EXHIBIT 10.1

 

EXCHANGE AND TERMINATION AGREEMENT

 

THIS EXCHANGE AND TERMINATION AGREEMENT (this “Agreement”), dated as of February
11, 2004, by and among Andrea Electronics Corporation, a New York corporation,
with headquarters located at 45 Melville Park Road, Melville, New York 11447
(the “Company”), and HFTP Investment L.L.C., a Delaware limited liability
company (the “Investor”).

 

WHEREAS:

 

A. The Company and the Investor have entered into that certain Securities
Purchase Agreement, dated as of October 5, 2000 (the “Securities Purchase
Agreement”), pursuant to which the Investor purchased from the Company shares of
the Company’s Series C Convertible Preferred Stock (the “Series C Preferred
Stock”), which are convertible into shares of the Company’s common stock, par
value $0.01 per share (the “Common Stock”) (as converted, the “Series C
Conversion Shares”), in accordance with the terms of the Company’s Certificate
of Amendment of the Certificate of Incorporation filed with the Secretary of
State of the State of New York on October 6, 2000 (the “Series C Certificate of
Amendment”);

 

B. The Investor is the holder of (i) 629.187593 shares of Series C Preferred
Stock (each a “Series C Preferred Share” and, collectively, the “Series C
Preferred Shares”) and (ii) a warrant to purchase 75,000 shares of Common Stock
(the “Warrant”);

 

C. Upon the terms and conditions set forth in this Agreement, the Company wishes
to exchange, and the Investor wishes to allow the Company to exchange, 46.3 of
the Series C Preferred Shares (the “Exchange Shares”) and the Warrant
(collectively with the Exchange Shares, the “Exchange Securities”), for the
number of shares of Common Stock equal to the lesser of (i) 1,800,000 (such
number to be adjusted for any stock splits, stock dividends, stock combinations
or other similar transactions involving the Common Stock that are effective at
any time after the date hereof and prior to the Closing) and (ii) the largest
number that will not cause the Investor (together with its affiliates) to have
beneficial ownership of more than 9.99% of the Company’s outstanding Common
Stock immediately following the Closing (as defined herein) (the shares of
Common Stock to be issued to the Investor being referred to as the “Common
Shares”);

 

D. The exchange of the Exchange Securities for the Common Shares is being made
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D as promulgated by the United States Securities and Exchange
Commission under the Securities Act of 1933, as amended (the “1933 Act”); and

 

E. The Investor has entered into an agreement (the “Purchase Agreement”), dated
of even date herewith with certain third parties (the “Third Party Investors”),
pursuant to which the Investor shall sell its remaining 582.887593 shares of
Series C Preferred Stock to the Third Party Investors.

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NOW THEREFORE, the Company and the Investor hereby agree as follows:

 

1. AUTHORIZATION AND EXCHANGE OF THE EXCHANGE SECURITIES.

 

(a) Authorization. The Company will, prior to the Closing (as defined below),
duly authorize the issuance of the Common Shares to the Investor in exchange for
the Exchange Securities.

 

(b) Exchange of the Exchange Securities. Subject to the satisfaction (or waiver)
of the conditions set forth in Sections 6 and 7, the Investor shall tender to
the Company on the Closing Date (as defined below) the Exchange Securities, and
in exchange therefor, the Company shall issue the Common Shares to the Investor.

 

(c) Closing Date. The date and time of the closing (the “Closing”) shall be
10:00 a.m. Central Time, on February 18, 2004, or such other date as is mutually
agreed to by the Company and the Investor (the “Closing Date”), subject to
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7. The Closing shall occur on the Closing Date at the
offices of Katten Muchin Zavis Rosenman, 525 West Monroe Street, Suite 1600,
Chicago, Illinois 60661-3693.

 

(d) Deliveries.

 

(i) Deliveries by the Company. On the Closing Date, the Company shall deliver to
the Investor:

 

(A) the Common Shares through The Depository Trust Company (“DTC”) Fast
Automated Securities Transfer Program by crediting such number of Common Shares
to the Investor’s balance account with DTC through its Deposit Withdrawal Agent
Commission system in accordance with the Investor’s written instructions (which
Common Shares shall be free from any restrictive legend and from any stop
order),

 

(B) an officer’s certificate pursuant to Section 7(c) hereof,

 

(C) the opinion of Muldoon Murphy & Faucette LLP, in the form attached hereto as
Exhibit A,

 

(D) a secretary’s certificate pursuant to Section 7(e) hereof, and

 

(E) a letter from the Company’s transfer agent pursuant to Section 7(f) hereof.

 

(ii) Deliveries by the Investor. On the Closing Date, the Investor shall deliver
to the Company:

 

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(A) an assignment separate from certificate in the form attached hereto as
Exhibit B, transferring the Exchange Shares to the Company,

 

(B) the certificate representing the Warrant, in genuine and unaltered form, and

 

(C) a certificate of an authorized representative of the Investor setting forth
the number of Common Shares to be delivered to the Investor pursuant to this
Agreement and confirming that the issuance of such number of Common Shares will
not cause the Investor (together with its affiliates) to have beneficial
ownership of more than 9.99% of the outstanding Common Stock immediately
following such issuance of the Common Shares.

 

2. INVESTOR’S REPRESENTATIONS AND WARRANTIES.

 

The Investor represents and warrants with respect to only itself that:

 

(a) Investment Purpose. The Investor is acquiring the Common Shares for its own
account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the
representations herein, the Investor does not agree to hold any of the Common
Shares for any minimum or other specific term and reserves the right to dispose
of the Common Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.

 

(b) Accredited Investor Status. The Investor is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D.

 

(c) Reliance on Exemptions. The Investor understands that the Common Shares are
being offered to it in reliance on specific exemptions from the registration
requirements of the United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and the Investor’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Investor set forth herein in order to determine the
availability of such exemptions and the eligibility of the Investor to acquire
the Common Shares.

 

(d) No Governmental Review. The Investor understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Common Shares or the
fairness or suitability of the investment in the Common Shares nor have such
authorities passed upon or endorsed the merits of the offering of the Common
Shares.

 

(e) Information. The 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 issuance of the Common Shares which have been
requested by the Investor. The Investor and its advisors, if any, have been
afforded the opportunity to ask questions of the

 

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Company. Neither such inquiries nor any other due diligence investigations
conducted by the Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor’s right to rely on the Company’s
representations and warranties contained in Section 3 below.

 

(f) Residency. The Investor is a resident of the State of New York.

 

(g) Authorization; Enforcement; Validity. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Investor and is a
valid and binding agreement of the Investor, enforceable against the Investor in
accordance with its terms.

 

(h) Ownership of the Exchange Shares. The Investor is the sole beneficial owner
of the Exchange Shares and, assuming that the Company delivered good and valid
title to the Exchange Shares to the Investor free and clear of any and all
voting agreements and arrangements, liens, encumbrances, claims, charges,
security interests and restrictions of any nature whatsoever (other than those
imposed by federal and state securities laws) (collectively, “Encumbrances”),
then as of the Closing, the Investor shall have transferred to the Company good
and valid title to the Exchange Shares, free and clear of any and all
Encumbrances.

 

(i) History of Exchange Shares; Non-Affiliate Status. The Investor purchased the
Exchange Shares directly from the Company on October 10, 2000 and has held the
Exchange Shares continuously since such date. The Investor is not, and at no
time during the period from October 10, 2000 through the date hereof and the
Closing Date has the Investor been, an “affiliate” of the Company (within the
meaning of Rule 144(a)(1) under the 1933 Act).

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to the Investor that:

 

(a) Organization and Qualification. The Company is a corporation duly organized
and validly existing in good standing under the laws of New York, and has the
requisite corporate power and authorization to own its properties and to carry
on its business as now being conducted.

 

(b) Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement including, without limitation, the issuance of the Common Shares
in accordance with the terms hereof. The execution and delivery of this
Agreement by the Company and the consummation by it of the transactions
contemplated hereby, including, without limitation, the issuance of the Common
Shares, has been duly authorized by the Company’s Board of Directors, and no
further consent or authorization is required by the Company, its Board of
Directors or its stockholders. This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.

 

(c) No Stockholder Approval. The Company is not, and will not be, required

 

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(under the rules and regulations of the Principal Market (as defined below) or
otherwise) to obtain the approval of its stockholders with respect to the
execution and performance of this Agreement or the issuance of the Common Shares
to the Investor. Without limiting the foregoing, (i) no issuance by the Company
of securities to the Third Party Investors (the “Third Party Transactions”) will
cause the Company to be required (under the rules and regulations of the
Principal Market or otherwise) to obtain stockholder approval for the execution
and performance of this Agreement or the issuance of Common Shares to the
Investor, and (ii) except for the Third Party Transactions, 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 cause this
offering of the Common Shares to be integrated with prior offerings by the
Company for purposes of any applicable stockholder approval provisions (under
the rules and regulations of the Principal Market or otherwise), nor will the
Company take any action or steps that would cause the offering of the Common
Shares to be integrated with any other such offerings.

 

(d) Capitalization. As of the date hereof, the authorized common stock of the
Company consists of (such numbers to be adjusted for any stock splits, stock
dividends, stock combinations or other similar transactions involving the Common
Stock that are effective at any time after the date hereof) 200,000,000 shares
of Common Stock, of which as of the date hereof [29,108,018] shares are issued
and outstanding. All of such outstanding shares have been validly issued and are
fully paid and nonassessable. No shares of the Company’s common stock are
subject to preemptive rights or any other similar rights (arising under New York
law, the Company’s Certificate of Incorporation, as amended and as in effect on
the date hereof (the “Certificate of Incorporation”), or the Company’s By-laws,
as amended and as in effect on the date hereof (the “By-Laws”) or any agreement
or instrument to which the Company is a party) or any liens or encumbrances
granted or created by the Company. Except for the Series C Preferred Stock,
there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Common Shares as
described in this Agreement. The Company has furnished to each Investor true and
correct copies of the Certificate of Incorporation and the By-laws.

 

(e) Issuance of Common Shares. As of the Closing, the Common Shares will have
been duly authorized and, upon issuance in accordance with the terms hereof,
shall be (i) validly issued, fully paid and non-assessable, and (ii) free from
all taxes, liens and charges with respect to the issuance thereof. Subject to
the truth and accuracy of the Investor’s representations in Section 2 hereof,
the issuance of the Common Shares to the Investor in exchange for the Exchange
Securities is exempt from registration under the 1933 Act and any applicable
state securities laws, and as long as the Common Shares are not held by an
“affiliate” of the Company (within the meaning of Rule 144(a)(1) under the 1933
Act), the Common Shares will be freely tradeable without restriction pursuant to
Rule 144(k) under the 1933 Act or under any applicable state securities laws,
and the Company shall not at any time, directly or indirectly, take any position
or action inconsistent therewith or take any position that the Investor is, or
has at any time been, an “affiliate” of the Company (within the meaning of Rule
144(a)(1) under the 1933 Act).

 

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(f) No Conflicts. The execution, delivery and performance of this Agreement by
the Company and the consummation by the Company of the transactions contemplated
hereby will not (i) result in a violation of the Certificate of Incorporation 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
material agreement, indenture or instrument to which the Company is a party;
(iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including, without limitation, federal and state securities laws and
regulations and the rules and regulations of The American Stock Exchange, Inc.
(the “Principal Market”)) applicable to the Company or by which any property or
asset of the Company is bound or affected. 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, including, without limitation, the issuance of
the Common Shares in accordance with the terms hereof.

 

(g) SEC Documents; Financial Statements. Since December 31, 2002, the Company
has filed all reports, schedules, forms, statements and other documents required
to be filed by it with the SEC pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the “SEC Documents”). As of
their respective dates and based on information known to management of the
Company as of the date of this Agreement, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents.
Based on information known to management of the Company as of the date of this
Agreement, none of the SEC Documents, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates and based on information known to management of the Company as of the date
of this Agreement, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Based on information known to management of the Company as of
the date of this Agreement, such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).

 

(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

 

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the offer or sale of the Common Shares.

 

(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, nor
will make, any offers or sales of any security or solicited, nor will solicit,
any offers to buy any security, under circumstances that would require
registration of any of the Common Shares under the 1933 Act. Neither the
Company, nor any of its affiliates, nor any person acting on its or their behalf
has, directly or indirectly, taken, nor will take, any other action or steps
that would require registration of any of the Common Shares under the 1933 Act.

 

(j) Rights Agreement. Assuming that the Investor has no present intention to
takeover or to 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 shares of Common Stock of which the Investor is deemed the Beneficial
Owner (as defined in the Rights Plan), the 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 Common Shares pursuant to this Agreement or
the acquisition of Series C Conversion Shares upon conversion of the Series C
Preferred Shares, and (ii) neither the acquisition of the Common Shares pursuant
to this Agreement nor the acquisition by the Investor of Series C Conversion
Shares upon conversion of the Series C Preferred Shares, shall, under any
circumstances, trigger a Distribution Date within the meaning of the Rights
Plan.

 

(k) Application of Takeover Protections. 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, without
limitation, 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
Investor as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company’s issuance of the Common Shares and
the Investor’s ownership of the Common Shares or as a result of the acquisition
of Series C Conversion Shares.

 

(l) Major Transactions. The Company does not have any written or oral agreement,
letter of intent, understanding, contract, arrangement, commitment or obligation
relating to a Major Transaction (as defined in Section V(C) of the Series C
Certificate of Amendment).

 

(m) No Other Agreements. The Company has not, directly or indirectly, made any
agreements with the Investor relating to the terms or conditions of the
transactions contemplated by this Agreement except as set forth in this
Agreement.

 

(n) Information. Neither the Company nor any of its officers, directors,
employees or agents have provided the Investors with any material nonpublic
information, other than information relating to this Agreement and the
transactions contemplated hereby and

 

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information relating to the Third Party Transactions, all of which information
will be disclosed in the Announcing 8-K (as defined below).

 

4. COVENANTS.

 

(a) Best Efforts. Each party shall use its best efforts to timely satisfy each
of the conditions to be satisfied by it as provided in Section 6 and Section 7
of this Agreement.

 

(b) Listing. So long as the Common Stock is listed for trading on the Principal
Market or any other securities exchange or trading market, the Common Shares
will be listed for trading on such exchange or market.

 

(c) Disclosure of Transactions and Other Material Information. At or before 8:30
a.m. (Eastern Time) on February 17, 2004, the Company shall file a Current
Report on Form 8-K (the “Announcing Form 8-K”) with the SEC describing the terms
of the transactions contemplated by this Agreement and the Third Party
Transactions and including as exhibits to the Announcing Form 8-K this Agreement
and any agreements entered into by the Company with respect to the Third Party
Transactions (along with any other instruments that will define the rights of
the Third Party Investors), if any such agreements have been executed, in the
form required by the 1934 Act, and neither the Company nor the Investor shall
issue any press release or any other public statement with respect to the
transaction contemplated by this Agreement and the Purchase Agreement, or with
respect to the Third Party Transactions, prior to such filing of the Announcing
8-K. From and after the filing of the Announcing Form 8-K with the SEC, the
Investor shall not be in possession of any material nonpublic information
received from the Company or any of its respective officers, directors,
employees or agents. The Company shall not, and shall cause each of its
respective officers, directors, employees and agents not to, provide the
Investor with any material nonpublic information regarding the Company from and
after the filing of the Announcing Form 8-K with the SEC without the express
written consent of the Investor. Subject to the foregoing, neither the Company
nor the Investor shall issue any press releases or any other public statements
with respect to the transactions contemplated by this Agreement and the Purchase
Agreement or with respect to the Third Party Transactions or disclosing the name
of the Investor; provided, however, that the Company shall be entitled, without
the prior approval of the Investor, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with
the Announcing Form 8-K and contemporaneously therewith and (ii) as is required
by applicable law and regulations or as directed by the Principal Market
(provided that in the case of clause (i) the Investor shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release).

 

(d) Expenses. Subject to Section 9(k), the Company shall reimburse the Investor
for the Investor’s reasonable attorney’s fees and expenses in due diligence and
negotiating and preparing this Agreement and agreements with the Third Party
Investors. Any amounts requested by the Investor for reimbursement of expenses
pursuant to this Section 4(d) shall be paid by the Company to the Investor
promptly.

 

(e) Limitation on Net Sales of Common Stock. So long as the Investor holds

 

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any Common Shares, the Investor agrees that it will not enter into, directly or
indirectly, any net sales of Common Stock on any single day (each such day is
referred to as a “Limited Sales Day”) in excess of that number of shares of
Common Stock equal to (i) for any Limited Sales Day during the period beginning
on and including the Closing Date and ending on and including the date which is
30 days after the Closing Date, 0.0% of the daily trading volume for the Common
Stock (as reported by Bloomberg Financial Markets, or any successor thereto
(“Bloomberg”)) for that trading day, and (ii) for any Limited Sales Day after
the date which is 30 days after the Closing Date, 5.0% of the daily trading
volume for the Common Stock (as reported by Bloomberg) for that trading day;
provided, however, that the restrictions on net sales set forth above shall not
apply (i) with respect to any sale of shares of Common Stock held by the
Investor as of the Closing Date (other than shares of Common Stock issued
pursuant to a conversion by the Investor of Preferred Shares after February 5,
2004) and any such sale shall be ignored for all purposes of this Section 4(e),
(ii) on and after the first date on which there has been any Major Transaction
or an announcement of any pending, proposed or intended Major Transaction, or
(iii) on and after the date which is one year after the Closing Date.

 

(f) Prior Closing Under Purchase Agreement. If the sale of the 582.887593 Series
C Preferred Shares to the Third Party Investors pursuant to the Purchase
Agreement closes prior to the Closing, then so long as the Investor continues to
hold any Exchange Shares it agrees (i) to continue to be bound by any waivers or
agreements made by it in the Seller Transaction Documents (as defined in the
Purchase Agreement) notwithstanding the Investor’s assignment of its right
thereunder to the Third Party Investors in accordance with the Purchase
Agreement and (ii) not to convert any of its Exchange Shares into Series C
Conversion Shares other than pursuant to the exchange contemplated by this
Agreement. The Company acknowledges and agrees (x) until the Closing the
Investor continues to be the holder of 46.3 Series C Preferred Shares in spite
of the fact that, for logistical purposes, the orignal stock certificate
representing all of the Series C Preferred Shares held by the Investor will be
delivered to representatives of the Third Party Investors in connection with the
closing of the sale by the Investor of 582.887593 Series C Preferred Shares
pursuant to the Purchase Agreement, which closing may occur prior to the
Closing, and (y) in the event that the Closing does not occur on or prior to
February 18, 2004, the Company will deliver to the Investor on February 18, 2004
an original stock certificate representing 46.3 Series C Preferred Shares in the
name of the Investor.

 

5. TRANSFER AGENT INSTRUCTIONS.

 

No certificates representing any Common Shares shall bear any restrictive
legend. The Company warrants that the Common Shares shall be freely transferable
on the books and records of the Company and the Company shall not at any time
issue any stop transfer instructions, nor permit any stop transfer instructions
to be issued, to its transfer agent with respect to the Common Shares. The
Company shall permit the transfer of such Common Shares and promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denominations as specified by the Investor and without any restrictive legend.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Investor by vitiating the intent and purpose of
the transaction contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Investor shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required.

 

6. CONDITIONS TO THE COMPANY’S OBLIGATIONS AT CLOSING.

 

The obligation of the Company to exchange the Investor’s Series C Preferred
Shares for Common Shares at the Closing is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions, provided that
these conditions are for the Company’s sole benefit and may be waived by the
Company at any time in its sole discretion by providing the Investor with prior
written notice thereof:

 

(a) The Investor shall have delivered to the Company (i) an assignment separate
from certificate in the form attached hereto as Exhibit B, representing the
Exchange

 

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Shares and (ii) the certificate representing the Warrant.

 

(b) The representations and warranties of the Investor shall be true and correct
as of the date when made and as of the Closing Date as though made at that time,
and the Investor 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 Investor at or prior to the Closing Date.

 

(c) The transactions contemplated by the Purchase Agreement shall have been
consummated prior to, or shall be consummated concurrently with, the Closing.

 

7. CONDITIONS TO THE INVESTOR’S OBLIGATIONS AT CLOSING.

 

The obligation of the Investor hereunder to exchange the Exchange Shares for the
Common Shares at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Investor’s sole benefit and may be waived by the Investor
at any time in its sole discretion by providing the Company with prior written
notice thereof:

 

(a) The Company shall have credited the number of Common Shares to the
Investor’s balance account with DTC through its Deposit Withdrawal Agent
Commission system in accordance with the Investor’s written instructions (which
Common Shares shall be free from restrictive legend and from any stop order).

 

(b) The Common Stock shall not have been suspended by the SEC or the Principal
Market from trading on the Principal Market; and the Common Shares shall be
listed upon the Principal Market.

 

(c) The representations and warranties of the Company shall be true and correct
as of the date when made and as of the Closing Date 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 Date. The Investor
shall have received a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by the Investor.

 

(d) The Investor shall have received the opinion of Muldoon Murphy & Faucette
LLP dated as of the Closing Date, in the form of Exhibit A attached hereto.

 

(e) The Company shall have delivered to the Investor a secretary’s certificate,
dated as of the Closing Date, certifying as to (i) the resolutions of the
Company’s board of directors approving this Agreement and the transactions
contemplated thereby, (ii) the Certificate of Incorporation and (iii) the
By-laws, each as in effect at the Closing.

 

(f) The Company shall have delivered to the Investor a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding as of
a

 

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date within five days of the Closing Date.

 

(g) The transactions contemplated by the Purchase Agreement shall have been
consummated prior to, or shall be consummated concurrently with, the Closing.

 

8. INDEMNIFICATION. In consideration of the Investor’s execution and delivery of
this Agreement and in addition to all of the Company’s obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Investor and all of its stockholders, officers, directors, employees and direct
or indirect investors and any of the foregoing persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
“Indemnitees”) from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including,
without limitation, reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement or any other
certificate, instrument or document contemplated hereby, (b) any breach of any
covenant, agreement or obligation of the Company contained in this Agreement or
any other certificate, instrument or document contemplated hereby, (c) any cause
of action, suit or claim brought or made against such Indemnitee (other than a
cause of action, suit or claim which is (x) brought or made by the Company and
(y) is not a shareholder derivative suit) and arising out of or resulting from
(i) the execution, delivery, performance or enforcement of this Agreement or any
other certificate, instrument or document contemplated hereby, or (ii) the
status of the Investor or holder of the Common Shares as an investor in the
Company. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The indemnification required by this Section 8
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or Indemnified
Liabilities are incurred.

 

9. MISCELLANEOUS.

 

(a) Governing Law; Jurisdiction; Jury Trial. All 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 jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York. Each of the parties
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

 

11

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proceeding is improper. Each of the parties 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 OF THE PARTIES 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 identical counterparts, both
of which shall be considered one and the same agreement and shall become
effective when both counterparts have been signed 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; Effect on Prior Agreements; Amendments.

 

(i) This Agreement supersedes all other prior oral or written agreements between
the Investor, the Company, their affiliates and persons acting on their behalf
with respect to the matters expressly discussed herein, and this Agreement and
the instruments referenced herein contain the entire understanding of the
parties with respect to the matters expressly covered herein and therein and,
except as specifically set forth herein or therein, neither the Company nor the
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters.

 

(ii) No provision of this Agreement may be amended or waived other than by an
instrument in writing signed by the Company and the Investor.

 

(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) when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one (1) business day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. Unless such party has indicated another address and/or
facsimile number and/or to the

 

12

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attention of such other person as the recipient party has specified by written
notice five (5) days prior to the effectiveness of such change, 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: (631) 719-1830

Facsimile: (631) 719-1824

Attention: Paul E. Donofrio, President and Chief Executive Officer

 

With a copy to:

 

Muldoon Murphy & Faucette LLP

5101 Wisconsin Avenue, NW

Washington, DC 20016

Telephone: (202) 686-4966

Facsimile: (202) 966-9409

Attention: Lawrence Spaccasi, Esq.

 

If to the Transfer Agent:

 

Continental Stock Transfer & Trust Company

Two Broadway

New York, NY 10004

Telephone: (212) 509-4000

Facsimile: (212) 509-7616

Attention: Compliance Officer

 

If to the Investor:

 

Promethean Asset Management, L.L.C.

750 Lexington Avenue

New York, NY 10022

Telephone: (212) 702-5240

Facsimile: (212) 758-9620

Attention: Robert J. Brantman

With a copy to:

 

Katten Muchin Zavis Rosenman

525 West Monroe Street, Suite 1600

Chicago, IL 60661

Telephone: (312) 902-5493

Facsimile: (312) 577-8858

Attention: Mark D. Wood, Esq.

 

13

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Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (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.

 

(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including, without limitation, any purchasers of the Common Shares. The Company
shall not assign this Agreement or any rights or obligations hereunder without
the prior written consent of the Investor. The Investor may assign some or all
of its rights hereunder (i) to a Permitted Transferee (as defined below) without
the consent of the Company and (ii) to a person which is not a Permitted
Transferee with the prior consent of the Company, which consent shall not be
unreasonably withheld; in which event such assignee shall be deemed to be the
Investor hereunder with respect to such assigned rights; provided, however, that
any such assignment shall not release the Investor from its obligations
hereunder unless such obligations are assumed by such assignee. For purposes of
this Section 9(g), a “Permitted Transferee” means (i) an Affiliate (as defined
below) of the Investor, or (ii) any entity which has the same investment advisor
or manager or trading advisor or manager as the Investor or an Affiliate of the
Investor. “Affiliate” for purposes of this Section 9(g) means, with respect to
any person or entity, another person or entity that, directly or indirectly, (A)
has a 5% or more equity interest in that person or entity, (B) controls that
person or entity, (C) is controlled by that person or entity, or (D) is under
common control with that person or entity. “Control” or “controls” for purposes
of this Section 9(g) means that a person or entity has the power, directly or
indirectly, to conduct or govern the policies of another person or entity.

 

(h) No Third Party Beneficiaries. Except with respect to Section 9(o), 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. Unless this Agreement is terminated under Section 9(k), the
representations and warranties of the Company and the Investor contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, 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

 

14

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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 16, 2004 due to the Company’s or the Investor’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching
party’s failure to waive such unsatisfied condition(s)), the nonbreaching 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; provided, however, that if this Agreement is terminated by the
Company pursuant to this Section 9(k), the Company shall remain obligated to
reimburse the Investor for the expenses described in Section 4(d) above.

 

(l) Financial Advisor. The Company shall be responsible for the payment of any
financial advisory fees or brokers’ commissions relating to or arising out of
the transactions contemplated hereby. The Company shall pay, and hold the
Investor harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim made against the Investor for such fees.

 

(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. The Investor shall have all rights and remedies set forth in this
Agreement and all rights and remedies which have been granted at any time under
any other agreement or contract and all of the rights which the Investor has
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.

 

(o) Mutual General Release.

 

(i) In consideration of the releases set forth in Sections 9(o)(ii) and
9(o)(iii), and other consideration set forth herein, effective as of the
Closing, the Investor, on behalf of itself and, to the extent permitted by law,
its heirs, executors, administrators, devisees, trustees, partners, directors,
officers, shareholders, employees, consultants, representatives, predecessors,
principals, agents, parents, associates, affiliates, subsidiaries, attorneys,
accountants, successors, successors-in-interest and assignees (collectively, the
“Investor Releasing Persons”), hereby waives and releases, to the fullest extent
permitted by law, but subject to Section 9(o)(iii) below, any and all claims,
rights and causes of action, whether known or unknown (collectively, the
“Investor Claims”), that any of the Investor Releasing Persons had, currently
has or then has against (i) the Company, (ii) any of the Company’s current or
former parents, shareholders, affiliates, subsidiaries, predecessors or assigns,
or (iii) any of the Company’s or such other persons’ or entities’ current or
former officers, directors,

 

15

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employees, agents, principals, investors, signatories, advisors, consultants,
spouses, heirs, estates, executors, attorneys, auditors and associates and
members of their immediate families (collectively, the “Company Released
Persons”), including, without limitation, any Investor Claims arising out of or
relating to the Securities Purchase Agreement, Registration Rights Agreement
between the Company and the Investor, dated as of October 5, 2000 (the
“Registration Rights Agreement”) and the Series C Certificate of Amendment
(collectively, the “Released Documents”), other than Investor Claims arising
from third party claims, actions or proceedings after the Closing.

 

(ii) In further consideration of the Investor entering into this Agreement,
effective as of the Closing, the Company on behalf of itself and, to the extent
permitted by law, its heirs, executors, administrators, devisees, trustees,
partners, directors, officers, shareholders, employees, consultants,
representatives, predecessors, principals, agents, parents, associates,
affiliates, subsidiaries, attorneys, accountants, successors,
successors-in-interest and assignees (collectively, the “Company Releasing
Persons”), hereby waives and releases, to the fullest extent permitted by law,
but subject to Section 9(o)(iii) below, any and all claims, rights and causes of
action, whether known or unknown (collectively, the “Company Claims”), that any
of the Company Releasing Persons had, currently has or then has against (i) the
Investor, (ii) any of the Investor’s current or former parents, shareholders,
affiliates, subsidiaries, predecessors or assigns, or (iii) any of the
Investor’s or such other persons’ or entities’ current or former officers,
directors, employees, agents, principals, investors, signatories, advisors,
consultants, spouses, heirs, estates, executors, attorneys, auditors and
associates and members of their immediate families (collectively, the “Investor
Released Persons”), including, without limitation, any Company Claims arising
out of or relating to the Released Documents.

 

(iii) The Company and the Investor acknowledge that the releases set forth in
Sections 9(o)(i), and 9(o)(ii) above do not affect any claim which any Company
Releasing Person or Investor Releasing Person may have under this Agreement or
Section 5, 6 or 7 of the Registration Rights Agreement.

 

(p) Limitation of Beneficial Ownership. Notwithstanding anything to the contrary
in this Agreement, in no event shall the Investor have the right to convert any
Series C Shares into, or exchange any Series C Shares for, shares of Common
Stock to the extent that, after giving effect to such conversion or exchange the
Investor (together with Investor’s affiliates) would have beneficial ownership
of in excess of 9.99% of the shares of the Common Stock outstanding immediately
after giving effect to such conversion or exchange. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Investor and its affiliates shall include the number of shares of Common
Stock issuable upon conversion or exchange of the Series C Shares with respect
to which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable (i) upon conversion of
the remaining unconverted Series C Shares beneficially owned

 

16

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by Investor and its affiliates, and (ii) upon conversion or exercise of the
unconverted or unexercised portion of any other securities of the Company
beneficially owned by the Investor and its affiliates subject to a limitation on
conversion or exercise analogous to the limitation contained in this paragraph.
Except as set forth in the preceding sentence, for purposes of this paragraph
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. For purposes of this paragraph, in
determining the number of outstanding shares of Common Stock, the Investor may
rely on the number of outstanding shares of Common Stock as reflected in (1) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (2) a more
recent public announcement by the Company or (3) any other notice by the Company
or its transfer agent setting forth the number of shares of Common Stock
outstanding, including, without limitation, as disclosed in Section 3(d) of this
Agreement. For purposes of compliance with this paragraph, upon the written or
oral request of the Investor, the Company shall reasonably promptly confirm
orally and in writing to the Investor the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of
the Company, including the Series C Shares, by Investor or its affiliates since
the date as of which such number of outstanding shares of Common Stock was
reported.

 

* * * * * *

 

17

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IN WITNESS WHEREOF, the Investor and the Company have caused this Exchange and
Termination Agreement to be duly executed as of the date first written above.

 

COMPANY:

 

ANDREA ELECTRONICS CORPORATION

 

     

INVESTOR:

 

HFTP INVESTMENT L.L.C

By: Promethean Asset Management, L.L.C.

Its: Investment Manager

By:   /s/    Paul E. Donofrio       By:   /s/    Robert J. Brantman    

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

         

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

   

Name: Paul E. Donofrio

Title:   President and Chief Executive Officer

         

Name: Robert J. Brantman

Its: Authorized Representative

 

 

18

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EXHIBIT A

 

Form of Company Counsel Opinion

 

Based on the foregoing, and subject to the assumptions and qualifications set
forth below, we are of the opinion that:

 

1. The Company is a corporation incorporated, validly existing and in good
standing under the laws of New York, and has the requisite corporate power and
authority to conduct its business, and to own, lease and operate its properties,
as described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002.

 

2. The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under the Exchange and Termination Agreement
(the “Exchange Agreement”), including issuance of the Common Shares, in
accordance with the terms of the Exchange Agreement. The execution and delivery
of the Exchange Agreement by the Company, the performance of the obligations of
the Company thereunder and the consummation by it of the transactions
contemplated therein have been duly authorized by the Company’s Board of
Directors and no further consent or authorization of the Company, its Board of
Directors or its stockholders is required therefor. The Exchange Agreement has
been duly executed and delivered by the Company and constitutes the valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms.

 

3. The issuance of the Common Shares has been duly authorized, and when issued
in accordance with the terms of the Exchange Agreement, the Common Shares will
be validly issued, fully paid and non-assessable and free of all taxes, liens,
charges and preemptive rights with respect to the issue thereof.

 

4. As of the date hereof, the authorized common stock of the Company consists of
200,000,000 shares of Common Stock, par value $0.01 per share. None of such
Common Stock or such Preferred Stock is subject to preemptive rights or other
rights of the shareholders of the Company pursuant to the Certificate of
Incorporation or the By-laws or under the New York Business Corporation Law.
Except for the Series C Preferred Stock, to our knowledge, there are no
securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Common Shares in accordance with the
terms of the Exchange Agreement.

 

5. Subject to the accuracy as to factual matters of the Investor’s
representations in Section 2 of the Exchange Agreement, the Common Shares may be
issued to you pursuant to the Exchange Agreement without registration under the
1933 Act or the securities laws of any state, and you will be able to utilize or
tack the holding period applicable to the Series C Preferred Stock for purposes
of Rule 144 under the 1933 Act in connection with sales of the Common Shares.

 

6. No authorization, approval, consent, filing or other order of any Federal or
state governmental body, regulatory agency, self-regulatory organization or
stock exchange or market, or any court, or, to our knowledge, any third party,
is required to be obtained by the Company to

 

19

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enter into and perform its obligations under the Exchange Agreement or for the
issuance and sale of the Common Shares.

 

7. To our knowledge and other than that which has been publicly disclosed by the
Company, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body or any governmental agency or
self-regulatory organization pending or threatened against the Company or any of
the properties of the Company which is reasonably be expected to have a material
adverse effect on the business, properties, assets, operations, results of
operations, financial condition or prospects of the Company taken as a whole or
on the transactions contemplated by the Exchange Agreement.

 

8. The execution, delivery and performance by the Company of the Exchange
Agreement, the consummation by the Company of the transactions contemplated
thereby, and the compliance by the Company with the terms thereof, does not (a)
violate, conflict with or constitute a default (or an event which, with the
giving of notice or lapse of time or both, constitutes or would constitute a
default) under (i) the Certificate of Incorporation or the By-laws, or (ii) any
agreement, note, lease, mortgage, deed or other instrument to which the Company
is a party or by which the Company is bound and which the Company has filed as
an exhibit to its reports filed with the Securities Exchange Commission under
the Securities Exchange Act of 1934, as amended (the “1934 Act”) or which, to
our knowledge, the Company otherwise is required or will be required to file as
an exhibit to its reports under the 1934 Act; or (b) result in any violation of
any statute, law, rule or regulation known to us to be applicable to the Company
or, to the best of our knowledge, any order, writ, injunction or decree.

 

9. To our knowledge, the Company is not an “investment company” or any entity
controlled by an “investment company,” as such terms are defined in the
Investment Company Act of 1940, as amended.

 

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20

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EXHIBIT B

 

Form of Assignment Separate From Certificate

 

 

FOR VALUE RECEIVED, HFTP Investment L.L.C. does hereby sell, assign and transfer
unto Andrea Electronics Corporation, a New York corporation,
                          shares of the Series C Convertible Preferred Stock,
$0.01 par value per share, of Andrea Electronics Corporation, a New York
corporation (the “Company”), standing in the undersigned’s name on the books of
said Company represented by Certificate No.              and does hereby
irrevocably constitute and appoint                           as attorney to
transfer the said securities on the books of the Company with full power of
substitution in the premises.

 

Dated: