as well as outside sales representative
organizations to market our Andrea Anti-Noise Products, our Andrea DSP
Microphone and Software Products and our Aircraft Communications Products.
Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products are
marketed to computer OEMs and related peripheral devices, distributors of
personal computers and telecommunications equipment, software publishers,
computer and consumer electronic retailers, and end-users in both business and
household environments. These products are sold to end-users through
distributors and value-added resellers, software publishers, Internet Service
Providers, Internet Content Developers, and retailers. Under our existing
collaborative agreements, our collaborators have various marketing and sales
rights to our Andrea Anti-Noise and Andrea DSP Microphone and Software
Products. We are seeking to enter additional collaborative arrangements for
marketing and selling our Andrea Anti-Noise Products and Andrea DSP Microphone
and Software Products, but we cannot assure that we will be successful in
these efforts. Market acceptance of the Andrea Anti-Noise Products and Andrea
DSP Microphone and Software Products is critical to our success.

     We market our Aircraft Communications Products to OEMs, military
organizations, and industrial customers.

Production Operations

     We conduct assembly operations at our New York facility and through
subcontractors. During initial production runs of Andrea Anti-Noise Products,
we assemble the products at our New York facility from purchased components.
As sales of any particular Andrea Anti-Noise Product increase, assembly
operations are transferred to a subcontractor in Asia. Most of the components
for the Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products are available from several sources and are not characteristically in
short supply. However, certain specialized components, such as microphones and
DSP boards, are available from a limited number of suppliers and subject to
long lead times. To date we have been able to obtain sufficient supplies of
these more specialized components, but we cannot assure that we will continue
to be able to do so. Shortages of, or interruptions in, the supply of these
more specialized components could have a material adverse effect on our sales
of Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products.

     We assemble our Aircraft Communications Products at our New York facility
from purchased components. Certain highly specialized components for our
Aircraft Communications Products sold for military and industrial use have
limited sources of supply, the availability of which can affect particular
products. We do not believe, however, that our earnings have been, or will be,
materially affected due to unavailability of these components.

Competition

     The markets for our Andrea Anti-Noise Products, Andrea DSP Microphone and
Software Products and Aircraft Communications Products are highly competitive.
Competition in these markets is based on varying combinations of product
features, quality and reliability of performance, price, sales, marketing and
technical support, ease of use, compatibility with evolving industry standards
and other systems and equipment, name recognition, and development of new
products and enhancements. Our Andrea Anti-Noise Products compete primarily with
products from Plantronics Inc., Labtec Inc. and Emkay Innovative Products Inc.
Most of our current and potential competitors in these markets have
significantly greater financial, marketing, technical, and other resources than
us. Consequently, these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, marketing, and sale of their products than
we can. We cannot assure that one or more of these competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. In addition, we have incurred significant price pressure, as
well as, more recently, a decline in unit sales of Andrea Anti-Noise Products to
our OEM customer base shipping continuous speech dictation products.

     In the markets for our Aircraft Communications Products, we often compete
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying to specific military initiatives. Our
performance in these markets is further subject to several factors, including
dependence on government appropriations, the time required for design and
development, the complexity of product design, the rapidity with which product
designs and technology become obsolete, the intense competition for available
business, and the acceptability of manufacturing contracts by government
inspectors.

     We believe that our ability to compete successfully will depend upon our
capability to develop and maintain advanced technology, develop proprietary
products, attract and retain qualified personnel, obtain patent or other
proprietary protection for our products and technologies, and manufacture,
assemble and market products, either alone or through third parties, in a
profitable manner.

Employees

     At December 31, 2000, we had 121 employees, of whom 37 were engaged in
production and related operations, 31 were engaged in research and
development, and 53 were engaged in management, administration, sales and
customer support duties. None of our employees are unionized or covered by a
collective bargaining agreement. We believe that we generally enjoy good
relations with our employees. During the first quarter of 2001, we undertook
steps to reduce the number of our employees. For more information about this
reduction, please see ITEM 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

ITEM 2.  Properties

     Andrea's corporate headquarters is located in Melville, New York. Our
corporate headquarters is located in approximately 40,000 square feet of
leased space which houses our production operations, research and development
activities, sales, administration and executive offices. We also lease
facilities in Utah and Israel dedicated for research and development, and in
Hong Kong for production management and limited research and development
activities. We believe that we maintain our machinery, equipment and tooling
in good operating condition and that these assets are adequate for our current
business and adequately insured. See Notes 6 and 13 to our Consolidated
Financial Statements for further information concerning our property
and equipment and leased facilities.

ITEM 3.  Legal Proceedings

     On November 17, 1998 a complaint was filed against us in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. ("NCT";
formerly Noise Cancellation Technologies, Inc.) and NCT Hearing Products,
Inc., one of NCT's subsidiaries. The complaint involves two of Andrea's
patents, U.S. Patent No. 5,732,143 and U.S. Patent No. 5,825,897. These
patents relate to certain active noise reduction technology that is
particularly applicable to aircraft passenger headphones. Andrea does not
currently derive any sales or licensing revenue from aircraft passenger
headphones. The complaint requests a declaration that these two patents are
invalid and unenforceable and that NCT's products do not infringe upon these
two patents. The complaint alleges that Andrea has engaged in unfair
competition by misrepresenting the scope of the two patents, tortuously
interfering with prospective contractual rights between NCT and its existing
and potential customers, making false and disparaging statements about NCT and
its products, and falsely advertising Andrea's ANR products. The complaint
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. On December 30,
1998, we filed and served an answer to the NCT complaint, denying the
allegations and asserting affirmative defenses and counterclaims. Our
counterclaims allege that NCT has infringed U.S. Patents Nos. 5,732,143 and
5,825,897, and that NCT has engaged in trademark infringement, false
designation of origin, and unfair competition. The counterclaims also allege
that NCT's patent infringement has been and is willful. 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 second
half of 1999, both NCT and Andrea submitted briefs to the Court on whether to
have an early hearing on the meaning of the claims in the two Andrea patents.
This type of hearing is called a "Markman Hearing". We are unable to
anticipate when the Court will issue a decision on this question. We and NCT
are proceeding with discovery, including document production and depositions.
If this suit is ultimately resolved in favor of NCT, we could be materially
adversely effected. We believe, however, that NCT's allegations are without
merit and we intend to vigorously defend Andrea and to assert against NCT the
claims described above.

     On March 11, 1999, we were notified about a claim filed with the New York
State Environmental Protection and Spill Compensation Fund (the "Fund") by the
owners (Mark J. Mergler and Ann Mergler, the "Claimants") of property
adjoining our former Long Island City facility. This claim alleges property
damages arising from petroleum migrating from our former facility and was
purportedly detected in the basement of the Claimants' property. In their
claim to the Fund, the Claimants alleged that their property has been damaged
and that they have incurred remedial costs. In the event the Fund honors this
claim in whole or in part, we may be liable to reimburse the Fund. The New
York State Department of Environmental Conservation has asserted a demand that
we investigate and remediate the discharge of petroleum from a fuel oil
storage tank at our former Long Island City facility, and determine whether
the petroleum discharge has migrated to the Claimants' adjoining property. We
engaged environmental consultants to investigate the discharge from the fuel
oil storage tank and we are currently funding remediation work. We denied,
however, the allegations that any petroleum discharge has migrated to the
Claimant's property and objected to the claim made by the Claimant to the
Fund. On September 2, 1999, a civil action related to this matter was
commenced in the Nassau County Supreme Court by Mark J. Mergler and Ann
Mergler. The plaintiffs allege that the fuel oil released from the heating
system of our former facility has migrated beneath and onto the neighboring
property causing an excess of $1,000,000 in direct and consequential damages.
The plaintiffs' allegations against us include, negligence, nuisance and
strict liability under the New York State Navigation Law. We have submitted an
answer denying the allegations and all liability relating to the alleged
property damage. This lawsuit is at an early stage and we are unable to
evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss, if any.

     In addition to the litigation described above, we are from time to time
subject to routine litigation incidental to our business.

ITEM 4.  Submission of Matters to a Vote of Security Holders

     The annual meeting of shareholders of Andrea was held on June 22, 2000.
The results of this meeting were reported in our Form 10-Q for the six-month
period ended June 30, 2000.

ITEM 5.  Market for Registrant's Common Equity and Related Stockholder Matters

     Andrea's common stock is listed on the American Stock Exchange under the
symbol "AND". The table below sets forth the high and low sales prices for
Andrea's Common Stock as reported by the American Stock Exchange. On March
28, 2001, there were approximately 530 holders of record of Andrea's Common
Stock.

    Quarter Ended                             High                         Low

    March 31, 1999                            12                           6.25
    June 30, 1999                             12.75                        6.38
    September 30, 1999                         7.81                        5
    December 31, 1999                         10                           6.38
    March 31, 2000                            17.75                        7
    June 30, 2000                             11.63                        5.75
    September 30, 2000                         9.25                        5.31
    December 31, 2000                          7.65                        1.80

No common stock dividends were paid in 2000 or 1999.

ITEM 6.  Selected Financial Data

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                       ------------
                                          2000              1999              1998            1997           1996
                                          ----              ----              ----            ----           ----
<S>                                     <C>                <C>             <C>             <C>             <C>
INCOME STATEMENT DATA
Sales                                    $15,567,664        $17,112,487     $21,304,570     $26,429,804     $9,244,109
Cost of Sales                             11,279,649         11,908,751      14,178,871      16,077,801      5,913,091
Gross Profit                               4,288,015          5,203,736       7,125,699      10,352,003      3,331,018
Research and Development                   4,694,116          3,399,666       2,016,684       1,106,880        988,483
General, Administrative and
     Selling Expenses                      9,373,025          8,954,805      13,002,959       5,753,130      3,872,919
Income (Loss) from Operations             (9,779,126)        (7,150,735)     (7,893,944)      3,491,993     (1,530,384)
Other Income (Expense)                       204,774            (26,258)      1,447,989          76,864        (13,833)
Income (Loss) Before Provision
     (Benefit) for Income Taxes           (9,574,352)        (7,176,993)     (6,445,955)      3,568,857     (1,544,217)
Provision (Benefit) for Income
     Taxes                                   --                --                --             154,461     (1,222,000)
Net Income (Loss)                         (9,574,352)        (7,176,993)     (6,445,955)      3,414,396       (322,217)
Preferred Stock Dividends                    351,209            195,843          --              --             --
Net Income (Loss) attributable to
     Common Shareholders                $ (9,925,561)      $ (7,372,836)    $(6,445,955)    $ 3,414,396      $(322,217)
Earnings (Loss)
     Per Share
       Basic                                  $ (.72)            $ (.56)         $ (.61)          $ .42          $(.05)
       Diluted                                $ (.72)            $ (.56)         $ (.61)          $ .39          $(.05)

BALANCE SHEET DATA
Current Assets                           $19,161,845        $19,315,415     $18,818,190     $14,430,645    $ 9,926,077
Total Assets                             $47,272,866        $49,853,402     $50,681,940     $17,789,184   $ 10,794,250
Current Liabilities                       $4,126,794         $5,293,930      $4,481,074      $2,643,986    $ 1,090,003
Total Liabilities                         $4,322,661         $6,001,769      $7,103,040      $2,682,486    $ 3,286,289
Redeemable Securities                    $12,162,725         $7,187,077      $  --           $  --         $   --
Total Equity                             $30,787,480        $36,664,556     $43,578,900     $15,106,698    $ 7,507,961

</TABLE>


Quarterly Results and Seasonality

         The following table sets forth unaudited financial data for each of
Andrea's last eight fiscal quarters.


<TABLE>
<CAPTION>
                                      Year Ended December 31, 1999                       Year Ended December 31, 2000
                            ------------------------------------------------  ------------------------------------------------
                              First      Second       Third      Fourth          First      Second       Third      Fourth
                             Quarter     Quarter     Quarter     Quarter        Quarter     Quarter     Quarter     Quarter
-------------------------- -------------------------------------------------  ------------------------------------------------
<S>                       <C>         <C>         <C>          <C>           <C>         <C>         <C>         <C>
  Income Statement Data:
    Net Sales              $4,664,135  $4,324,079  $4,326,098   $3,798,175    $3,201,484  $3,181,268  $5,318,936  $3,865,976
    Gross Profit            1,364,819   1,332,005   1,372,582    1,134,330       802,309     814,915   1,546,625   1,124,166
    Loss from Operations
                           (1,692,463) (1,741,930) (1,681,747)  (2,034,595)   (2,489,467) (2,527,636) (2,092,278) (2,669,745)
    Net Loss               (1,744,948) (1,758,032) (1,656,086)  (2,017,927)   (2,484,621) (2,476,013) (2,045,438) (2,568,280)
    Preferred Stock
    Dividends                   -           8,525      94,097       93,221        91,377      60,410      60,577     138,845
    Net Loss
    Attributable to
    Common Shareholders    (1,744,948) (1,766,557) (1,750,183)  (2,111,148)   (2,575,998) (2,536,423) (2,106,015) (2,707,125)
    Basic and Diluted
    Loss per Share              (0.13)      (0.13)      (0.13)       (0.16)        (0.19)      (0.18)      (0.15)      (0.19)
</TABLE>


     ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

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

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

     In order to complement our internal efforts to develop digital signal
processing technology, in May 1998, we acquired Lamar Signal Processing, Ltd.,
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. This acquisition resulted in a substantial
amount of goodwill and other intangible assets. The amortization of the
goodwill and other intangible assets has a significant, negative, non-cash
impact on our results of operations. See Note 3 to our Consolidated Financial
Statements.

     We outsource the assembly of most of our Andrea Anti-Noise(R) Products
from purchased components, and we are currently assembling our Andrea DSP
Microphone and Software Products from purchased components at our New York and
Israeli facilities. We manufacture our Aircraft Communications Products at our
New York facility.

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 year ended
December 31, 2000 and other items set forth in this Report on Form 10-K are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The words "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "seeks," variations of such words, and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and
projections about our business and industry, our beliefs and certain
assumptions made by our management. Investors are cautioned that matters
subject to forward-looking statements involve risks and uncertainties
including economic, competitive, governmental, technological and other factors
that may affect our business and prospects. These statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. In order to
obtain the benefits of these "safe harbor" provisions for any such
forward-looking statements, we wish to caution investors and prospective
investors about the following significant factors, which, among others, have
in some cases affected our actual results and are in the future likely to
affect our actual results and could cause them to differ materially from those
expressed in any such forward-looking statements. These factors include:

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.


     Our revenue for the year ended December 31, 2000 was approximately $15.6
million compared to approximately $17.1 million for the year ended December
31, 1999. For the year ended December 31, 2000, we had a net loss of
approximately $9.6 million versus a net loss of $7.2 million for the year
ended December 31, 1999. We continue to experience significant price pressure
on our Andrea Anti-Noise Products, and more recently, we have experienced a
decline in unit sales of these products to those of our customers who bundle
them with their continuous speech dictation products. In response, we are
examining 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. As a result of these factors, we expect to continue to accumulate
losses and the market price of our common stock could decline.

If we fail to obtain additional capital, we may be required to significantly
reduce, or refocus, our operations and our business, results of operations and
financial condition could be materially and adversely effected.

     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 may not be available
on favorable terms, if at all. Additionally, we may only be able to obtain
funds through arrangements that require us to relinquish rights to our
products, technologies or potential markets.

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 35,000,000 shares of common stock presently authorized,
14,759,357 were outstanding as of March 26, 2001. This does not include
5,243,125 shares of our common stock reserved for issuance upon exercise of
outstanding awards granted under our 1991 Performance Equity Plan and 1998
Stock Plan and shares of our common stock reserved for further awards under
the 1998 Stock Plan and 6,411,140 shares of common stock reserved for issuance
upon conversion of the Series B and Series C convertible preferred stock and
exercise of related warrants. In addition, 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 1,200,000 of these
1,800,000 shares have expired, and trading restrictions on the remaining
600,000 shares expire on May 5, 2001. As these trading restrictions expire,
these shares are subject to demand and piggyback registration rights. To date,
902,880 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.

     Currently, we have 348 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 any sixty day period. 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 348 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 Stock  Percentage of Outstanding
Conversion Price      Issuable Upon Conversion(1)          Common Stock(2)
----------------   --------------------------------   -------------------------
     $1.00                   3,480,000                         19%
     $2.00                   1,740,000                         11%
     $3.00                   1,160,000                          7%
     $4.00                    870,000                           6%
     $5.00                    696,000                           5%
     $6.00                    580,000                           4%
     $7.00                    497,143                           3%
     $8.00                    435,000                           3%

(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 any
     sixty day period, 9.99% of the outstanding shares of our common stock
     following such conversion and, in the event that, on a cumulative basis,
     the shares of common stock issuable upon conversion of the Series B
     Convertible Preferred Stock would exceed 19.9% of our common stock
     outstanding on June 18, 1999, approval of our shareholders would be
     required.

(2)  Based on 14,759,357 shares of common stock outstanding as of
     March 26, 2001.

     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 Stock   Percentage of Outstanding
Conversion Price     Issuable Upon Conversion(1)             Common Stock(2)
----------------   --------------------------------   -------------------------
   $1.00                7,500,000                               34%
   $2.00                3,750,000                               20%
   $3.00                2,500,000                               14%
   $4.00                1,875,000                               11%
   $5.00                1,500,000                                9%
   $6.00                1,250,000                                8%
   $7.00                1,071,429                                7%

(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 any
     sixty day period, 9.99% of the outstanding shares of our common stock
     following such conversion and, in the event that, on a cumulative basis,
     the shares of common stock issuable upon conversion of the Series C
     Convertible Preferred Stock would exceed 19.9% of our common stock
     outstanding on October 10, 2000, approval of our shareholders would be
     required.

(2)  Based on 14,759,357 shares of common stock outstanding as of March 26,
     2001.

     The following table illustrates the varying amounts of shares of common
stock that would be issuable upon conversion of all 348 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 Stock  Percentage of Outstanding
Conversion Price(1)   Issuable Upon Conversion(2)            Common Stock(3)
------------------- --------------------------------  -------------------------
       $1.00                 10,980,000                           43%
       $2.00                  5,490,000                           27%
       $3.00                  3,660,000                           20%
       $4.00                  2,745,000                           16%
       $5.00                  2,196,000                           13%
       $6.00                  1,830,000                           11%
       $7.00                  1,568,572                           10%

(1) The calculation assumes that the conversion price of the Series B and
    Series C convertible preferred stock are equal. This could occur at
    any reset date on which the conversion price for the Series C
    convertible preferred stock is adjusted down to the Series B
    convertible preferred stock conversion price. The conversion price of
    the Series B convertible preferred stock would be the prevailing
    market price.

(2) 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, in some circumstances.

(3) Based on 14,759,357 shares of common stock outstanding as of
    March 26, 2001.

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 as 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.

If we are unable to obtain shareholder approval for issuances of common stock
upon conversions of our Series B convertible preferred stock and Series C
convertible preferred stock that exceed 19.99% of our outstanding common
stock, we may have to pay substantial penalties.

     Because there is no floor on the conversion prices of the Series B
convertible preferred stock and Series C convertible preferred stock, we may
ultimately be required to issue an amount of common stock exceeding 19.99% of
our outstanding common stock upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock. We cannot, however,
issue shares of common stock that would exceed 19.99% of our outstanding
common stock unless we obtain the approval of our shareholders. If we are
required to obtain this approval of our shareholders and we are unable to do
so, we will be forced to pay the holder of the Series B convertible preferred
stock and the Series C convertible preferred stock substantial penalties until
we obtain this approval. In addition, if shareholder approval is not obtained
by a required date, then the holder of the Series B convertible preferred
stock and Series C convertible preferred stock may force us to redeem all or a
portion of the preferred shares (the 19.99% test for each of the Series B
convertible preferred stock and the Series C convertible preferred stock is
calculated based on the number of shares of common stock outstanding on the
date of such issuances).

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 Anti-Noise and Andrea
Digital Signal Processing Microphone and Software 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 Anti-Noise and Andrea DSP
Microphone and Software 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 market for
computer-based automobile monitoring and control systems for use by drivers
and passengers. This market is commonly referred to as the automobile
telematics 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 our voice interface and
Internet communications 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 and Andrea DSP
Microphone and Software products and our traditional line of military and
industrial products are highly competitive. We may not compete successfully
with any of our competitors. Most of our current and potential competitors
have significantly greater financial, technology development, marketing,
technical support and other resources than we do. Consequently, these
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, marketing, and sale of their products than we can. One or
more of these competitors may independently develop technologies that are
substantially equivalent or superior to our technology. The introduction of
products incorporating new technologies could render our products obsolete and
unmarketable and could exert price pressures on existing products.

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

     In the markets for our traditional 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. We have also established direct marketing
arrangements with large electronic and computer retail chains in the United
States, as well as with distributors in Europe and the Americas. These
channels may not devote sufficient resources to support the sale of our
products.

If we fail to maintain sales of Andrea Anti-Noise products and Andrea DSP
Microphone and Software products to IBM, we would experience a material
adverse effect on our business, results of operations and financial condition.

     We are substantially dependent on our product procurement relationship
with IBM. During the years ended December 31, 2000, 1999 and 1998, IBM and
several of IBM's affiliates, distributors, licensees and integrators accounted
for 44%, 49% and 61%, respectively, of our net sales. IBM is not
obligated to purchase these products and is free to purchase microphone and
earphone products and technologies from our competitors.

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.

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.

     As more fully described in "Item 3. Legal Proceedings" of this annual
report, on November 17, 1998 a complaint was filed against us in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. and NCT
Hearing Products, Inc., one of NCT's subsidiaries, requesting a declaration
that two of our patents, which relate to active noise reduction technology
applicable to aircraft passenger headphones, are invalid and unenforceable and
that these patents are not being infringed by NCT's products. The complaint
also seeks to enjoin us from engaging in certain 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.

     On December 30, 1998, we filed and served an answer to the NCT complaint,
denying the allegations and asserting affirmative defenses and counterclaims.
The counterclaims seek injunctive relief for 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 second half of
1999, both NCT and Andrea submitted briefs to the court on whether to have an
early hearing on the meaning of the claims in the two Andrea patents. This
type of hearing is called a "Markman Hearing." We are unable to anticipate
when the court will issue a decision on this question. We and NCT are
proceeding with discovery, including document production and depositions. If
this suit is ultimately resolved in favor of NCT, we could be materially
adversely effected. We believe, however, that NCT's allegations are without
merit and we intend to vigorously defend ourselves and to assert against NCT
the claims described above.

     As more fully described in "Item 3. Legal Proceedings" of this annual
report, on March 11, 1999, we were notified about a claim filed with the New
York State Environmental Protection and Spill Compensation Fund by the owners
(Mark J. Mergler and Ann Mergler) of property adjoining our former Long Island
City facility. This claim alleges property damages arising from petroleum
migrating from our former facility and was purportedly detected in the
basement of the claimants' property. In their claim to the fund, the claimants
alleged that their property has been damaged and that they have incurred
remedial costs. In the event the fund honors this claim in whole or in part,
we may be liable to reimburse the fund. The New York State Department of
Environmental Conservation has asserted a demand that we investigate and
remediate the discharge of petroleum from a fuel oil storage tank at our
former Long Island City facility, and determine whether the petroleum
discharge has migrated to the claimants' adjoining property.

     We engaged environmental consultants to investigate the discharge from
the fuel oil storage tank and we are currently funding remediation work. We
denied, however, the allegations that any petroleum discharge has migrated to
the claimant's property and objected to the claim made by the claimant to the
fund. On September 2, 1999, a civil action related to this matter was
commenced in the Nassau County Supreme Court by Mark J. Mergler and Ann
Mergler. The plaintiffs allege that the fuel oil released from the heating
system of our former facility has migrated beneath and onto the neighboring
property causing in excess of $1,000,000 in direct and consequential damages.
The plaintiffs' allegations against us include, negligence, nuisance and
strict liability under the New York State Navigation Law. We have submitted an
answer denying the allegations and all liability relating to the alleged
property damage. This lawsuit is at an early stage and we are unable to
evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss, if any.

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
year ended December 31, 2000, sales to customers outside the United States
accounted for approximately 30% of our net sales. International sales and
operations are subject to a number of risks, including:

     o    trade restrictions in the form of license requirements;

     o    restrictions on exports and imports and other government controls;

     o    changes in tariffs and taxes;

     o    difficulties in staffing and managing international operations;

     o    problems in establishing and managing distributor relationships;

     o    general economic conditions; and

     o    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.

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.

Results Of Operations

     Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Sales

     Sales for the year ended December 31, 2000 were $15,567,664, a decrease
of 9% from sales of $17,112,487 for the year ended December 31, 1999. The
decrease in sales for the year ended December 31, 2000 reflects an approximate
10% decrease in sales of Andrea Anti-Noise Products to $11,974,410, or 77% of
total sales and an approximate 23% decrease in sales of our Aircraft
Communications Products, to $2,923,031, or 19% of total sales, both offset by
initial sales of Andrea DSP Microphone and Software Products of $670,223, or
4% of total sales. The primary reasons for the decrease of Andrea Anti Noise
Product sales during 2000 were a significant decline in headset unit shipments
to IBM and, to a lesser extent, continued price pressures from IBM. In
addition, the decrease from 1999 reflects a decline in Aircraft Communication
Product sales as a result of a product transformation required to meet future
demand for printed circuit and digital-based intercom systems. Initial sales
of Andrea DSP Microphone and Software Products were primarily comprised of
shipments of Andrea's far-field microphone products for use with business
videoconferencing systems, professional audio microphones and desktop speech
dictation applications. For the year ended December 31, 2000, sales of our
computer headsets to one customer and certain of that customer's affiliates,
distributors, licensees and integrators accounted for approximately 44% of our
total sales.

Cost of Sales

     Cost of sales as a percentage of sales for the year ended December 31,
2000 increased to 72% from 70% for the year ended December 31, 1999. This
increase in cost of sales percentage is primarily a result of lower than
expected Andrea Anti-Noise and Aircraft Communications production and sales
(described above under "Sales") over which to spread the Company's pool of
fixed overhead costs.

Research and Development

     Research and development expenses for the year ended December 31, 2000
increased 38% to $4,694,116 from $3,399,666 for the year ending December 31,
1999. This increase is due to the Company's continuing efforts to develop its
digital signal processing microphone and software technologies, coupled with,
to a lesser extent, efforts in Aircraft Communication technologies. Research
and development in DSP-based technology at the Company is 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 Company's array microphone technologies obtained
through the acquisition of Lamar Signal Processing, Ltd. ("Lamar") in May
1998. Correspondingly, the activities of Lamar accounted for approximately 28%
of the total research and development expenses during 2000. The Company
believes that the acquisition of Lamar significantly reinforces its position
in digital signal processing by extending the Company's 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 superior to other known DSP-based
technologies in the marketplace, 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 the
Company with a significant competitive advantage. For 2001, we expect total
research and development spending to approach levels similar to that of 2000.

General, Administrative and Selling Expenses

     General, administrative and selling expenses increased approximately 5%
to $9,373,025 for the year ended December 31, 2000 from $8,954,805 for the
year ended December 31, 1999. The slight increase was due to an increase in
sales and marketing expenses during the second half of the year associated
with sales efforts in the automotive telematics market, as well as increases
in overall sales and marketing salaries. The Company implemented a cost
reduction plan aimed at cutting costs that are not integral to the execution
of the Company's overall strategy, and to ensure conservative spending during
the current period of economic uncertainty. Included in the Company's cost
reduction initiatives was a reduction in workforce which was implemented
during February of 2001, representing a reduction of approximately 25% of the
Company's then total workforce.

Other Income (Expense)

     Other income for the year ended December 31, 2000 was $204,774 compared
to other expense of $26,258 for the year ended December 31, 1999. The increase
is due to interest earned on higher cash balances throughout 2000, coupled
with other miscellaneous income generated during 2000.

Provision for Income Taxes

     The Company did not record income tax expense for the year ending
December 31, 2000 in light of the net loss recorded for the period.
Furthermore, the realization of a portion of the Company's 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. The Company 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
Andrea's management believes that, more likely than not, previously reserved
deferred tax assets will be realized, Andrea will reduce the reserve
accordingly. See Note 12 to our Consolidated Financial Statements.

Net Loss

     Net loss for the year ended December 31, 2000 was $9,574,352 compared to
a net loss of $7,176,993 for the year ended December 31, 1999. The net loss
for the year ended December 31, 2000 principally reflects the factors
described above.

     Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Sales

     Sales for the year ended December 31, 1999 were $17,112,487, a decrease
of 20% from sales of $21,304,570 for the year ended December 31, 1998. The
decrease in sales for the year ended December 31, 1999 reflects an approximate
23% decrease in sales of Andrea Anti-Noise Products to $13,310,138, or 78% of
total sales, and an approximate 6% decrease in sales of our Aircraft
Communications Products, to $3,802,349, or 22% of total sales. The primary
reasons for the decrease of Andrea Anti Noise Product sales during 1999 were
the lower volumes and lower price/lower margin sales of PC headsets to the
Company's original equipment manufacture (OEM) customers. For the year ended
December 31, 1999, sales of our computer headsets to one customer and certain
of that customer's affiliates, distributors, licensees and integrators
accounted for approximately 49% of our total sales.

Cost of Sales

     Cost of sales as a percentage of sales for the year ended December 31,
1999 increased to 70% from 67% for the year ended December 31, 1998. This
increase in cost of sales percentage is primarily a result of the shift in
product mix described above under "Sales".

Research and Development

     Research and development expenses for the year ended December 31, 1999
increased 69% to $3,399,666 from $2,016,684 for the year ending December 31,
1998. This increase is due to the Company's continuing efforts to develop its
digital signal processing microphone and software technologies, coupled
with, to a lesser extent, efforts in computer/telephony headset technologies.
The activities of Lamar accounted for approximately 20% of the total research
and development expenses during 1999.

General, Administrative and Selling Expenses

     General, administrative and selling expenses decreased approximately 31%
to $8,954,805 for the year ended December 31, 1999 from $13,002,959 for the
year ended December 31, 1998. Excluding the effect of a full year of goodwill
amortization expense associated with the acquisition of Lamar in May of 1998,
during the year ended December 31, 1999, general, administrative and selling
expenses decreased approximately 40% from the same period in 1998. The
decreases are primarily attributable to cost reduction efforts and a
reallocation of resources to research and development activities.

Other Income (Expense)

     Other expense for the year ended December 31, 1999 was $26,258 compared
to other income of $1,447,989 for the year ended December 31, 1998. This
change is primarily attributable to the net gain on the sale of the Company's
then corporate headquarters in Long Island City during the year ended December
31, 1998 of $1,864,767.

Provision for Income Taxes

     The Company did not record income tax expense for the year ending
December 31, 1999 in light of the net loss recorded for the period.

Net Income (Loss)

     Net loss for the year ended December 31, 1999 was $7,176,993 compared to
a net loss of $6,445,955 for the year ended December 31, 1998. The net loss
for the year ended December 31, 1999 principally reflects the factors
described above.

Liquidity And Capital Resources

     The Company's principal sources of funds have historically been, and are
expected to continue to be, gross cash inflows from operations and proceeds
from the sale of convertible notes and redeemable convertible preferred stock
to certain financial institutions. At December 31, 2000, we had cash and cash
equivalents of $9,151,835 compared with $9,153,148 at December 31, 1999. The
balance of cash and cash equivalents at December 31, 2000 is primarily a
result of the Company's issuance and sale in a private placement of $7,500,000
of its Series C Redeemable Convertible Preferred Stock on October 10, 2000
(the "Series C Preferred Stock"). The Company is using the net proceeds from
the issuance of the Series C Preferred Stock 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.

     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, and $500,000 was paid on each of the six, twelve and
twenty-four month anniversaries of the closing date, with the remainder
payable on the thirty-six month anniversary of the closing. The approximate
$500,000 in additional cash consideration remaining, due on the thirty-six
month anniversary of the closing, is recorded as current portion of long-term
debt in the accompanying consolidated balance sheet.

     Working capital at December 31, 2000 was $15,035,051 compared to
$14,021,485 at December 31, 1999. The increase in working capital reflects a
decrease in total current liabilities of $1,167,136, partially offset by a
decrease in total current assets of $153,570. The decrease in current
liabilities primarily reflects a $1,485,077 decrease in convertible notes
(representing the payment of the remaining obligation of convertible notes
issued in June 1998), offset by a $266,355 increase in other current
liabilities. The decrease in total current assets primarily reflects a
decrease in inventory of $838,709 and a decrease in prepaid expenses and other
current assets of $46,558, offset by an increase in accounts receivable of
$733,010.

     The decrease in cash of $1,313 reflects $6,680,509 of net cash used in
operating activities, $369,970 of net cash used in investing activities and
$7,049,166 of net cash provided by financing activities.

     The cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $9,574,352 net loss for the year ended December
31, 2000, a $733,010 increase in accounts receivable, a $257,657 increase in
other assets, a $287,544 increase in prepaid expenses and other current
assets, and a $323,798 decrease in other current liabilities, partially offset
by a $838,709 decrease in inventory. The increase in accounts receivable
primarily reflects the level of the third and fourth quarter sales, coupled
with timing of sales collection. Generally, the Company collects receivables
from sales within two months. The increase in other assets primarily reflects
increases in patent and trademark costs associated with the Company's
proprietary technologies. The increase in prepaid expenses and other current
assets, the decrease in other current liabilities, 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 the Andrea Anti-Noise
and Aircraft Communication products lines.

     The cash used in investing activities is primarily attributable to
investments in the Company's existing information systems, as well as, to a
lesser extent, capital expenditures consisting of the ongoing upgrade and
purchases of manufacturing dies and molds for the Company's product lines.

     The net cash provided by financing activities reflects the issuance and
sale of the Series C Preferred Stock and the exercises of employee stock
options, offset by the payment of the remaining principal amount of the Notes
and the twenty-four month anniversary installment payment to the former
shareholders of Lamar.

     Demand for the Company's products and technologies has required the
Company to raise additional working capital to support operations. In
addition, the acquisition of Lamar will require the Company to continue to
provide working capital to support Lamar's operations and to repay notes to
the sellers of Lamar. In December 1995, April 1996, August 1996 and June 1998,
the Company raised working capital through the issuance of convertible
subordinated debentures. In June 1999, the Company raised $7.5 million through
the issuance and sale of Series B Preferred Stock. In October 2000, the
Company raised $7.5 million through the issuance and sale of Series C
Preferred Stock. We believe that our current levels of cash, anticipated gross
cash flows from operations, as well as our access to financing sources,
provide sufficient liquidity and capital resources to fund working capital
requirements for at least twelve to eighteen months. Notwithstanding the
significance of sales of Andrea Anti-Noise Products as a percentage of our
total sales during 2000, we cannot assure that demand will continue for these
products or any of our other 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Our principal source of financing 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 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.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and schedule listed in Item 14(a)(1) and (2) are
included in this Report beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                    PART V

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 as to directors and executive
officers is incorporated by reference to the information captioned "Election
of Directors" included in the Company's definitive proxy statement in
connection with the meeting of shareholders to be held on or about June 28,
2001. The information regarding compliance with Section 16 of the Securities
and Exchange Act of 1934 and the Rules promulgated thereunder is incorporated
by reference to the Company's definitive proxy statement in connection
with the meeting of shareholders to be held on or about June 28, 2001.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item 11 is incorporated by reference to
the information captioned "Election of Directors - Executive Compensation"
included in the Company's definitive proxy statement in connection with the
meeting of shareholders to be held on or about June 28, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 is incorporated by reference to
the information captioned "Security Ownership" included in the Company's
definitive proxy statement in connection with the meeting of shareholders to
be held on or about June 28, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     The information required by this Item 13 is incorporated by reference to
the information captioned "Certain Relationships and Related Party
Transactions" included in the Company's definitive proxy statement in
connection with the meeting of shareholders to be held on or about June 28,
2001.

                                    PART VI

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) (1) Financial Statements

     The following financial statements of Andrea Electronics Corporation, the
notes thereto, the related reports thereon of independent public accountants,
and financial statement schedules are filed under Item 8 of this Report.

                                                                           Page
                                                                           ----
     Report of Independent Public Accountants                               F-1

     Consolidated Balance Sheets at December 31, 2000 and 1999              F-2

     Consolidated Statements of Operations for the years ended
     December 31, 2000, 1999 and 1998                                       F-3

     Consolidated Statements of Shareholders' Equity for the
     three years ended December 31, 2000                                    F-4

     Consolidated Statements of Cash Flows for the years ended
     December 31, 2000, 1999 and 1998                                       F-5

     Notes to Consolidated Financial Statements                             F-6

(2)  Index To Financial Statement Schedules

     Report of Independent Public Accountants on Schedule                   S-1

     Schedule II - Valuation and Qualifying Accounts                        S-2

(3)  Exhibits

     See (c) below.

     (b) Reports On Form 8-K

     On October 12, 2000, the Registrant filed a Current Report on Form 8-K
relating to the issuance of its Series C convertible preferred stock.

     (c) Exhibits

                               INDEX TO EXHIBITS

Exhibit
Number      Description
--------    -----------

3.1         Amended and Restated Certificate of Incorporation of Registrant
            (incorporated by reference to Exhibit 3.1 of the Registrant's Form
            10-K for the year ended December 31, 1992)

3.2         Certificate of Amendment of the Restated Certificate of
            Incorporation of Registrant (incorporated by reference to Exhibit
            3.2 of the Registrant's Form 10-K for the year ended December 31,
            1997)

3.3         Certificate of Amendment of the Restated Certificate of
            Incorporation of Registrant (incorporated by reference to Exhibit
            3.1 of the Registrant's Current Report on Form 8-K filed November
            30, 1998)

3.4         Certificate of Amendment to the Certificate of Incorporation of
            the Registrant (incorporated by reference to Exhibit 3.1 of the
            Registrant's Current Report on Form 8-K filed June 22, 1999)

3.5         Certificate of Amendment to the Certificate of Incorporation of
            the Registrant (incorporated by reference to Exhibit 3.1 of the
            Registrant's Current Report on Form 8-K filed October 12, 2000)

3.6         Amended By-Laws of Registrant (incorporated by reference to
            Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed
            November 30, 1998)

4.1         Securities Purchase Agreement, dated as of June 10, 1998, relating
            to the sale of the Registrant's 6% Convertible Notes due June 10,
            2000 (with forms of Note and Registration Rights Agreement
            attached thereto) (incorporated by reference to Exhibit 4.1 of the
            Registrant's Form S-3, No. 333-61115, filed August 10, 1998)

4.2         Securities Purchase Agreement, dated June 11, 1999, by and between
            HFTP Investment L.L.C. and the Registrant (incorporated by
            reference to Exhibit 4.1 of the Registrant's Current Report on
            Form 8-K filed June 22, 1999)

4.3         Registration Rights Agreement, dated June 11, 1999, by and between
            HFTP Investment L.L.C. and the Registrant (incorporated by
            reference to Exhibit 4.2 of the Registrant's Current Report on
            Form 8-K filed June 22, 1999)

4.4         Form of Warrant by and between HFTP Investment L.L.C. and the
            Registrant (incorporated by reference to Exhibit 4.3 of the
            Registrant's Current Report on Form 8-K filed June 22, 1999)

4.5         Securities Purchase Agreement, dated October 5, 2000, by and
            between HFTP Investment L.L.C. and the Registrant (incorporated by
            reference to Exhibit 10.1 of the Registrant's Current Report on
            Form 8-K filed October 12, 2000)

4.6         Registration Rights Agreement, dated October 5, 2000 by and between
            HFTP Investment L.L.C. and the Registrant (incorporated by
            reference to Exhibit 4.1 of the Registrant's Current Report on
            Form 8-K filed October 12, 2000)

4.7         Rights Agreement dated as of April 23, 1999 between the Company and
            Continental Stock Transfer and Trust Company, as Rights Agent,
            including the form of Certificate of Amendment to Certificate of
            Incorporation as Exhibit A, the form of Rights Certificate as
            Exhibit B and the Summary of Rights to Purchase Shares of Series A
            Preferred Stock (incorporated by reference to Exhibit 4.1 of the
            Registrant's Current Report on Form 8-K filed May 7, 1999)

10.1        1991 Performance Equity Plan, as amended (incorporated by reference
            to Exhibit 4 of the Registrant's Registration Statement on Form
            S-8, No. 333-45421, filed February 2, 1998)

10.2        1998 Stock Plan of the Registrant, as amended (incorporated
            by reference to Exhibit B of the Registrant's Definitive
            Proxy Statement in connection with the annual meeting of
            shareholders held on June 22, 2000)

10.3*       Procurement Agreement, dated June 16, 1995, by and between
            International Business Machines Corporation and the Registrant
            (incorporated by reference to Exhibit 10.1 of the Registrant's
            Form 10-Q for the three month period ended June 30, 1995)

10.4        Employment Agreement, dated as of April 12, 2000, by and between
            John N. Andrea and the Registrant (incorporated by reference to
            Exhibit 10.1 of the Registrant's Form 10-Q for the three months
            ended March 31, 2000)

10.5        Employment Agreement, dated as of April 12, 2000, by and between
            Douglas J. Andrea and the Registrant (incorporated by reference to
            Exhibit 10.2 of the Registrant's Form 10-Q for the three months
            ended March 31, 2000)

10.6        Employment Agreement, dated as of January 1, 1998, by and between
            Patrick D. Pilch and the Registrant (incorporated by reference to
            Exhibit 10.8 of the Registrant's Form 10-K for the year ended
            December 31, 1997)

10.7        Employment Agreement, dated as of November 20, 1998, by and
            between Christopher P. Sauvigne and the Registrant (incorporated
            by reference to Exhibit 10.1 of the Registrant's Current Report on
            Form 8-K filed November 30, 1998)

10.8*      Production Procurement Agreement, dated as of June 11, 1997, by
            and between International Business Machines Corporation and the
            Registrant (incorporated by reference to Exhibit 10.9 of the
            Registrant's Form 10-K for the year ended December 31, 1997)

10.9       Revolving Loan and Security Agreement, dated as of September 23,
            1997, by and between IBM Credit Corporation and the Registrant
            (incorporated by reference to Exhibit 10.11 of the Registrant's
            Form 10-K for the year ended December 31, 1997)

10.10       Stock Purchase Agreement, dated April 6, 1998, as amended by
            Amendment No. 1 thereto dated May 5, 1998, relating to the
            purchase of the shares of Lamar Signal Processing, Ltd. (including
            form of Registration Rights Agreement) (incorporated by reference
            to Exhibits 2.1 and 2.2 of the Registrant's Current Report on Form
            8-K filed May 8, 1998)

10.11*      Procurement Agreement, dated as of January 13, 1999, by and
            between the Registrant and Microsoft Corporation (incorporated by
            reference to Exhibit 10.15 of the Registrant's Form 10-K for the
            year ended December 31, 1998)

10.12*      Purchase Agreement, dated as of February 25, 1999, by and between
            the Company and Clarion Corporation of America (incorporated by
            reference to Exhibit 10.16 of the Registrant's Form 10-K for the
            year ended December 31, 1998)

10.13*      Source Code License Agreement, dated as of October 29, 1998,
            between the Company and Intel Corporation (incorporated by
            reference to Exhibit 10.17 of the Registrant's Form 10-K for the
            year ended December 31, 1998)

10.14       Employment Agreement, dated as of April 12, 2000, by and between
            Richard A. Maue and the Registrant (incorporated by reference to
            Exhibit 10.3 of the Registrant's Form 10-Q for the three months
            ended March 31, 2000)

21          Subsidiaries of Registrant

23          Consent of Independent Public Accountants
____________________

  *    Certain portions of this Agreement have been accorded confidential
       treatment.

(d)    FINANCIAL STATEMENT SCHEDULES

           See Item 14(a)(2).


                         REPORT OF INDEPENDENT PUBLIC

                                  ACCOUNTANTS

To Andrea Electronics Corporation:

     We have audited the accompanying consolidated balance sheets of Andrea
Electronics Corporation (a New York corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Andrea Electronics
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.

                                                            ARTHUR ANDERSEN LLP

Melville, New York
February 28, 2001


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                              -----------------------------------
                                          ASSETS                                                   2000               1999
                                          ------                                              ----------------   ----------------
<S>                                                                                          <C>                <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                                  $     9,151,835    $    9,153,148
   Accounts receivable, net of allowance for doubtful accounts of $186,121 and $202,521,
     respectively                                                                                   3,503,713         2,770,703

   Inventories, net                                                                                 6,285,038          7,123,747
   Prepaid expenses and other current assets                                                          221,259            267,817
                                                                                              ----------------   ---------------

                  Total current assets                                                             19,161,845         19,315,415

PROPERTY AND EQUIPMENT, net                                                                         1,393,760          1,930,506
DEFERRED INCOME TAXES                                                                               1,806,615          1,806,615
GOODWILL, net (Note 3)                                                                             13,403,836         14,511,012
OTHER INTANGIBLE ASSETS, net (Note 3)                                                               9,243,917         10,034,865
OTHER ASSETS, net                                                                                   2,262,893          2,254,989
                                                                                              ---------------    ---------------

                  Total assets                                                                $    47,272,866    $    49,853,402
                                                                                              ===============    ===============

                           LIABILITIES AND SHAREHOLDERS' EQUITY
                           ------------------------------------

CURRENT LIABILITIES:
   Trade accounts payable                                                                     $     2,107,660    $     2,134,873
   Current portion of long-term debt (Note 8)                                                         676,046            597,247
   Convertible notes, net                                                                                    -         1,485,077
   Other current liabilities                                                                        1,343,088          1,076,733
                                                                                              ---------------    ---------------

                  Total current liabilities                                                         4,126,794          5,293,930

LONG-TERM DEBT (Note 8)                                                                               195,867            693,362
OTHER LIABILITIES                                                                                            -            14,477
                                                                                              -----------------  ---------------

                  Total liabilities                                                                 4,322,661          6,001,769
                                                                                              ---------------    ---------------

SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized: 1,000
   shares; issued and outstanding: 500 and 750 shares, respectively (Notes 9 and 16);
   liquidation value: $5,000,000
                                                                                                   4,830,060          7,187,077
                                                                                              --------------     --------------

SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized: 1,500
   shares; issued and outstanding: 750 and 0 shares, respectively (Note 10);
   liquidation value: $7,500,000
                                                                                                   7,332,665                  -
                                                                                              --------------     --------------

COMMITMENTS AND CONTINGENCIES (Note 13)

SHAREHOLDERS' EQUITY:
   Preferred stock, $.01 par value; authorized: 4,997,500 shares; none issued and
     outstanding                                                                                           -                   -
   Common stock, $.50 par value; authorized: 35,000,000 shares; issued and outstanding:
     13,897,572 and 13,242,538 shares, respectively                                                 6,948,786          6,621,269
   Additional paid-in capital                                                                      46,711,609         42,990,641
   Accumulated deficit                                                                            (22,872,915)       (12,947,354)
                                                                                              ---------------    ---------------

                  Total shareholders' equity                                                       30,787,480         36,664,556
                                                                                              ---------------    ---------------
                  Total liabilities and shareholders' equity                                  $    47,272,866    $    49,853,402
                                                                                              ===============    ===============
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                        For the Years Ended December 31,
                                                                                ---------------------------------------------------
                                                                                    2000              1999             1998

<S>                                                                            <C>              <C>               <C>
NET SALES                                                                      $   15,567,664    $   17,112,487    $   21,304,570

COST OF SALES                                                                      11,279,649        11,908,751        14,178,871
                                                                               --------------    --------------    --------------

              Gross profit                                                          4,288,015         5,203,736         7,125,699

RESEARCH AND DEVELOPMENT EXPENSES                                                   4,694,116         3,399,666         2,016,684

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES                                        9,373,025         8,954,805        13,002,959
                                                                               --------------    --------------    --------------

              Loss from operations                                                 (9,779,126)       (7,150,735)       (7,893,944)
                                                                               ---------------   --------------    --------------

OTHER INCOME (EXPENSE), net:
   Interest income                                                                    416,393           246,882           233,346
   Interest expense                                                                  (233,880)         (306,843)         (710,324)
   Rent and miscellaneous income                                                       22,261            33,703         1,924,967
                                                                               --------------    --------------    --------------
                                                                                      204,774           (26,258)        1,447,989
                                                                               --------------    --------------    --------------

LOSS BEFORE PROVISION FOR INCOME TAXES                                             (9,574,352)       (7,176,993)       (6,445,955)

PROVISION FOR INCOME TAXES (Note 12)                                                         -           -                      -
                                                                               ----------------  --------------    --------------

              Net loss                                                             (9,574,352)       (7,176,993)       (6,445,955)
                                                                               ===============   ==============    ==============

PREFERRED STOCK DIVIDENDS                                                             351,209           195,843                 -
                                                                               --------------    --------------    --------------

              Net loss attributable to common shareholders                     $   (9,925,561)   $   (7,372,836)   $   (6,445,955)
                                                                               ===============   ==============    ==============

PER SHARE INFORMATION (Note 4):

Net Loss Per Share - Basic and Diluted                                         $        (.72)    $        (.56)    $        (.61)
                                                                               ==============    =============     =============

Shares used in computing net loss per share - Basic and Diluted                    13,748,945        13,229,559        10,614,237
                                                                               ==============    ==============    ==============
</TABLE>


The accompanying notes are an integral part of these consolidated statements.


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2000




<TABLE>
<CAPTION>
                                                                                    Additional                           Total
                                                       Shares         Common         Paid-In        Accumulated       Shareholders'
                                                     Outstanding      Stock          Capital          Deficit           Equity
                                                     -----------      ------------   ------------   ------------     -------------
<S>                                                    <C>            <C>           <C>             <C>              <C>
BALANCE, December 31, 1997                             8,706,692      $ 4,353,346   $  9,881,915    $     871,437    $  15,106,698

 Conversion of convertible debt                        2,334,846        1,167,423      9,211,993              -         10,379,416
 Exercise of stock options, net of related costs         350,500          175,250        934,710           -            1,109,960
 Issuance of common stock for acquisition of
  subsidiary (Note 3)                                  1,818,000          909,000     22,519,781              -         23,428,781
  Net loss                                                 -                 -             -           (6,445,955)      (6,445,955)
                                                      -----------      -----------   ------------    -------------    -------------

BALANCE, December 31, 1998                            13,210,038        6,605,019     42,548,399       (5,574,518)      43,578,900

 Exercise of stock options, net of related costs          32,500           16,250         93,785              -            110,035
 Issuance of warrants in connection with
  Series B Redeemable Convertible Preferred
  Stock (Note 9)                                           -                 -           348,457              -            348,457
   Preferred stock dividends                               -                 -             -             (195,843)        (195,843)
   Net loss                                                -                 -             -           (7,176,993)      (7,176,993)
                                                      -----------      ------------  ------------     -------------   -------------

BALANCE, December 31, 1999                            13,242,538        6,621,269     42,990,641      (12,947,354)      36,664,556

 Conversion of Series B Redeemable Convertible
  Preferred Stock (Note 9)                               371,909          185,955      2,231,447             -           2,417,402
 Exercise of stock options, net of related costs         283,125          141,562      1,489,521             -           1,631,083
 Preferred stock dividends                                 -                 -             -             (351,209)        (351,209)
   Net loss                                                -                 -             -           (9,574,352)      (9,574,352)
                                                      -----------      ------------   ------------     -------------  -------------

BALANCE, December 31, 2000                            13,897,572     $  6,948,786   $ 46,711,609    $ (22,872,915)   $  30,787,480
                                                      ===========      ============   ============     =============  =============
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                            For the Years Ended December 31,
                                                                                    -----------------------------------------------
                                                                                         2000            1999            1998
                                                                                     ------------    ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                  <C>             <C>             <C>
   Net loss                                                                           $ (9,574,352)   $ (7,176,993)   $ (6,445,955)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Non-cash interest expense                                                              39,964          93,023         646,650
     Depreciation and amortization                                                       3,644,392       3,390,987       2,594,519
     Gain on sale of building                                                                  -               -        (1,864,767)
     (Increase) Decrease in:
       Accounts receivable, net                                                           (733,010)      2,097,079        (278,132)
       Inventories, net                                                                    838,709         890,576      (2,218,773)
       Prepaid expenses and other current assets                                          (287,544)       (242,559)       (128,400)
       Other assets                                                                       (257,657)       (563,619)       (312,350)
     Increase (Decrease) in:
       Trade accounts payable                                                              (27,213)        (87,039)      1,154,192
       Other current liabilities                                                          (323,798)       (947,508)       (106,474)
                                                                                      ------------- --------------    ------------
              Net cash used in operating activities                                     (6,680,509)     (2,546,053)     (6,959,490)
                                                                                      ------------- --------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of marketable securities                                                 -               -           102,717
   Acquisition of business, net of cash acquired                                               -               -          (947,276)
   Proceeds from sale of building                                                              -               -         2,282,563
   Purchases of property and equipment                                                    (369,970)       (834,135)     (1,710,389)
                                                                                      ------------- --------------    ------------
              Net cash used in investing activities                                       (369,970)       (834,135)       (272,385)
                                                                                      -------------   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payment of debt obligations (Notes 3 and 8)                                            (596,840)       (514,122)       (500,000)
   Proceeds from Series B Redeemable Convertible Preferred Stock (Note 9)                      -         7,500,000             -
   Proceeds from Series C Redeemable Convertible Preferred Stock, net of costs
     (Note 10)                                                                                                 -               -
                                                                                         7,500,000

   Proceeds from convertible notes                                                             -               -        10,000,000
   Payment of convertible notes                                                         (1,485,077)            -               -
   Proceeds from issuance of common stock upon exercise of stock options, net of
     related costs                                                                       1,631,083         110,035       1,109,960
                                                                                      ------------    ------------    ------------
              Net cash provided by financing activities                                  7,049,166       7,095,913      10,609,960
                                                                                      ------------    ------------    ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                        (1,313)      3,715,725       3,378,085

CASH AND CASH EQUIVALENTS, beginning of year                                             9,153,148       5,437,423       2,059,338
                                                                                      ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of year                                                $  9,151,835    $  9,153,148    $  5,437,423
                                                                                      ============    ============    ============

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

   Conversion of convertible debentures and related accrued interest into common
     stock                                                                            $       -       $       -       $ 10,379,416
                                                                                      ============    ============    ============
   Conversion of Series B Redeemable Convertible Preferred Stock and
related accrued interest into common stock (Note 9)                                   $  2,417,402    $       -       $       -
                                                                                      ============    ============    ============
   Issuance of common stock for acquisition (Note 3)                                  $       -               -       $ 23,428,781
                                                                                      ============    ============    ============
   Issuance of notes payable for acquisition (Notes 3 and 8)                          $       -               -       $  1,672,212
                                                                                      ============    ============    ============
   Issuance of warrants in connection with Series B Redeemable Convertible
     Preferred Stock (Note 9)                                                         $       -       $    348,457    $        -
                                                                                      ============    ============    =============
Cash paid for:
   Interest                                                                           $    212,859    $     49,601    $      3,261
                                                                                      ============    ============    ============
   Income taxes                                                                       $     47,675    $     29,479    $     32,503
                                                                                      ============    ============    ============
</TABLE>


The accompanying notes are an integral part of these consolidated statements.


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000

1.   ORGANIZATION AND BUSINESS
     -------------------------

     Andrea Electronics Corporation, incorporated in the State of New York in
1934, (together with its subsidiaries, "Andrea") has been engaged in the
electronic communications industry since its inception. Andrea is presently
focused on the development, manufacture and marketing of its Andrea Anti-Noise
family of electronic headsets and handsets with noise canceling and noise
reducing properties. Noise cancellation enhances voice-activated computing,
computerized speech recognition, and computer and Internet telephony. In
addition, Andrea is currently developing and marketing a new line of digital
signal processing ("DSP") products to further its role in technology enhanced
communications, and in May 1998, acquired Lamar Signal Processing, Ltd.
("Lamar"), an Israeli corporation engaged in the development of DSP, noise
cancellation microphone solutions (Note 3). Prior to Andrea 's entry into the
voice-activated computing market in the 1990s, its primary business was
selling intercom systems for military and industrial use. Andrea continues to
manufacture for these systems and is seeking to apply its knowledge of the
military and industrial markets to develop applications of its Andrea
Anti-Noise technologies for these markets.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

Principles of Consolidation

     The financial statements include the accounts of Andrea and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

Cash and Cash Equivalents

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

Concentration of Credit Risk

     Andrea is a manufacturer of audio communications equipment for several
industries. Andrea primarily generates sales from its noise canceling and
active noise canceling products as well as through sales to the federal
government. Sales of noise canceling and active noise canceling products were
significant to one customer and its affiliates, accounting for approximately
37% and 43% of total accounts receivable at December 31, 2000 and 1999,
respectively, and approximately 44%, 49% and 61% of the total sales for 2000,
1999 and 1998, respectively. Sales to the federal government and related
subcontractors aggregated approximately 25% and 19% of total accounts
receivable at December 31, 2000 and 1999, respectively, and approximately 18%,
23% and 19% of the total sales for 2000, 1999 and 1998, respectively.

Inventories

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

Property and Equipment

     Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets, which are
as follows:

     Leasehold improvements      shorter of lease term or estimated useful life
     Machinery and equipment     3 - 7 years

     Expenditures for maintenance and repairs that do not materially prolong
the normal useful life of an asset are charged to operations as incurred.
Improvements that substantially extend the useful lives of the assets are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the accounts and
the resulting gain or loss, if any, is reflected in the statement of
operations.

Intangible Assets

     Patents and trademarks associated with Andrea 's proprietary technology
are carried at cost less accumulated amortization, which is calculated on a
straight-line basis over the estimated useful lives of the assets, not to
exceed 17 years. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. Patents and trademarks approximated $1,286,000
and $1,181,000, net of accumulated amortization of $181,000 and $32,000, at
December 31, 2000 and 1999, respectively, and are included in other assets on
the accompanying consolidated balance sheets. Goodwill and other intangible
assets associated with Andrea 's acquisition (Note 3) are carried at cost less
accumulated amortization, which is calculated on a straight-line basis over 7-
15 years.

Long-Lived Assets

     Andrea accounts for its long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" for purposes of
determining and measuring impairment of its long-lived assets (primarily
intangible assets). Andrea's policy is to periodically review the value
assigned to its enterprise level goodwill and other intangible assets,
resulting from its acquisition of Lamar (Note 3) to determine if it has been
permanently impaired by adverse conditions which may affect Andrea or Lamar.
If Andrea identifies a permanent impairment such that the carrying amount of
Andrea's enterprise level goodwill or other intangible assets is not
recoverable using the sum of an undiscounted cash flow projection (gross
margin dollars from product sales), a new cost basis for the impaired asset(s)
will be established. This new cost basis will be net of any recorded
impairment. Considerable management judgment is necessary to estimate
undiscounted future operating cash flows and, accordingly, actual results
could vary significantly from such estimates. As of December 31, 2000,
management believes that no impairment exists for any of its long-lived
assets.

Revenue Recognition

     Revenue is recognized upon shipment, acceptance of goods and
collectibility considerations of the product. Andrea reports its sales
levels on a net sales basis, with net sales being computed by deducting from
gross sales the amount of actual sales returns and the amount of reserves
established for anticipated sales returns.

Barter Transactions

     Andrea records barter transactions at the estimated fair market value of
the services received. Deferred charges relating to a barter transaction
approximated $670,000 and $770,000 at December 31, 2000 and 1999,
respectively, and is included in other assets. The deferred charges are being
amortized over the lesser of the period of benefit or the program period, not
to exceed five years. Andrea did not engage in any barter transactions during
2000, 1999 or 1998.

Income Taxes

     Andrea accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This pronouncement established financial
accounting and reporting standards for the effects of income taxes that result
from Andrea 's activities during the current and preceding years. It requires
an asset and liability approach for financial accounting and reporting for
income taxes.

     The provision for income taxes is based upon income, if any, after
adjustment for those permanent items that are not considered in the
determination of taxable income. Deferred taxes result when Andrea recognizes
revenue or expenses for income tax purposes in a different year than for
financial reporting purposes (Note 12).

Stock-Based Compensation

     Andrea complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and Financial Accounting Standards Board Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation " while providing the
required pro forma disclosures as if the fair value method had been applied
(Note 14).

Research and Development

     Andrea expenses all research and development costs as incurred.

Advertising Expenses

     In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs", Andrea charges all media costs of newspaper and magazine
advertisements as well as trade show costs to the consolidated statements of
operations when advertisements are run and trade shows are attended. Prepaid
advertising at December 31, 2000 and 1999, which primarily represents costs
for media and trade show services purchased but not yet incurred, is included
in prepaid expenses and other current assets in the accompanying consolidated
balance sheets. Total advertising and marketing expenses for the years ended
December 31, 2000, 1999 and 1998 approximated $500,000, $500,000 and $1.2
million, respectively.

Fair Value of Financial Instruments

     Andrea calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than the book value of those financial instruments. When
the fair value approximates book value, no additional disclosure is made.
Andrea uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, Andrea uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. As of December 31,
2000 and 1999, the carrying value of all financial instruments approximated
fair value.

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 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. 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.

Derivative Instruments

     In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No.
137 and SFAS No. 138 is effective for all fiscal years beginning after June
15, 2000 and will not require retroactive restatement of prior period
financial statements. This statement 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. While Andrea operates in international
markets, it does so presently without the use of derivative instruments or
engagement in hedging activities and, accordingly, the adoption of this
standard by Andrea in the first quarter of 2001 did not have a material effect
on its consolidated financial statements.

Reclassifications

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

Use of Estimates

     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 amount of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.

3.       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 $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 is payable in the form
of a promissory note 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:

                            Net Value at       Net Value at    Estimated Useful
                         December 31, 2000   December 31, 1999         Life
                         -----------------   ----------------  ----------------

  Goodwill                       $13,403,836      $14,511,012       15 years

Other Intangible Assets:
   Core Technology               $ 9,060,694      $ 9,809,119       15 years

   Workforce in Place                183,223          225,746        7 years
Total Other Intangible Assets    -----------      -----------
                                 $ 9,243,917      $10,034,865
                                 ===========      ===========

     The pro forma results listed below, for the year ended December 31, 1998,
reflect pro forma adjustments, consisting primarily of amortization of
goodwill and interest expense on the discounted value of the $2,000,000 in
promissory notes, assuming the acquisition occurred at the beginning of the
period presented. Pro forma sales amounts would not be materially different
from the historical results reported for 1998.

                                                     For the Year Ended
                                                        December 31,
                                                     ------------------
                                                            1998
                                                     ------------------
      Net loss                                           $(7,143,660)
      Basic and Diluted loss per share                         $(.64)
      Shares used in computing net loss
            per share: Basic and Diluted                   11,236,840


4.   NET LOSS PER SHARE
     ------------------

     Andrea follows the provisions of SFAS No. 128, "Earnings Per Share". In
accordance with this statement, 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 Year Ending December 31,
                                                                             ---------------------------------------------------
                                                                                   2000              1999             1998
                                                                             ---------------   ---------------    --------------
<S>                                                                          <C>               <C>               <C>
   Numerator:
      Net loss                                                                $   (9,574,352)   $   (7,176,993)   $   (6,445,955)
      Less: Preferred Stock dividends                                                351,209           195,843            -
                                                                             ---------------   ---------------    --------------
         Net loss attributable to common shareholders                         $   (9,925,561)   $   (7,372,836)   $   (6,445,955)
                                                                             ===============    ==============    ==============
   Denominator:
      Weighted-average common shares outstanding - Basic and
                 Diluted *                                                        13,748,945        13,229,559        10,614,231
                                                                             ===============   ===============   ===============
   Net loss per share - Basic and Diluted                                     $        (.72)    $        (.56)    $        (.61)
                                                                             ===============    ==============    ==============
*    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.
</TABLE>


5.   INVENTORIES, net
     ----------------

     Inventories, net, consist of the following:

                                                            December 31,
                                              ---------------------------------
                                                    2000               1999
                                              --------------     --------------

     Raw materials                            $    2,476,881     $    2,631,403
     Work-in-process                                 842,267            461,250
     Finished goods                                3,447,901          4,411,605
                                              --------------     --------------
                                                   6,767,049          7,504,258

     Less: reserve for obsolescence                  482,011            380,511
                                              --------------     --------------
                                              $    6,285,038     $    7,123,747
                                              ==============     ==============


6.   PROPERTY AND EQUIPMENT, net
     ---------------------------

     Property and equipment, net, consists of the following:

                                                       December 31,
                                         --------------------------------
                                              2000               1999
                                        -------------      -------------

     Leasehold improvements                $   79,485         $   79,485
     Machinery and equipment                4,377,987          4,008,014
                                        -------------      -------------
                                            4,457,472          4,087,499

Less: accumulated depreciation
      and amortization                     (3,063,712)        (2,156,993)
                                        -------------      -------------
                                        $   1,393,760      $   1,930,506
                                        =============      =============


     Depreciation and amortization of property and equipment was $906,719,
$723,705 and $552,556 for the three years ended December 31, 2000, 1999 and
1998, respectively.

     During 1998, Andrea sold its primary operating facility in Long Island
City, New York. Andrea received approximately $2,200,000 in cash paid at the
closing and $200,000 in cash in an escrow account (the "Escrow Funds"). The
gain on the sale of the building was $1,864,767, which was included in rent
and miscellaneous income in the accompanying consolidated statement of
operations for the year ended December 31, 1998. The Escrow Funds are governed
by an escrow agreement whereby the buyer can claim certain expenses, as
defined. The Escrow Funds, which are included in other assets at December 31,
2000 and 1999, will remain with the escrow agent until such time as certain
conditions are met, as defined.

7.   OTHER CURRENT LIABILITIES
     -------------------------

     Other current liabilities consists of the following:

                                                       December 31,
                                            ---------------------------------
                                                   2000              1999
                                            --------------     --------------

        Accrued professional fees           $      857,495     $     612,619
        Accrued interest and dividends             393,015           145,273
        Accrued other                               92,578           318,841
                                            --------------     --------------
                                            $    1,343,088     $   1,076,733
                                            ==============     ==============


8.   LONG-TERM DEBT
     --------------

     Long-term debt consists of the following:

                                                          December 31,
                                            -----------------------------------
                                                     2000             1999
                                             -------------      ------------
        Notes payable to sellers, net (a)    $     484,997      $    826,330
        Bank note (b)                              386,916           464,279
                                             -------------      ------------
                                                   871,913         1,290,609

        Less: Current portion                     (676,046)         (597,247)
                                             -------------      -------------
                                             $     195,867      $    693,362
                                             =============      =============

(a)  As part of the aggregate purchase price of the Acquisition (Note 3),
     Andrea issued $2,000,000 in non-interest bearing promissory notes (the
     "Promissory Notes") to the former shareholders of Lamar, of which
     $1,500,000 has been paid as of December 31, 2000. In accordance with the
     terms of the Acquisition, the remaining obligation is payable on the
     thirty-six month anniversary of the closing date (May 5, 2001). The
     Promissory Notes are recorded net of an unaccreted discount of $15,003 at
     December 31, 2000, which discount reflects a 10.5% effective interest
     rate.

(b)  In connection with the Acquisition (Note 3), Andrea assumed the
     outstanding obligations of Lamar which, at December 31, 2000, includes
     Israeli government-guaranteed loans in the amount of $386,916, bearing
     interest at 8.7% per annum. These loans are part of a $1,000,000
     government-guaranteed credit facility approved for Lamar, which is
     subject to the implementation of an investment program in accordance with
     Israeli law. The approval associated with the investment program requires
     certain conditions to be met, as defined. In the event Lamar fails to
     meet the conditions, immediate repayment may be required. At December 31,
     2000, Andrea's management believes that Lamar was in compliance with
     those conditions.


Scheduled maturities of long-term debt are as follows:

       2001                                             $    691,049
       2002                                                  158,916
       2003                                                   20,428
       2004                                                   16,523
                                                        ----------------
                                                             886,916

Less:  Imputed interest to be amortized in 2001               15,003
       Current portion                                       676,046
                                                        ----------------
             Total                                      $    195,867
                                                        ================

9.   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 Series B Preferred Stock becomes convertible into Andrea 's Common
Stock according to a vesting schedule, with 12.5% of the shares having become
convertible on October 17, 1999, 12.5% of the shares having become convertible
on November 17, 1999, 12.5% of the shares having become convertible on
December 17, 1999, and an additional 12.5% becoming convertible at the end of
next five succeeding 30-day periods. The vesting schedule will lapse for
conversions occurring at the Maximum Conversion Price and upon the occurrence
of certain extraordinary events, as defined. Any unconverted Series B
Preferred Stock that remains outstanding on June 18, 2004 will automatically
convert into Andrea 's Common Stock. Andrea has reserved 2,450,000 of Common
Stock for issuance upon conversion of the shares of the Series B Preferred
Stock.

     Upon the announcement of a major transaction, as defined, 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 and 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 and 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.

     As of December 31, 2000, the Series B Preferred Stock is recorded net of
the unaccreted present value of the discount related to the warrants of
$169,940. Due to the redemption features described above, the Series B
Preferred Stock is presented outside of stockholders' equity in the
accompanying consolidated balance sheet. Subsequent to December 31, 2000, 100
and 52 shares, respectively, of the Series B Preferred Stock, together with
related accrued dividends, were converted into 566,824 and 294,961,
respectively, shares of Common Stock (Note 16).

10.  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 initially equal to 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 will be reset every six months thereafter to the lesser of
the then existing conversion price and 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 and (iii) the closing bid price on the day of conversion, subject in
each case to certain adjustments. The 5% dividend amount may, at the option of
Andrea, be paid in cash or in shares of Andrea 's Common Stock. The Series C
Preferred Stock is convertible or redeemable at maturity by Andrea, based upon
certain circumstances at that time, and is redeemable by the holder upon
certain events. Andrea has the right to require the conversion of the Series C
Preferred Stock after one year upon the satisfaction of certain conditions.
During the eighteen-month period beginning on October 10, 2000, the investors
may exercise an option to purchase up to an additional $2.5 million of Andrea's
Series C Preferred Stock, subject to the closing bid price of Andrea's
Common Stock being no less than $7.0565 as of the date of such exercise. These
additional Preferred Shares would be identical in all material respects to
those purchased at Initial Issuance and, consequently, a contingent beneficial
conversion feature exists which may result in the Investor obtaining a
conversion price for such additional Preferred Shares which, at the time of
the exercise of the option, could be less than the market price of the Common
Stock at such date. In accordance with the provisions of Emerging Issues Task
Force Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios", Andrea may
be required to record, at the time of exercise for such additional Preferred
Shares, a charge to accumulated deficit as a result of this beneficial
conversion right.


     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 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.


     As of December 31, 2000, the Series C Preferred Stock is recorded net of
unaccreted costs of $167,335. Due to the redemption features described above,
the Series C Preferred Stock is presented outside of stockholders' equity in
the accompanying consolidated balance sheet.

11.  RETIREMENT PLAN
     ---------------

     Andrea has a defined contribution profit sharing plan that is qualified
under Section 401(k) of the Internal Revenue Code and is available to
substantially all of its employees. Andrea 's contributions, which serve to
match a portion of participant contributions, were $67,118, $153,360 and
$152,487 for the years ended December 31, 2000, 1999 and 1998, respectively.

12.  INCOME TAXES
     ------------

Income tax provision (benefit) consists of the following:

                                               Year Ended December 31,
                                      -----------------------------------------
                                         2000          1999             1998
                                    ------------  --------------  -------------
       Federal:
          Current                   $         -   $         -     $          -
          Deferred                   (2,940,564)   (2,447,011)      (2,191,625)

       State and Local:
          Current                             -             -                -
          Deferred                     (432,436)     (359,855)        (322,298)
          Adjustment to
            valuation allowance
            related to net
            deferred tax assets       3,373,000   $ 2,806,866        2,513,923
                                    -----------   -----------     -------------
                                    $         -   $         -     $          -
                                    ===========   ===========     =============


A reconciliation between the effective rate for income taxes and the amount
computed by applying the statutory Federal income tax rate to loss before
income taxes is as follows:

                                              Year Ended December 31,
                                   --------------------------------------------
                                        2000             1999              1998
                                   --------------------------------------------
Statutory rate                           34%               34%             34%
State and local taxes                     5%                5%              5%
Change in valuation allowance
  for net deferred tax assets           (39%)             (39%)           (39%)
                                   -----------       -----------     -----------
                                          -                 -               -
                                   ===========       ===========     ===========


The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 2000 and 1999, are as
follows:

                                                        2000            1999
                                                    -------------  ------------
  Long-term deferred tax assets:
     Reserve for accrued expenses and trade credit  $   490,000    $   433,000
     Allowance for doubtful accounts                     73,000         79,000
     Depreciation                                            -         114,000
     Reserve for obsolescence                           188,000         98,000
     NOL carryforward                                12,386,000      8,547,000
                                                    -----------    -----------
                                                     13,137,000      9,271,000
       Less: valuation allowance                    (11,330,385)    (7,464,385)
                                                    -----------    ------------
           Deferred tax asset, net                  $ 1,806,615    $ 1,806,615
                                                    ===========    ===========


     As of December 31, 2000, Andrea had net operating loss and credit
carryforwards of approximately $34,000,000 expiring in varying amounts
beginning in 2006 through 2020. The determination that the net deferred tax
asset of $1,806,615 at December 31, 2000 and 1999 is realizable, is based on
Andrea 's expectations of future earnings. Included in the remaining fully
reserved deferred tax asset of approximately $11.3 million, is approximately
$5.0 million is related to tax benefits associated with the exercise of stock
options, which will not result in a tax benefit in the consolidated statement
of operations in future periods but, rather, will result in further increases
to additional paid-in capital, if and when realized.

13.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

Leases

     Andrea 's corporate headquarters is located in Melville, New York, where
Andrea leases space for manufacturing, research and development, sales and
executive offices from an unrelated party. The lease is for approximately
40,000 square feet and expires in June 2008. Rent expense under this operating
lease was approximately $540,000, $507,000 and $145,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, the
minimum future lease commitments, under this lease and all other
noncancellable operating leases, are as follows:

       2001                                                  $  837,214
       2002                                                     777,292
       2003                                                     759,849
       2004                                                     754,309
       2005                                                     692,208
       Thereafter                                             1,384,416
                                                             ----------
       Total                                                 $5,205,288
                                                             ==========

Employment Agreements

     Andrea has entered into employment agreements with the officers of the
Company. The future minimum commitments under these agreements are as follows:

                                 Number of        Aggregate Annual
             Fiscal Year        Individuals            Amount
             -----------        -----------       ----------------
                 2001                4                $1,225,000
                 2002                4                 1,094,000
                 2003                4                   175,000

Legal Proceedings

     On November 17, 1998, a complaint was filed against Andrea in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. ("NCT";
formerly Noise Cancellation Technologies, Inc.) and NCT Hearing Products,
Inc., one of NCT's subsidiaries. The complaint involves two of Andrea 's
patents relating to certain active noise reduction technology. Andrea does not
currently derive significant sales or licensing revenue from this technology.
The complaint requests a declaration that the two patents are invalid and
unenforceable and that NCT's products do not infringe the patents. The
complaint alleges that Andrea has engaged in unfair competition by
misrepresenting the scope of the two patents, tortuously interfering with
prospective contractual rights between NCT and its existing and potential
customers, making false and disparaging statements about NCT and its products,
and falsely advertising certain of Andrea 's technology. The complaint seeks
to enjoin Andrea from engaging in these alleged activities and seeks
compensatory damages of not less than $5,000,000, punitive damages of not less
than $50,000,000 and plaintiffs' costs and attorneys' fees. Andrea filed and
served an answer to the NCT complaint, denying the allegations and asserting
various affirmative defenses and counterclaims. Andrea's counterclaims allege
that NCT has willfully infringed the two patents, and that NCT has engaged in
trademark infringement, false designation of origin, and unfair competition
with respect to Andrea 's mark ANR READY. The counterclaims seek injunctive
relief with respect to the allegations of patent infringement, trademark
infringement, false designation of origin and unfair competition. Andrea also
seeks exemplary and punitive damages, prejudgment interest on all damages,
costs, reasonable attorneys' fees and expenses. Andrea believes that, based
upon the advice of outside legal counsel, NCT's allegations are without merit,
and we intend to vigorously defend the claims described above.

     In March 1999, Andrea was notified about a claim filed by the owners of
property adjoining Andrea's Long Island City facility with respect to certain
environmental matters. In September 1999, a complaint was filed in the Supreme
Court of the State of New York, County of Nassau seeking $1 million in
compensatory damages from Andrea. While no assurance can be given as to the
ultimate outcome of this matter, Andrea believes, based on the advice of
outside legal counsel, that the claim is without merit and is vigorously
defending itself.

     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.  STOCK PLANS
     -----------

     In 1991, the Board of Directors of Andrea (the "Board") adopted the 1991
Performance Equity Plan ("1991 Plan"), which was approved by the shareholders.
The 1991 Plan, as amended, authorizes the granting of awards, the exercise of
which would allow up to an aggregate of 2,000,000 shares of Andrea 's Common
Stock to be acquired by the holders of those awards. The awards can take the
form of stock options, stock appreciation rights, restricted stock, deferred
stock, stock reload options or other stock-based awards. Awards may be granted
to key employees, officers, directors and consultants. Stock options granted
to employees and directors under the 1991 Plan were granted for terms of up to
10 years at an exercise price equal to the market value at the date of grant
and are exercisable in whole or in part at stated times from the date of grant
up to four years from the date of grant.

     In 1998, the Board adopted the 1998 Stock Option Plan ("1998 Plan"),
which was subsequently approved by the shareholders. The 1998 Plan, as
amended, authorizes the granting of awards, the exercise of which would allow
up to an aggregate of 3,675,000 shares of Andrea 's Common Stock to be
acquired by the holders of those awards. Similar to the 1991 Plan, the awards
can take the form of stock options, stock appreciation rights, restricted
stock, deferred stock, stock reload options or other stock-based awards.
Awards may be granted to key employees, officers, directors and consultants.

     Andrea accounts for stock-based awards granted to employees and directors
under APB Opinion No. 25, under which no compensation cost has been recognized
for stock options granted at market value (Note 2). Had compensation cost for
these stock options been determined consistent with SFAS No. 123, Andrea 's
net loss and net loss per share would have changed to the following pro forma
amounts:


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                          -------------------------------------------------
                                                               2000              1999              1998
                                                          -------------     -------------     -------------
 <S>                                                     <C>               <C>                <C>
  Net loss attributable to common
   shareholders:                          As Reported     $ (9,925,561)     $ (7,372,836)     $ (6,445,955)
                                          Pro Forma       $(11,954,665)     $(11,338,178)     $(11,378,844)

  Basic and diluted net loss per share:   As Reported     $       (.72)     $       (.56)     $       (.61)
                                          Pro Forma       $       (.87)     $       (.86)     $      (1.07)
</TABLE>

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Option activity during 2000, 1999 and 1998 is
summarized as follows:


<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                             -------------------------------------------------------------------------------------
                                                        2000                         1999                        1998
                                             ---------------------------- --------------------------- ----------------------------
                                                              Weighted                    Weighted                     Weighted
                                                              Average                     Average                      Average
                                                              Exercise                    Exercise                     Exercise
                                                Shares         Price         Shares        Price         Shares         Price
                                               ---------      --------      ----------    --------     ----------      --------
<S>                                           <C>            <C>           <C>            <C>         <C>             <C>
Outstanding at beginning of period             4,300,000       $ 8.04       3,082,500      $ 9.06      1,824,750        $ 5.57
   Granted                                     1,233,000         6.27       1,345,000        5.42      1,637,000         11.73
   Exercised                                    (283,125)        5.82         (32,500)       5.67       (351,000)         3.49
   Forfeited                                    (225,625)       12.01         (65,000)      10.93              -           -
   Cancelled                                     (59,375)        9.92         (30,000)       9.52        (28,250)         5.44
                                                 --------                    --------                   --------

Outstanding at end of period                   4,964,875         7.57       4,300,000        8.04      3,082,500          9.06
                                               =========                    =========                  =========

Exercisable at end of period                   2,157,250         7.85       1,439,750        7.34        753,500          5.45
                                               =========                    =========                  =========
Weighted-average fair value of options
   granted                                                     $ 4.39                      $ 4.14                       $ 9.55
                                                               ======                      ======                       ======
</TABLE>


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


                                  2000             1999            1998
                                --------         --------        --------
  Expected life in years            5               6               6.5
  Risk-free interest rates        6.19%           5.92%            5.32%
  Volatility                       83%             77%              96%
  Dividend yield                    0%              0%               0%


The following table summarizes information about stock options outstanding at
December 31, 2000:


<TABLE>
<CAPTION>
                                                      Options Outstanding                           Options Exercisable
                                      ----------------------------------------------------    --------------------------------
                                                           Weighted-          Weighted-                        Weighted-
                                                            Average            Average                          Average
                                          Number           Remaining          Exercise         Number           Exercise
      Range of Exercise Prices          Outstanding     Contractual Life        Price        Exercisable         Price
----------------------------------    ----------------  ----------------    -----------    ---------------   ---------------
<S>                                    <C>                   <C>             <C>              <C>              <C>
   $  0.68    to  $  1.01                 147,500             1.51            $   0.68           147,500        $    0.68
      2.33    to     3.49                  10,000             9.93            $   3.30           -              $      -
      3.50    to     5.25                  15,000             5.58            $   5.00            15,000        $    5.00
      5.26    to     7.89               3,302,000             8.09            $   5.93         1,152,875        $    5.64
      7.90    to    11.84                 689,125             7.59            $   8.87           370,625        $    8.84
     11.85    to    17.78                 801,250             7.27            $  14.59           471,250        $   14.81
     --------------------            ------------------      ------         -----------       ---------------   --------------
   $  0.68    to  $ 17.78               4,964,875             7.69            $   7.57         2,157,250        $    7.85
     ====================            ------------------      ======         ========--=       ---------------   --------------
     ====================            ------------------      ======         ========--=       ---------------   --------------
</TABLE>

15.  SEGMENT INFORMATION
     -------------------

         Andrea follows the provisions of SFAS No. 131,"Disclosures about
Segments of an Enterprise and Related Information." Reportable operating
segments are determined based on Andrea 's management approach. The management
approach, as defined by SFAS No. 131, is based on the way that the chief
operating decision-maker organizes the segments within an enterprise for
making operating decisions and assessing performance. While Andrea 's results
of operations are primarily reviewed on a consolidated basis, the chief
operating decision-maker also manages the enterprise in three segments: (i)
Andrea Anti-Noise Products, (ii) Aircraft Communication Products, and (iii)
Andrea DSP Microphone and Software Products. Our Andrea-Anti-Noise Products
include our noise cancellation and active noise cancellation computer headset
products and related computer peripheral products. Our Andrea DSP Microphone
and Software Products primarily include products based on the use of some, or
all of the following technologies: Andrea Digital Super Directional Array
microphone technology (DSDA), Andrea Direction Finding and Tracking Array
microphone technology (DFTA), Andrea PureAudio noise filtering technology, and
Andrea EchoStop, an advanced acoustic echo cancellation technology. The
following represents selected consolidated financial information for Andrea's
segments for the years ended December 31, 2000, 1999 and 1998:


<TABLE>
<CAPTION>
                                                                    Aircraft            Andrea DSP
                                             Andrea Anti-        Communication        Microphone and
           Segment Data                      Noise Products          Products         Software Products             Total 2000
-------------------------------------    --------------------  -----------------  -----------------------  -----------------------
<S>                                         <C>                  <C>                  <C>                     <C>
    Net sales                                 $  11,974,410       $  2,923,031         $    670,223            $  15,567,664
    Income (loss) from operations                  (426,947)           636,060           (9,988,239)              (9,779,126)
    Depreciation                                    409,541            193,197              275,426                  878,164

                                                                     Aircraft              Andrea DSP
                                             Andrea Anti-         Communication           Microphone and
                                            Noise Products           Products            Software Products        Total 1999
-------------------------------------    --------------------  -----------------  -----------------------  -----------------------
    Net sales                                 $  13,310,138       $  3,802,349         $        -              $  17,112,487
    Income (loss) from operations                 1,312,588            591,502           (9,054,825)              (7,150,735)
    Depreciation                                    274,058            123,503              486,165                  883,726

                                                                     Aircraft              Andrea DSP
                                             Andrea Anti-         Communication           Microphone and
                                            Noise Products           Products            Software Products        Total 1999
-------------------------------------    --------------------  -----------------  -----------------------  -----------------------
    Net sales                                 $  17,266,874       $  4,037,696         $       -               $  21,304,570
    Income (loss) from operations                (8,418,844)           524,900                 -                  (7,893,944)
    Depreciation                                  1,096,229             93,683                 -                   1,189,912
</TABLE>

Management of Andrea assesses assets and non-operating income statement data
on a consolidated basis only, and Andrea has not restated any other prior
period information, as it would be impracticable. International revenues are
based on the country in which the end-user is located. For the years ended
December 31, 2000, 1999 and 1998, and as of each respective year-end, sales
and accounts receivable by geographic area are as follows:

<TABLE>
<CAPTION>
                     Geographic Data                      2000               1999                1998
      ------------------------------------------   -----------------  -----------------  ------------------
       <S>                                         <C>                <C>                <C>
        Sales:
             United States                          $    10,877,234    $    11,187,773    $    14,720,470
             Europe                                       1,788,065          3,803,160          3,723,609
             Other foreign                                2,902,365          2,121,554          2,860,491
                                                    ---------------    ---------------    ---------------
                                                    $    15,567,664    $    17,112,487    $    21,304,570
                                                    ===============    ===============    ===============
        Accounts receivable:
             United States                          $     2,055,056    $     1,975,971    $     3,264,958
             Europe                                         754,155            529,052            898,428
             Other foreign                                  694,502            265,680            704,396
                                                    ---------------    ---------------    ---------------
                                                    $     3,503,713    $     2,770,703    $     4,867,782
                                                    ===============    ===============    ===============
</TABLE>


16. SUBSEQUENT EVENTS - CONVERSIONS OF SERIES B REDEEMABLE CONVERTIBLE
    PREFERRED STOCK
    ---------------

In two separate conversions during January 2001, 100 shares and 52 shares of
Series B Redeemable Convertible Preferred Stock (Note 9) were converted into
566,824 and 294,961 shares, respectively, of Common Stock at a conversion
price of $1.88. The pro forma effect of this transaction is as follows:

<TABLE>
<CAPTION>
                                                                                           December 31, 2000
                                                                                   -----------------------------------
                                                                                                         Pro Forma
                                                                                       Actual           (Unaudited)
                                                                                   ---------------    ---------------
               <S>                                                                <C>                <C>
                Total current liabilities                                          $     4,126,794    $     4,031,281
                                                                                   ---------------    ---------------

                Total liabilities                                                        4,322,661          4,227,148
                                                                                   ---------------    ---------------

       Series B Redeemable Convertible Preferred Stock, 500 and 348 shares
          issued and outstanding, respectively                                           4,830,060          3,310,060
                                                                                   ---------------    ---------------
       Series C Redeemable Convertible Preferred Stock, 750 and 750 shares
          issued and outstanding, respectively                                           7,332,665          7,332,665
                                                                                   ---------------    ---------------

       SHAREHOLDERS' EQUITY:
        Preferred stock                                                                     -                  -
        Common Stock, 13,897,572 and 14,759,357 shares issued and outstanding,
          respectively                                                                   6,948,786          7,379,679
        Additional paid-in-capital                                                      46,711,609         47,896,229
        Accumulated deficit                                                            (22,872,915)       (22,872,915)
                                                                                   ---------------    ---------------

                Total shareholder's equity                                              30,787,480         32,402,993
                                                                                   ---------------    ---------------
                Total liabilities and shareholder's equity                         $    47,272,866    $    47,272,866
                                                                                   ===============    ===============
</TABLE>


                     INDEX TO FINANCIAL STATEMENT SCHEDULE


Report of Independent Public Accountants on Schedule                     S - 1

Schedule II - Valuation and Qualifying Accounts                          S - 2


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE


To Andrea Electronics Corporation:

We have audited, in accordance with auditing standards generally accepted in
the United States, the financial statements of Andrea Electronics Corporation
and subsidiaries included in this filing and have issued our report thereon
dated February 28, 2001. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
valuation and qualifying accounts is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                                          ARTHUR ANDERSEN LLP


Melville, New York
February 28, 2001


ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                               Charged to      Charged to
                                              Balance at       Costs and          Other                          Balance at
              2000                            January 1         Expenses         Accounts       Deductions       December 31
----------------------------------------   ---------------  ---------------  ---------------  --------------  -----------------
<S>                                         <C>               <C>               <C>             <C>              <C>
Allowance for doubtful accounts              $  202,521        $     -           $   -           $ 16,400         $  186,121
                                             ==========        ==========        =========       ========         ==========

              1999
----------------------------------------

Allowance for doubtful accounts              $  202,521        $     -           $    -          $    -           $  202,521
                                             ==========        ==========        =========       ========         ==========

              1998
----------------------------------------

Allowance for doubtful accounts              $   52,521        $  150,000        $     -         $   -            $  202,521
                                             ==========        ==========        =========       ========         ==========
</TABLE>



                                  SIGNATURES

         Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



                          ANDREA ELECTRONICS CORPORATION
                          By:  /s/ John N.  Andrea
                               ----------------------------------
                               Name:   John N.  Andrea
Date: March 30, 2001           Title:  Co-Chairman & Co-Chief
                                       Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
<S>                                     <C>                                     <C>


/s/ John N. Andrea
-----------------------------           Co-Chairman, Co-Chief                   March 30, 2001
John N. Andrea                          Executive Officer and Director


/s/ Douglas J. Andrea                   Co-Chairman, Co-Chief                   March 30, 2001
----------------------                  Executive Officer and Director
Douglas J. Andrea


/s/ Christopher P. Sauvigne             President and Chief Operating           March 30, 2001
------------------------------          Chief
Christopher P. Sauvigne


/s/ Richard A. Maue                     Senior Vice President, Chief            March 30, 2001
--------------------                    Financial and Chief Accounting
Richard A. Maue                         Officer


/s/ Gary A. Jones                       Director                                March 30, 2001
------------------
Gary A. Jones


/s/ Scott Koondel                       Director                                March 30, 2001
-----------------
Scott Koondel


/s/ Paul M. Morris                      Director                                March 30, 2001
-------------------
Paul M. Morris


/s/ Jack Lahav                          Director                                March 30, 2001
--------------
Jack Lahav


/s/ John Larkin                         Director                                March 30, 2001
---------------
John Larkin
</TABLE>




<PAGE>


                               INDEX TO EXHIBITS

Exhibit
Number             Description

3.1                Amended and Restated Certificate of Incorporation of
                   Registrant (incorporated by reference to Exhibit 3.1 of the
                   Registrant's Form 10-K for the year ended December 31, 1992)

3.2                Certificate of Amendment of the Restated Certificate of
                   Incorporation of Registrant (incorporated by reference to
                   Exhibit 3.2 of the Registrant's Form 10-K for the year
                   ended December 31, 1997)

3.3                Certificate of Amendment of the Restated Certificate of
                   Incorporation of Registrant (incorporated by reference to
                   Exhibit 3.1 of the Registrant's Current Report on Form 8-K
                   filed November 30, 1998)

3.4                Certificate of Amendment to the Certificate of Incorporation
                   of the Registrant (incorporated by reference to Exhibit 3.1
                   of the Registrant's Current Report on Form 8-K filed June
                   22, 1999)

3.5                Certificate of Amendment to the Certificate of Incorporation
                   of the Registrant (incorporated by reference to Exhibit 3.1
                   of the Registrant's Current Report on Form 8-K filed
                   October 12, 2000)

3.6                Amended By-Laws of Registrant (incorporated by reference to
                   Exhibit 3.2 of the Registrant's Current Report on Form 8-K
                   filed November 30, 1998)

4.1                Securities Purchase Agreement, dated as of June 10, 1998,
                   relating to the sale of the Registrant's 6% Convertible
                   Notes due June 10, 2000 (with forms of Note and
                   Registration Rights Agreement attached thereto)
                   (incorporated by reference to Exhibit 4.1 of the
                   Registrant's Form S-3, No. 333-61115, filed August 10,
                   1998)

4.2                Securities Purchase Agreement, dated June 11, 1999, by and
                   between HFTP Investment L.L.C. and the Registrant
                   (incorporated by reference to Exhibit 4.1 of the
                   Registrant's Current Report on Form 8-K filed June 22,
                   1999)

4.3                Registration Rights Agreement, dated June 11, 1999, by and
                   between HFTP Investment L.L.C. and the Registrant
                   (incorporated by reference to Exhibit 4.2 of the
                   Registrant's Current Report on Form 8-K filed June 22,
                   1999)

4.4                Form of Warrant by and between HFTP Investment L.L.C. and
                   the Registrant (incorporated by reference to Exhibit 4.3 of
                   the Registrant's Current Report on Form 8-K filed June 22,
                   1999)

4.5                Securities Purchase Agreement, dated October 5, 2000, by and
                   between HFTP Investment L.L.C. and the Registrant
                   (incorporated by reference to Exhibit 10.1 of the
                   Registrant's Current Report on Form 8-K filed October 12,
                   2000)

4.6                Registration Rights Agreement, dated October 5, 2000 by and
                   between HFTP Investment L.L.C. and the Registrant
                   (incorporated by reference to Exhibit 4.1 of the
                   Registrant's Current Report on Form 8-K filed October 12,
                   2000)

4.7                Rights Agreement dated as of April 23, 1999 between the
                   Company and Continental Stock Transfer and Trust Company,
                   as Rights Agent, including the form of Certificate of
                   Amendment to Certificate of Incorporation as Exhibit A, the
                   form of Rights Certificate as Exhibit B and the Summary of
                   Rights to Purchase Shares of Series A Preferred Stock
                   (incorporated by reference to Exhibit 4.1 of the
                   Registrant's Current Report on Form 8-K filed May 7, 1999)

10.1               1991 Performance Equity Plan, as amended (incorporated by
                   reference to Exhibit 4 of the Registrant's Registration
                   Statement on Form S-8, No. 333-45421, filed February 2,
                   1998)

10.2               1998 Stock Plan of the Registrant, as amended (incorporated
                   by reference to Exhibit B of the Registrant's Definitive
                   Proxy Statement in connection with the annual meeting of
                   shareholders held on June 22, 2000)

10.3*              Procurement Agreement, dated June 16, 1995, by and between
                   International Business Machines Corporation and the
                   Registrant (incorporated by reference to Exhibit 10.1 of
                   the Registrant's Form 10-Q for the three month period ended
                   June 30, 1995)

10.4               Employment Agreement, dated as of April 12, 2000, by and
                   between John N. Andrea and the Registrant (incorporated by
                   reference to Exhibit 10.1 of the Registrant's Form 10-Q for
                   the three months ended March 31, 2000)

10.5               Employment Agreement, dated as of April 12, 2000, by and
                   between Douglas J. Andrea and the Registrant (incorporated
                   by reference to Exhibit 10.2 of the Registrant's Form 10-Q
                   for the three months ended March 31, 2000)

10.6               Employment Agreement, dated as of January 1, 1998, by and
                   between Patrick D. Pilch and the Registrant (incorporated
                   by reference to Exhibit 10.8 of the Registrant's Form 10-K
                   for the year ended December 31, 1997)

10.7               Employment Agreement, dated as of November 20, 1998, by and
                   between Christopher P. Sauvigne and the Registrant
                   (incorporated by reference to Exhibit 10.1 of the
                   Registrant's Current Report on Form 8-K filed November 30,
                   1998)

10.8*             Production Procurement Agreement, dated as of June 11, 1997,
                   by and between International Business Machines Corporation
                   and the Registrant (incorporated by reference to Exhibit
                   10.9 of the Registrant's Form 10-K for the year ended
                   December 31, 1997)

10.9              Revolving Loan and Security Agreement, dated as of September
                   23, 1997, by and between IBM Credit Corporation and the
                   Registrant (incorporated by reference to Exhibit 10.11 of
                   the Registrant's Form 10-K for the year ended December 31,
                   1997)

10.10              Stock Purchase Agreement, dated April 6, 1998, as amended by
                   Amendment No. 1 thereto dated May 5, 1998, relating to the
                   purchase of the shares of Lamar Signal Processing, Ltd.
                   (including form of Registration Rights
                   Agreement)(incorporated by reference to Exhibits 2.1 and
                   2.2 of the Registrant's Current Report on Form 8-K filed
                   May 8, 1998)

10.11*             Procurement Agreement, dated as of January 13, 1999, by and
                   between the Registrant and Microsoft Corporation
                   (incorporated by reference to Exhibit 10.15 of the
                   Registrant's Form 10-K for the year ended December 31,
                   1998)

10.12*             Purchase Agreement, dated as of February 25, 1999, by and
                   between the Company and Clarion Corporation of America
                   (incorporated by reference to Exhibit 10.16 of the
                   Registrant's Form 10-K for the year ended December 31,
                   1998)

10.13*             Source Code License Agreement, dated as of October 29, 1998,
                   between the Company and Intel Corporation (incorporated by
                   reference to Exhibit 10.17 of the Registrant's Form 10-K
                   for the year ended December 31, 1998)

10.14              Employment Agreement, dated as of April 12, 2000, by and
                   between Richard A. Maue and the Registrant (incorporated
                   by reference to Exhibit 10.3 of the Registrant's Form 10-Q
                   for the three months ended March 31, 2000)

21                 Subsidiaries of Registrant

23                 Consent of Independent Public Accountants





---------------------------
* Certain portions of this Agreement have been accorded confidential
treatment.


<PAGE>



                        Subsidiaries of the Registrant

Exhibit 21


Name of Subsidiary                                       State of Incorporation
------------------                                       ----------------------

Andrea ANC Manufacturing Inc.                            Delaware
Andrea Digital Technologies, Inc.                        Delaware
Andrea Direct Marketing Inc.                             Delaware
Andrea Electronics Europe Inc.                           Delaware
Andrea Marketing Inc.                                    Delaware
Lamar Signal Processing, Ltd.                            Israel


<PAGE>



                        CONSENT OF EXPERTS AND COUNSEL
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS





As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements Files No. 33-84092, 333-35687, 333-14385, 333-82375,
333-83173 and 333-51424.





                              ARTHUR ANDERSEN LLP




Melville, New York
March 30, 2001