I'm sure there are all kinds of advanced signal processing techniques that I should be using, but for now I went with the simplest, most naive approach. And it sort of works, except when it doesn't. What I do is I keep an exponential moving average of the signal's volume and I decide that the signal is currently "high" when the average is above a threshold and "low" when it's below it. The threshold is set based on recent peak volume. Then I try to decide what the length of a dot and a dash is, interpret the input accordingly, and finally translate the dots and dashes to letters. The application adapts to changing volume and speed within reasonable limits (it should work up to about 40 WPM).
I was hesitant about putting the application on Android Market, as I only tested it on my phone and it quite often fails at translating Morse code. Then again, it's not like I have anything to lose by getting 1-star reviews and insulting comments, so why not.
Here's a Market link.
