Exhibit 10.2

 

ACKNOWLEDGEMENT AND WAIVER AGREEMENT

 

This Agreement is made and entered into as of February 12, 2004, by and among
Andrea Electronics Corporation, a New York corporation (the “Company”) and the
undersigned Investors (the “Investors” and each an “Investor”).

 

Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Company’s Certificate of Amendment of the
Certificate of Incorporation of the Company for the Company’s Series C
Convertible Preferred Stock (the “Series C Preferred Stock”), as filed with the
Secretary of State of the State of New York on October 6, 2000 (the “Certificate
of Amendment”).

 

WHEREAS, the Investors wish to purchase from HFTP Investment L.L.C. (“HFTP”)
582.887593 shares of Series C Preferred Stock (the “Preferred C Shares”) and in
connection therewith to have assigned to the Investors all of the rights, and
the Investors will assume all of the obligations of HFTP, with respect to
certain agreements between the Company and HFTP in connection with the Series C
Preferred Stock, to wit:

 

(i) The Securities Purchase Agreement dated as of October 5, 2000, (ii) a Waiver
and Acknowledgement, dated as of August 27, 2001, (iii) an Acknowledgement and
Agreement dated as of March 28, 2002, (iv) a Waiver Agreement dated as of March
28, 2002, (v) a Securities Agreement dated as of March 28, 2002 (the “Security
Agreement”), (vi) a Pledge Agreement dated as of March 28, 2002 (the “Pledge
Agreement”) and (vii) an Agreement dated as of January 6, 2003, which agreements
together with the Certificate of Amendment, collectively are referred to in this
Agreement as the “Series C Documents;” and

 

WHEREAS, in exchange for the removal of the adverse effect of certain provisions
of the Series C Preferred Stock and the Security Agreement and the Pledge
Agreement, the Company wishes to permit Investors to purchase the Preferred C
Shares from HFTP and to effect a sale of Common Stock at a price which will
cause the Conversion Price of Preferred C Shares to be permanently reset to a
price negotiated by the parties, and the Company and the Investors wish to
effect the other actions set forth herein.

 

NOW THEREFORE, in connection of the premises, mutual premises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Investors hereby agree as follows:

 

1. Agreements by Company.

 

(a) The Company hereby agrees and consents, and waives any objection, to the
assignment of the Series C Documents by HFTP to the Investors and the assumption
by the Investors of the rights and obligations of HFTP thereunder.

 

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(b) As of the Closing, contingent upon the assignment of the Series C Documents
to Investors, the Company has issued and sold to a third party purchaser one
hundred (100) shares (the “Purchased Shares”) of common stock, (the “Common
Stock”) par value $0.01 per share, of the Company at a purchase price of $0.2551
per share. The Closing shall be 10:00 am Central Time on February 13, 2004.

 

(c) The Company agrees not to exercise any right it has pursuant to the
Certificate of Amendment to redeem Preferred C Shares.

 

(d) The Company has caused to be delivered to the Investors an opinion of Anslow
& Jaclin regarding the matters set forth in Exhibit I hereto.

 

(e) At the Closing and the delivery to the Company by the Investors as of such
Closing, as required by Section 2(d) hereof, of the certificates for the
Preferred C Shares, together with requisite transfer authority for the transfer
of such Preferred C Shares to the Investors, the Company will deliver to the
respective Investors certificates for Preferred C Shares in accordance with the
information on the Schedule of Investors attached as Exhibit II hereto.

 

(f) The Company agrees to submit to its stockholders at its next annual meeting
of stockholders a proposal to amend the Certificate of Incorporation of the
Company to delete Article XX Limitation On Beneficial Ownership from the
Certificate of Amendment of the Certification of Incorporation regarding the
Series C Preferred Stock.

 

2. Agreements by the Investors.

 

The Investors, severally and not jointly, hereby agree to the following, to be
effective as of the Closing:

 

(a) Termination of Security Agreement. The Investors covenant and agree (i) that
the Security Agreement is hereby terminated and cancelled and of no further
force and affect, (ii) that the Investors hereby appoint the Company as their
agent to file any UCC-3 termination statements terminating any UCC financing
statements reflecting the security interest in the Collateral (as defined in the
Security Agreement), and to take any other actions on their behalf necessary to
terminate such security interest, (iii) that the Investors shall deliver to the
Company at the time of execution of this Agreement UCC-3 termination statements
from HFTP regarding the security interest in the Collateral, and (iv) the
Investors shall execute all other documents, if any, necessary or appropriate to
terminate the security interest evidenced by the Security Agreement.

 

(b) Termination of Pledge Agreement. The Investors covenant and agree that the
Pledge Agreement is hereby terminated and cancelled and has no further force or
effect; and the Investors agree to execute any additional documents which may be
required for such purpose and promptly to deliver or cause to be delivered any
assets held pursuant to Pledge Agreement to the Company.

 

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(c) Agreement Regarding Series C Preferred Stock. Each of the Investors as a
holder of Preferred C Shares hereby covenants and agrees that:

 

(i) Holders of Preferred C Shares shall not have any right to require the
Company to redeem Preferred C Shares pursuant to the Series C Documents, and no
such holder shall exercise any option in the Series C Documents to require the
Company to redeem all or any portion of such Investor’s Preferred C Shares;
provided, however, that an Investor shall retain any right under the Series C
Documents to elect to cause the Company to redeem Preferred C Shares under the
following circumstances:

 

(A) The Company fails to deliver to an Investor Conversion Shares within 10 days
of the Conversion Date on which such Investor satisfied the requirements for
conversion of Preferred C Shares, which the Company legally may issue to such
Investor; and

 

(B) The Company redeems or repurchasers any Common Stock or other equity
security junior to the Preferred C Shares in contravention of the rights of the
Preferred C Shares.

 

(ii) upon conversion of any Preferred C Shares, the converting Investor shall
cause to be returned to the Company for cancellation, or not to be issued, any
shares of Common Stock issuable upon such conversion as a result of any
Additional Amount (as defined in the Certificate of Amendment) arising after the
date hereof.

 

(iii) Each of the Investors agrees not to elect a Maturity Alternate Price, (as
defined in the Certificate of Amendment) as the Conversion Price upon conversion
of any Preferred C Shares.

 

(iv) Each of the Investors hereby agrees that there shall not be any adjustment
(hereafter referred to as a “D Preferred Stock Adjustment”) to the Conversion
Price of the Preferred C Shares as a result of any subsequent purchase by the
Investors of shares of Series D Convertible Preferred Stock (“Series D Shares”)
from the Company, the Conversion Price for the conversion of Series D Shares
into Common Stock, or the exercise price of Warrants issued by the Company in
conjunction with the issuance of Series D Shares. Thus, each of the Investors
hereby agrees that in connection with any conversion of the Preferred C Shares,
the Company shall only be obligated to issue and deliver that number of shares
of Common Stock which would be deliverable upon such conversion without giving
any effect to any D Preferred Stock Adjustment.

 

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(v) Each Investor hereby agrees that it shall not sell or transfer or permit the
transfer of any of its Preferred C Shares to any transferee unless such
transferee agrees in writing for the benefit of the Company, which writing is
delivered to the Company at the time of such transfer to be bound by the
agreements and obligations under this Agreement, including this restriction on
the transfer of the Preferred C Shares. Nothing in this Section 2(c)(iv),
however, prevents the conversion of the Preferred C Shares by an Investor and
the sale or transfer of the shares of Common Stock received by such Investor
upon such conversion.

 

(vi) Each Investor acknowledges and agrees that the certificate for Preferred C
Shares shall include a legend reflecting the restriction on transfer provided in
Section 2(iv).

 

(vii) Each of the Investors hereby agrees that no adjustment to the terms,
including the Conversion Price or Conversion Rate, as set forth in the
Certificate of Amendment to the Company’s Certificate of Incorporation governing
the Series C Preferred Stock, is required as a result of an exchange of
Preferred C Shares by HFTP with the Company for shares of Common Stock prior to
or concurrently with the Investors’ purchase of Preferred C Shares from HFTP.

 

(d) At the Closing, the Investors will deliver to the Company the certificates
for the Preferred C Shares, together with requisite transfer authority and
instructions to issue new certificates for Preferred C Shares registered in the
names of the respective Investors in accordance with the information on Schedule
II attached hereto.

 

(e) Each Investor, for itself, agrees with and for the benefit of the Company
that such Investor will not transfer, sell or convey, either directly or
indirectly, Series C Preferred Shares, Series C Conversion Shares and
derivatives of Series C Conversion Shares during any calendar week in an amount
greater than such Investor’s proportionate share of twenty five percent (25%) of
the volume of the Common Stock as reported by Bloomberg L.P. for any such
calendar week. Each Investor’s proportionate share shall be a fraction, the
numerator of which is the amount of Series C Preferred Shares purchased by an
Investor from HFTP and the denominator of which is the total amount of Series C
Preferred Shares purchased from HFTP by all Investors. The foregoing sales
limitation shall not apply to sales effected as per Common Stock prices greater
than sixty cents ($.60). The Company may waive the foregoing sales limitation as
to all, but not less than all Investors.

 

3. Investor Representations and Warranties

 

Each Investor severally represents and warrants that:

 

(a) Authorization, Enforcement. This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Investor and is a valid and
binding agreements of such Investor, enforceable against such Investor in
accordance with

 

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its terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

 

(b) Independent Actions. Each of the Investors has and is acting separately and
independently with respect to its purchase of Preferred C Shares, and the
execution of this Agreement, and is not an “affiliate” of any other Investor (as
defined by Rule 144(a) under the 1933 Act), or acting in concert with, any other
Investor in connection with such purchase of Preferred C Shares, execution of
this Agreement, or any negotiation with respect to a possible future investment
in the Company as contemplated by this Agreement.

 

(c) Information. Each Investor and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the Series C Preferred Stock which have been
requested by such Investor. Such Investor is aware of the SEC Documents,
including the disclosures regarding risks included in the SEC Documents. Such
Investor and its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due diligence
investigations conducted by such Investor or its advisors, if any, or its
representatives shall modify, amend or affect such Investor’s right to rely on
the Company’s representations and warranties contained in this Agreement below.
Such Investor understands that its investment in the Preferred C Shares involves
a high degree of risk. Such Investor has sought such accounting, legal and tax
advice as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Preferred C Shares and this Agreement.

 

(d) Series C Preferred Stock. The Investors, in the aggregate, as of the
Closing, shall have purchased from HFTP and assumed the obligations of HFTP
under the Series C Documents with respect to, and own of record and beneficially
582.887593 shares of Series C Preferred Stock.

 

(e) Accredited Investor Status. Each Investor is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D under the 1933 Act or
institutional investor as defined by Rule 144(a) under the 1933 Act

 

(f) Security Agreement. The investors as of the Closing shall be the assignees
of the Security Agreement and the only persons entitled to the security
interests covered by such Security Agreement and the Investors have full power
and authority to terminate and cancel such Security Agreement.

 

(g) Pledge Agreement. The Investors as of the Closing shall be the assignees of
the Pledge Agreement and the only persons entitled to the pledge of assets of
the Company covered by such Pledge Agreement, and the Investors have full power
and authority to terminate and cancel the Pledge Agreement and return, as of
Closing, the pledged shares to the Company.

 

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(h) Non-Affiliation with HFTP or the Company. Each Investor is not and has not
been an “affiliate” of HFTP or the Company (within the meaning of Rule 144(a)(1)
under the 1933 Act.

 

(i) The Investors as of the Closing shall have obtained from HFTP UCC-3
termination statements terminating any UCC financing statements reflecting
HFTP’s security interest in the Collateral (as defined in the Security
Agreement).

 

4. Representations and Warranties of The Company.

 

The Company represents and warrants to the Investors that:

 

(a) Organization and Qualification. The Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly
or indirectly, owns capital stock or holds an equity or similar interest) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect”
means any material adverse effect on the business, properties, assets,
operations, results of operations or financial condition of the Company and its
Subsidiaries taken as a whole, or on the ability of the Company to perform its
obligations under this Agreement or to perform its obligations with respect to
the Series C Preferred Stock.

 

(b) Authorization, Enforcement, Compliance with Other Instruments. (i) The
Company has the requisite corporate power and authority to enter into and
perform its obligations under this Agreement, and to issue the Securities in
accordance with the terms hereof and no further consent of authorization is
required by the Company, its Board of Directors or its stockholders for the
issuance of (or the obligation to issue) the Securities and (ii) this Agreement
constitutes the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors’ rights and remedies.

 

(c) Authorized Securities. The Company has sufficient authorized and unissued
shares of Common Stock to issue the Purchased Shares.

 

(d) Issuance of Securities. The Securities are duly authorized and, upon
issuance in accordance with the terms hereof, shall be (i) validly issued, fully
paid and non-assessable, (ii) free from all taxes, liens and charges with
respect to the issue thereof and (iii) entitled to the rights and preferences
set forth in the Company’s Certificate of Incorporation.

 

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(e) No Conflicts. The execution, delivery and performance of this Agreement by
the Company and the performance by the Company of its obligations under this
Agreement will not (i) result in a violation of the Company’s Certificate of
Incorporation, the Certificate of Amendment, preferences and rights of any
outstanding series of preferred stock of the Company or the By-laws; (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party; or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations
and the rules and regulations of the principal market or exchange on which the
Common Stock is traded or listed) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected. Neither the Company nor its Subsidiaries is
in violation of any term of (i) its Certificate of Incorporation, any
Certificate of Amendment, preferences and rights of any outstanding series of
preferred stock or By-laws, respectively, or (ii) any statute, rule or
regulation applicable to the Company or its Subsidiaries and neither the Company
nor its Subsidiaries is in default under any material contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order, except
for defaults as would not, individually or in the aggregate, have a Material
Adverse Effect. The business of the Company and its Subsidiaries is not being
conducted, and shall not be conducted, in violation of any law, ordinance or
regulation of any governmental entity, except where such violation would not
result in a Material Adverse Effect. Except as specifically contemplated by this
Agreement and as required under the 1933 Act and the securities laws of the
State of New York and except such as have been obtained as of the date hereof,
the Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency or any
regulatory or self-regulatory agency in order for it to execute, deliver or
perform any of its obligations under or contemplated by this Agreement in
accordance with its terms.

 

(f) Absence of Certain Changes. Except as disclosed in reports filed by the
Company with the SEC under the 1934 Act or in Schedule 3(f), since December 31,
2002 there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
liabilities results of operations of the Company or its Subsidiaries, taken as a
whole. The Company has not taken any steps, and does not currently propose to
take any steps, to seek protection pursuant to any bankruptcy law nor does the
Company or any of its Subsidiaries have any actual knowledge that its creditors
intend to initiate involuntary bankruptcy proceedings or any actual knowledge of
any fact which would reasonably lead a creditor to do so.

 

(g) Absence of Litigation. Except as disclosed in Schedule 3(g), there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of

 

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the Company or any of its Subsidiaries, threatened against or affecting the
Company, the Common Stock or any of the Company’s Subsidiaries or any of the
Company’s or the Company’s Subsidiaries’ officers or directors in their
capacities as such, which would have a Material Adverse Effect. Except as set
forth in Schedule 3(g), to the knowledge of the Company none of the directors or
officers of the Company have been involved in securities related litigation
during the past five years.

 

(h) No General Solicitation. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the 1933 Act) in connection with the offer or sale of the Securities.

 

(i) No Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of any of the Securities
under the 1933 Act or cause this offering of Securities to be integrated with
prior offerings by the Company for purposes of the 1933 Act, nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.

 

(j) Application of Takeover Protections. Assuming that the Investors, including
acting in concert with others, have no present intention to exercise control
over, takeover or participate in a takeover of the Company, the Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the state of its incorporation which is or could become applicable to the
Investors as a result of the Investors and the Company fulfilling their
obligations under this Agreement, including, without limitation, the Company’s
issuance of the Securities and the Investors’ ownership of the Securities.

 

(k) Rights Agreement. Assuming that Investors, including acting in concert with
others, have no present intention to exercise control over, takeover or
participate in a takeover of the Company and so long as the proviso to the first
sentence of Section IV(A) of the Certificate of Amendment remains in full force
and effect, the Company specifically represents, warrants and agrees that, (i)
in accordance with that certain Rights Agreement dated as of April 23, 1999 (the
“Rights Plan”) between the Company and Continental Stock Transfer & Trust
Company, as the Rights Agent thereunder, regardless of the number of Conversion
Shares of which an Investor is deemed the Beneficial Owner (as defined in the
Rights Plan), an Investor is not intended to be nor will be deemed to be an
Acquiring Person within the meaning of the Rights Plan because of the
acquisition of the Securities pursuant to this Agreement, and (ii) the
acquisition of the Securities pursuant to this Agreement, shall not, under any
circumstances, trigger a Distribution Date within the meaning of the Rights
Plan; provided, however, that only Securities acquired pursuant to this
Agreement shall be deemed excluded from the number of shares of Common Stock
deemed beneficially owned by Investors in determining whether an Investor is an
Acquiring Person within the meaning of the Rights Plan.

 

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(l) Conversion Price. The Company acknowledges and agrees that pursuant to the
Certificate of Amendment governing the Series C Preferred Stock, the sale of the
shares of Common Stock under this Agreement will cause an adjustment to the
Conversion Price of the Preferred C Shares to the sales price for such Purchased
Shares to the extent such sales price is less than the applicable Conversion
Price immediately prior to the sale of the Purchased Shares.

 

(m) Holding Period of Preferred C Shares. The Company also acknowledges and
agrees that HFTP purchased the Preferred C Shares directly from the Company on
October 10, 2000 and has held the Preferred C Shares continuously since such
date. The Company further acknowledges and agrees that HFTP has represented to
it as of the date hereof that it is not an affiliate of the Company. In
addition, the Company has delivered to the Investors, as of the date hereof, the
opinion of Anslow & Jaclin, LLP, Freehold, New Jersey to the effect that HFTP is
not an affiliate of the Company and the Investors are entitled to tack the
holding period of HFTP of the Preferred C Shares sold by HFTP to the Investors
to the Investors own holding period for those shares for purposes of the holding
period requirements of Rule 144(d) under the 1933 Act. The Company agrees not to
take any position contrary to such representation and opinion with respect to
the Investors’ holding of the Preferred C Shares.

 

(n) Conversion Limitations of Series C Preferred Stock. The Company acknowledges
that the provisions of the Series C Documents and the Certificate of Amendment
of the Certificate of Incorporation setting forth the terms of the Series C
Preferred Stock that impose limitations on the amount of Preferred C Shares that
may be converted into Common Stock at any time by a holder of Preferred C Shares
only apply to each holder, of record or beneficially, of Preferred C Shares and
its affiliates, and such a holder is not required to aggregate its ownership of
Company securities with the ownership of Company securities by any other holder
of Preferred C Shares (not an affiliate of it or acting in concert with it) for
purposes of the limitations on conversion of Preferred C Shares into Common
Stock by a holder thereof set forth in the Certificate of Amendment; and the
Company agrees that it shall not take a position contrary to such application of
those conversion limitations. Thus, based on the representations of the
Investors in Section 3(h) of this Agreement, none of the Investors would have to
aggregate its ownership of Company securities with ownership of such securities
of HFTP for purposes of calculating a conversion limitation governing the
Preferred C Shares.

 

(o) The Company acknowledges its obligation in accordance with the Series C
Documents to issue shares of its Common Stock upon the conversion of Preferred C
Shares by the Investors. As of the transfer of the Preferred C Shares by HFTP to
the Investors, there were no defaults in the obligations of a holder of
Preferred C Shares which are assumed by the Investors, the rights of the
Investors to the rights and obligations of the Preferred C Shares in accordance
with the Series C Documents is not impaired in any way, and the Company does not
have any defenses to its obligations under the Series C Documents against those
rights and obligations of the Investors.

 

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(p) The Company has obtained the approval of its stockholders to the extent
required by applicable rules and regulations of the American Stock Exchange for
the issuance of Common Stock upon conversion of the Preferred C Shares in excess
of the Exchange Cap (as defined in the Certificate of Amendment).

 

(r) Conversion Amount of the Series C Preferred Stock. The Conversion Amount of
the Series C Preferred Stock, as defined in the Certificate of Amendment
governing the Series C Preferred Stock is $11,671.233 per share of Series C
Preferred Stock as of February 12, 2004.

 

5. Covenants.

 

(a) Filing of Form 8-K. On or before the second business day after the Closing
Date, the Company shall submit a Form 8-K to the U.S. Securities and Exchange
Commission describing the terms of this Agreement.

 

(b) Possible Future Investment. The Company and the Investors agree to negotiate
in good faith to reach an agreement for purchases from the Company by the
Investors, on a pro rata basis to their investments in Preferred C Shares, of an
aggregate of $2,500,000 of equity securities of the Company, with a view towards
achieving $1,250,000 of such investment within seven (7) days of the date hereof
and the remainder upon receipt of approval by the Company’s stockholders or
satisfaction of any other requirements imposed by the AMEX.

 

6. Conditions to the Company’s Obligations At Closing.

 

(a) The representations and warranties of the Investors shall be true and
correct as of the date when made and as of the Closing as though made at that
time and the Investors shall have performed, satisfied and complied with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Investors at or prior to the Closing.

 

7. Conditions to the Investor’s Obligations At Closing.

 

(a) The representations and warranties of the Company shall be true and correct
as of the date when made and as of the Closing as though made at that time, and
the Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing.

 

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8. Governing Law; Miscellaneous.

 

(a) Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of
New York shall govern all issues concerning the relative rights of the Company
and its stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice, of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.

 

(c) Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.

 

(e) Entire Agreement; Amendments. This Agreement supersedes all other prior oral
or written agreements among the Investors and the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Investor makes any representation, warranty, covenant or
undertaking with respect to such matters. No

 

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provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and the parties affected thereby, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought.

 

(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) upon delivery by a nationally recognized delivery
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

 

If to the Company:

   

Andrea Electronics Corporation

   

45 Melville Park Road

   

Melville, New York 11747

   

Telephone:

  

(516) 719-1800

   

Facsimile:

  

(516) 719-1824

   

Attention:

  

President, Chief Executive Officer

With a copy to:

   

Andrea Electronics Corporation

   

45 Melville Park Road

   

Melville, New York 11747

   

Telephone:

  

(516) 719-1800

   

Facsimile:

  

(516) 719-1824

   

Attention:

  

Executive Vice President, Chief Financial Officer

 

If to an Investor, to it at the address and facsimile number set forth on the
Schedule of Investors, attached as Exhibit I hereto, with copies to Investors’
representatives as set forth on the Schedule of Investors, attached as Exhibit I
hereto, or at such other address and/or facsimile number and/or to the attention
of such other person as the recipient party has specified by written notice
given to each other party five days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communications, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a nationally recognized overnight delivery service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

 

12

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(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns. The
parties shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the other parties. Notwithstanding the
foregoing, any assignment by an Investor shall not release the Investor from its
obligations hereunder unless such obligations are assumed by such assignee and
the Company has consented to such assignment and assumption, which consent shall
not be unreasonably withheld.

 

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.

 

(i) Survival. The representations and warranties and covenants of the Company
and the Investors contained in Sections 3 and 4 and 5 shall survive the Closing.

 

(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

 

(k) Termination. In the event that the Closing shall not have occurred on or
before February 13, 2004, unless extended, due to the Company’s or the
Investors’ failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the non-breaching party’s failure to waive such unsatisfied condition(s)),
the non-breaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party.

 

(l) Placement Agent. The Company and the Investors each acknowledge that they
have not engaged any placement agent in connection with the sale and purchase,
respectively, of the Purchased Shares.

 

(m) No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

 

(n) Remedies. Investors shall have all rights and remedies set forth in this
Agreement and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law. Any person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.

 

* * * * * *

 

13

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.

 

    Andrea Electronics Corporation

By:

 

/s/    Paul E. Donofrio

--------------------------------------------------------------------------------

   

Paul E. Donofrio

   

President and Chief Executive Officer

    Investors:     ALPHA CAPITAL AKTIENGESELLSCHAFT    

By:

 

/s/    Konrad Adermann

--------------------------------------------------------------------------------

       

Konrad Adermann

       

Director

        CONGREGATION MISHKAN SHOLOM INCORPORATED    

By:

 

/s/    CONGREGATION MISHKAN SHOLOM     INCORPORATED

--------------------------------------------------------------------------------

        [Name]        

Chief Financial Officer

        STONESTREET LIMITED PARTNERSHIP    

By:

 

/s/    Michael Funkelsten

--------------------------------------------------------------------------------

       

Michael Funkelsten

       

President

        GREENWICH GROWTH FUND LIMITED    

By:

 

/s/    Evan Schmenauer

--------------------------------------------------------------------------------

       

Evan Schmenauer

       

Director

 

14

--------------------------------------------------------------------------------

        WHALEHAVEN FUNDS LIMITED    

By:

 

/s/    Evan Schmenauer        

--------------------------------------------------------------------------------

       

Evan Schmenauer

       

Director

        ELLIS INTERNATIONAL LTD.    

By:

 

/s/    Wilheim Ungar        

--------------------------------------------------------------------------------

       

Wilheim Ungar

       

Officer

        LONGVIEW EQUITY FUND, LP    

By:

 

/s/    S. Michael Rudolph

--------------------------------------------------------------------------------

       

S. Michael Rudolph

       

Investment Manager

        LONGVIEW INTERNATIONAL EQUITY FUND, LP    

By:

 

/s/    S. Michael Rudolph

--------------------------------------------------------------------------------

       

S. Michael Rudolph

       

Investment Manager

        LONGVIEW FUND LP    

By:

 

/s/    S. Michael Rudolph

--------------------------------------------------------------------------------

       

S. Michael Rudolph

       

General Partner

        ENABLE GROWTH PARTNERS    

By:

 

/s/    Mitch Levine

--------------------------------------------------------------------------------

       

Mitch Levine

       

Managing Partner

 

15

--------------------------------------------------------------------------------

        REDWOOD CAPITAL PARTNERS, INC.    

By:

 

/s/    Richard Rosenblum

--------------------------------------------------------------------------------

       

Richard Rosenblum

       

President

        CAMDEN INTERNATIONAL LTD.    

By:

 

/s/    Deirdre McCoy

--------------------------------------------------------------------------------

       

Deirdre McCoy

       

Director

        GAMMA OPPORTUNITY CAPITAL PARTNERS, LP    

By:

 

/s/    Jonathan P. Knight

--------------------------------------------------------------------------------

       

Jonathan P. Knight

       

Director

        DOMINO INTERNATIONAL LTD.    

By:

 

/s/    Anna Marie Lowe

--------------------------------------------------------------------------------

       

Anna Marie Lowe

       

Director

        PALISADES MASTER FUND, LP    

By:

 

/s/    Discover Management LTD

--------------------------------------------------------------------------------

       

Discover Management LTD

       

Authorized Signatory

 

16

--------------------------------------------------------------------------------

        LUCRATIVE INVESTMENTS    

By:

 

/s/    Emmanuel Bloch        

--------------------------------------------------------------------------------

       

Emmanuel Bloch

       

General Attorney

 

17

--------------------------------------------------------------------------------

EXHIBIT II

 

Schedule of Investors

 

Name

--------------------------------------------------------------------------------

 

Number of Shares

of Series C

Preferred Stock

--------------------------------------------------------------------------------

Alpha Capital Aktiengesellschaft

   

Congregation Mishkan Sholom Incorporated

   

Stonestreet Limited Partnership

   

Greenwich Growth Fund Limited

   

Whalehaven Funds Limited

   

Ellis International Ltd.

   

Longview Equity Fund, LP

   

Longview International Equity Fund, LP

   

Longview Fund LP

   

Enable Growth Partners

   

Redwood Capital Partners, Inc.

   

Camden International Ltd.

   

Gamma Opportunity Capital Partners, LP

   

Domino International Ltd.

   

Palisades Master Fund, LP

   

Lucrative Investments

   

 

18