Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

     Registration Rights Agreement (this “Agreement”) executed this 23rd day of
June, 2005, by and between DIGITAL RECORDERS, INC., a North Carolina corporation
(the “Company”), and DOLPHIN OFFSHORE PARTNERS, L.P. (the “Holder”).

     WHEREAS, it is contemplated under that certain Stock Purchase Agreement by
and between the Company and the Holder dated June 23, 2005 (as such may be
amended from time to time, the “Stock Purchase Agreement”) and that certain
Stock Purchase Warrant dated as of June 23, 2005, by the Company in favor of the
Holder (the “Warrant Agreement”), that the Company provide the Holder with
certain registration rights.

     NOW THEREFORE, in consideration of the mutual covenants and agreements and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I
REQUIRED REGISTRATION

     1.1 Required Registration. Subject to Sections 1.5 and 5.2 hereof, the
Company shall, at its sole cost and expense, file a Registration Statement on or
before August 23, 2005 and cause a Registration Statement under the 1933 Act
covering the resale by Holder of all of the Conversion Shares and Warrant Stock
to be declared effective by the Commission on or before October 23, 2005, time
being of the essence (the “Target Effective Date”). The Company will use its
best efforts to keep such Registration Statement current and effective for at
least two (2) years from the date hereof or until such earlier date as the
Company’s registration obligations with respect to the Conversion Shares
terminate pursuant to Section 5.2 hereof.

     1.2 Demand Registration.

     (a) At any time during the period beginning on the date on which any
Dividend Shares become issuable (upon the initial issuance as dividends of
shares of Preferred Stock convertible into such Dividend Shares, as contemplated
by clause (b) of the definition of “Preferred Stock” contained in Section 6.1),
and ending on the earlier of two years after the final issue date of such shares
of Preferred Stock or the date on which the Company’s registration obligations
with respect to the Dividend Shares terminate pursuant to Section 5.2 hereof,
the Holder may request the Company to register under the Securities Act all, but
not less than all, of the Dividend Shares that the Holder then holds or has the
right to acquire and that constitute Registrable Securities, for sale by such
Holder in the manner specified in such request. The Company will use its best
efforts to expeditiously effect the registration of the Dividend Shares
following such a request. The Holder shall have the right to require such a
registration one (1) time, provided that if the requested registration is not
effected as contemplated by Section 1.5, the Holder shall continue to have the
rights specified in this Section 1.2 until such registration is effected in
accordance herewith. The Company shall not be required to effect a registration

 

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pursuant to a request under this Section 1.2 within six (6) months after the
filing of a registration statement relating to a public offering of securities
by the Company. Any Registration Statement filed pursuant hereto may include, in
addition to the Dividend Shares, such other shares of Common Stock or other
securities of the Company for sale by the Company or other security holders of
the Company as the Company may deem appropriate, provided that the inclusion of
such additional securities does not unreasonably interfere with the Holder’s
ability to dispose of the Dividend Shares pursuant to such registration. The
Company may satisfy its obligations under this Section 1.2 by amending the
Registration Statement filed pursuant to Section 1.1 to add the Dividend Shares
thereto, if appropriate and permitted under applicable rules of the Commission.

     (b) If at the time of any request to register Dividend Shares pursuant to
this Section 1.2 the Company is engaged in discussions or negotiations regarding
a possible acquisition or other significant corporate transaction that, in the
good faith determination of the Company’s Board of Directors, would be adversely
affected by the requested registration to the material detriment of the Company,
then the Company may at its option direct that such request be delayed for a
period not in excess of sixty (60) days from the date of such request, such
right to delay a request to be exercised by the Company not more than once in
any one (1) year period.

     1.3 Piggyback Registration. If at any time the Company shall propose to
register any Common Stock, whether or not for sale for its own account, under
the 1933 Act, by future registrations on Form SB-2, S-1, S-2 or S-3 for future
financings (but not Form S-4 or S-8) or any successor or similar forms (except
for any registrations in connection with an employee benefit plan or dividend
reinvestment plan or a merger, consolidation or other business combination) it
shall give written notice to the Holder of its intention to do so and of the
Holder’s rights under this Section 1.3 at least 30 days prior to the filing of a
registration statement with respect to such registration with the Commission.
Upon the written request of the Holder made within 20 days after the receipt of
that notice, which request shall specify the Registrable Securities intended to
be registered and disposed of by such Investor, the Company shall, subject to
the provisions hereof, use its best efforts to include in such registration
statement all Registrable Securities that the Company has been so requested to
register by Holder. If Holder decides not to include all of its Registrable
Securities in any registration statement thereafter filed by the Company, such
Investor shall nevertheless continue to have the right pursuant to this
Section 1.3 to include any Registrable Securities in any subsequent registration
statement or registration statements as may be filed by the Company with respect
to offerings of its securities, upon all the terms and conditions set forth
herein. If, at any time after giving written notice of its intention to register
any securities and prior to the effective date of the registration statement
filed in connection with a registration under this Section 2(g), the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to each Holder and upon giving that notice (i) in the case of a
determination not to register, the Company shall be relieved of its obligation
to register any Registrable Securities in connection with such

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registration without prejudice and (ii) in the case of a determination to delay
registering, the Company shall be permitted to delay registering any Registrable
Securities for the same period as the delay in registering such other
securities.

     1.4 Restriction on Registration. Notwithstanding the foregoing, the Company
shall not be required to effect a registration pursuant to the foregoing
provisions of Section 1.1, 1.2 or 1.3 if it is determined that such registration
would not be permitted under applicable securities laws or the rules and
regulations of the Commission.

     1.5 Expenses. The Company will pay all of its Registration Expenses in
connection with the registrations required by Sections 1.1, 1.2 and 1.3,
including any Registration Statement that is not deemed to be effected pursuant
to the provisions of Section 1.6 hereof.

     1.6 Effective Registration Statement. A registration pursuant to
Section 1.1, 1.2 or 1.3 of this Agreement shall not be deemed to have been
effected (i) unless a Registration Statement with respect thereto has been
declared effective by the Commission, (ii) if after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason or (iii) the Registration Statement does not remain continuously
effective until termination of the Company’s registration obligations pursuant
to Section 5.2 hereof. If a registration pursuant to this Article I is deemed
not to have been effected as provided in this Section 1.6, then the Company
shall continue to be obligated to effect the registration required by
Section 1.1 or 1.2.

     1.7 Obligations of the Holder.

     (a) In connection with any registration of Registrable Securities pursuant
to Section 1.1, 1.2 or 1.3, the Holder shall furnish to the Company in a timely
manner all information regarding itself and the distribution of such Registrable
Securities as may be required to be included in the Registration Statement and
as the Company may from time to time reasonably request in order to effect the
registration of such Registrable Securities, and shall otherwise cooperate with
the Company to the extent reasonably necessary to effect such registration.

     (b) Each Holder agrees, that upon receipt of any notice from the Company of
the happening of any event of the kind described in paragraph (f) of Article II
hereof, the Holder will forthwith discontinue disposition of Registrable
Securities covered by any Registration Statement or Prospectus until the
Holder’s receipt of the copies of the supplemented or amended Prospectus
contemplated by such paragraph (f), or until it is advised in writing by the
Company that the use of the applicable Prospectus may be resumed, and has
received copies of any additional or supplemental filings that are incorporated
by reference in such Prospectus, and, if so directed by the Company, the Holder
will deliver to the Company (at the Company’s expense) all copies, other than
permanent file copies then in the Holder’s possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice.

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     (c) If any Registrable Securities are to be sold in an underwritten
offering, the Holder shall complete and execute all questionnaires, powers of
attorney, indemnities, underwriting agreements (including customary indemnities
by the selling stockholders) and other documents reasonably and customarily
required under the terms of such underwriting arrangements.

ARTICLE II
REGISTRATION PROCEDURES

     Whenever any Registrable Securities are to be registered pursuant to this
Agreement, the Company will use best efforts to effect the registration of such
Registrable Securities for sale in accordance with the intended method or
methods of disposition thereof as quickly as possible, and pursuant thereto the
Company will as expeditiously as reasonably possible:

     (a) prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities and use its best efforts to cause such
Registration Statement to become and remain effective for the period
contemplated by Section 1.1 or 1.2; provided, that as promptly as practicable
before filing a Registration Statement or Prospectus or any amendments or
supplements thereto, the Company will (i) furnish to counsel selected by the
Holder copies of all such documents proposed to be filed, and (ii) notify the
Holder of (x) any request by the Commission to amend such Registration Statement
or amend or supplement any Prospectus, or (y) any stop order issued or
threatened by the Commission, and take all reasonable actions required to
prevent the entry of such stop order or to promptly remove it if entered;

     (b) (i) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the period contemplated by Section 1.1 or 1.2, and (ii) comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the Holder set forth in
such Registration Statement;

     (c) furnish to the Holder, without charge, such number of conformed copies
of such Registration Statement, each amendment and supplement thereto, the
Prospectus included in such Registration Statement (including each preliminary
Prospectus and, in each case, including all exhibits) and such other documents
as the Holder may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by it;

     (d) use its best efforts to register or qualify such Registrable Securities
under such other securities or blue sky laws of such jurisdictions in the United
States as the Holder shall reasonably request, to keep such registration or
qualification in effect for so long as such Registration Statement remains in
effect and do any and all other acts and things which may be reasonably
necessary or advisable to enable the Holder to consummate the disposition in
such jurisdictions of the Registrable Securities owned by

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it; provided, however, that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this clause (d), (ii) subject itself to taxation in
any such jurisdiction or (iii) consent to general service of process in any such
jurisdiction;

     (e) use its best efforts (if the offering is underwritten) to furnish to
the Holder a signed copy, addressed to the Holder (and the underwriters, if any)
of an opinion of counsel for the Company or special counsel to the selling
stockholder, dated the effective date of such Registration Statement (and, if
such Registration Statement includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), covering substantially
the same matters with respect to such Registration Statement (and the Prospectus
included therein) as are customarily covered in opinions of issuer’s counsel
delivered to the underwriters in underwritten public offerings, and such other
legal matters as the Holder (or the underwriters, if any) may reasonably
request;

     (f) notify the Holder, at a time when a Prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
known to the Company as a result of which the Prospectus included in such
Registration Statement, as then in effect, contains an untrue statement of a
material fact or omits to state any fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and, at the request of the Holder, the
Company will prepare and furnish to the Holder a reasonable number of copies of
a supplement to or an amendment of such Prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such Registrable Securities, such
Prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made;

     (g) cause all such Registrable Securities to be listed on each securities
exchange and quotation system on which similar securities issued by the Company
are then listed and to enter into such customary agreements as may be required
in furtherance thereof, including, without limitation, listing applications and
indemnification agreements in customary form;

     (h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such Registration Statement;

     (i) make available for inspection by the Holder, any underwriter
participating in any disposition pursuant to such Registration Statement and any
attorney, accountant or other agent retained by the Holder or any such
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company’s officers, directors,
employees and independent accountants to supply all information reasonably
requested by the Holder, any such underwriter, attorney, accountant or agent in
connection with such Registration Statement to enable them to conduct a
reasonable investigation within the meaning of the Securities Act;

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     (j) subject to other provisions hereof, use its best efforts to cause such
Registrable Securities covered by such Registration Statement to be registered
with or approved by such other governmental agencies or authorities or
self-regulatory organizations as may be necessary to enable the sellers thereof
to consummate the disposition of such Registrable Securities; and

     (k) promptly notify the Holder of the issuance of any stop order by the
Commission or the issuance by any state securities commission or other
regulatory authority of any order suspending the qualification or exemption from
qualification of any of the Registrable Securities under state securities or
“blue sky” laws, and use every reasonable effort to obtain the lifting at the
earliest possible time of any stop order suspending the effectiveness of any
Registration Statement or of any order preventing or suspending the use of any
preliminary Prospectus.

ARTICLE III
REGISTRATION EXPENSES

     3.1 Registration Expenses. All Registration Expenses will be borne as
provided in Section 1.5 of this Agreement.

     3.2 Sellers’ Expenses. The Company shall have no obligation to pay (a) any
underwriting discounts or commissions or stock transfer taxes attributable to
the sale of Registrable Securities, which expenses will be borne by all sellers
of securities included in such registration in proportion to the aggregate
selling price of the securities to be so registered, or (b) any fees or expenses
of attorneys for the Holder or any other selling stockholder.

ARTICLE IV
INDEMNIFICATION

     4.1 Company’s Indemnification Obligations. The Company agrees to indemnify
and hold harmless the Holder and each other Person, if any, who controls the
Holder within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act (collectively, the “Holder Indemnitees”):

     (a) against any and all loss, liability, claim, damage or expense arising
out of or based upon an untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement (or any amendment or
supplement thereto), including all documents incorporated therein by reference,
or in any preliminary Prospectus or Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;

     (b) against any and all loss, liability, claim, damage and expense to the
extent of the aggregate amount paid in settlement of any litigation,
investigation or proceeding

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by any governmental agency or body, commenced or threatened, or of any claim
based upon any such untrue statement or omission or any such alleged untrue
statement or omission, if such settlement is effected with the written consent
of the Company; and

     (c) against any and all reasonable expense incurred by them in connection
with investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim based upon any such untrue statement or omission or any
such alleged untrue statement or omission, to the extent that any such expense
is not paid under clause (a) or (b) above

provided, that this indemnity does not apply to any loss, liability, claim,
damage or expense to the extent arising out of an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Holder expressly for use in the preparation of any Registration Statement
(or any amendment or supplement thereto), including all documents incorporated
therein by reference, or in any preliminary Prospectus or Prospectus (or any
amendment or supplement thereto); and provided further, that the Company will
not be liable to the Holder or any other Holder Indemnitee under the indemnity
agreement in this Section 4.1, with respect to any preliminary Prospectus or the
final Prospectus or the final Prospectus as amended or supplemented, as the case
may be, to the extent that any such loss, liability, claim, damage or expense of
such Holder Indemnitee results from the fact that the Holder sold Registrable
Securities to a Person to whom there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the final Prospectus or of the
final Prospectus as then amended or supplemented, whichever is most recent, if
the Company has previously and timely furnished copies thereof to the Holder.

     4.2 Holder’s Indemnification Obligations. In connection with any
Registration Statement in which the Holder is participating, the Holder agrees
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 4.1 of this Agreement) the Company and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act with respect to any statement or alleged
statement in or omission or alleged omission from such Registration Statement,
any preliminary, final or summary Prospectus contained therein, or any amendment
or supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Holder. The obligations of each
Holder pursuant to this Section 4.2 (if there are more than one) are to be
several and not joint (however, husband and wife are to be treated as one
Holder); provided, that with respect to each claim pursuant to this Section 4.2,
each such Holder’s maximum liability under this Section shall be limited to an
amount equal to the net proceeds actually received by such Holder (after
deducting any underwriting discount and expenses) from the sale of Registrable
Securities being sold pursuant to such Registration Statement or Prospectus by
such Holder.

     4.3 Notices; Defense; Settlement. Promptly after receipt by an indemnified
party hereunder of written notice of the commencement of any action or
proceeding involving a claim

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referred to in Section 4.1 or Section 4.2 of this Agreement, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
provided, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under
Section 4.1 or Section 4.2 of this Agreement except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified, to the extent that
it may wish, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof with counsel mutually
satisfactory to the indemnifying party and the indemnified party, the
indemnifying party will not be liable to such indemnified party for any legal or
other expenses subsequently incurred by the latter in connection with the
defense thereof, unless in such indemnified party’s reasonable judgment, upon
the advice of counsel, a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, in which case the
indemnifying party shall not be liable for the fees and expenses of (i) more
than one counsel for all holders of Registrable Securities, selected by the
Holder or (ii) more than one counsel for the Company in connection with any one
action or separate but similar or related actions. An indemnifying party who is
not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party, based on advice of counsel, a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels. The indemnifying party will not, without the
prior written consent of each indemnified party, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such indemnified party or any Person who controls such indemnified party
is a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of such indemnified
party from all liability arising out of such claim, action, suit or proceeding.
Notwithstanding anything to the contrary set forth herein, and without limiting
any of the rights set forth above, in any event, any party will have the right
to retain, at its own expense, counsel with respect to the defense of a claim.

     4.4 Indemnity Provision. The Company and the Holder shall provide for the
foregoing indemnity (with appropriate modifications) in any underwriting
agreement with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority other than the Securities Act.

     4.5 Contribution Based on Relative Fault. In order to provide for just and
equitable contribution if a claim for indemnification pursuant to the
indemnification provisions of this Article IV is made but it is found in a final
judgment by a court of competent jurisdiction (not subject to further appeal)
that such indemnification may not be enforced in such case, and the express
provisions hereof provide for indemnification in such case, then the
indemnifying party

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shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in Section 4.1
or Section 4.2 of this Agreement in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, in connection with statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations, including, without limitation, the
relative benefits received by each parties from the offering of the securities
covered by such Registration Statement, the parties’ relative knowledge and
access to information concerning the matter with respect to which the claim was
asserted and the opportunity to correct and prevent any statement or omission.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or the indemnified party and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statements or omission. The parties hereto agree that it
would not be just and equitable if contributions pursuant to this Section 4.5
were to be determined by pro rata or per capita allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the first sentence of this Section 4.5. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this Section 4.5 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any action or claim (which shall be
limited as provided in Section 4.3 of this Agreement if the indemnifying party
has assumed the defense of any such action in accordance with the provisions
thereof) which is the subject of this Section 4.5. Promptly after receipt by an
indemnified party under this Section 4.5 of notice of the commencement of any
action against such party in respect of which a claim for contribution may be
made against an indemnifying party under this Section 4.5, such indemnified
party shall notify the indemnifying party in writing of the commencement thereof
if the notice specified in Section 4.3 of this Agreement has not been given with
respect to such action; provided, that the omission to so notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may otherwise have to any indemnified party under this Section 4.5,
except to the extent that the indemnifying party is actually prejudiced by such
failure to give notice. The Company and the Holder agree with each other, and
will agree with the underwriters of the Registrable Securities, if requested by
such underwriters, that (i) the underwriters’ portion of such contribution shall
not exceed the underwriting discount and (ii) that the amount of such
contribution by the Holder shall not exceed an amount equal to the net proceeds
actually received by the Holder from the sale of Registrable Securities in the
offering to which the losses, liabilities, claims, damages or expenses of the
indemnified parties relate. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.

     4.6 Payments. The indemnification required by this Article IV shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as and when expense, loss, damage or liability is
incurred.

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ARTICLE V
TRANSFER AND TERMINATION OF REGISTRATION RIGHTS;

     5.1 Transfer of Rights. The Holder identified in the preamble of this
Agreement may transfer its rights to register such Holder’s Registrable
Securities hereunder to any transferee of such Registrable Securities, provided
that such rights may not be transferred (a) to any person or entity who or which
is engaged in an activity or business directly competitive with any activity or
business of the Company or any subsidiary of the Company as presently conducted;
or (b) to any person or entity without the Company’s prior written consent,
which shall not be unreasonably withheld; and provided further that the proposed
transferee enters into a written agreement with the Company, agreeing to be
bound by the terms and conditions hereof. As used in Agreement, “Holder” shall
refer to the Holder identified in the preamble of this Agreement and to each
permitted transferee of such Holder’s rights pursuant to this Section 5.1, as
the context requires; provided that no Holder other than the Holder identified
in the preamble of this Agreement shall have the right to make any transfer or
assignment of rights under this Agreement.

     5.2 Termination of Rights. The registration rights of any Holder of such
rights hereunder and the registration obligations of the Company hereunder with
respect to Registrable Securities will terminate on the earliest date at which
such Registrable Securities have been sold or may be sold pursuant to the
exemption from registration provided under Rule 144(k) promulgated under the
Securities Act.

ARTICLE VI
DEFINITIONS

     6.1 Terms. As used in this Agreement, the following defined terms shall
have the meanings set forth below:

     “Business Day” means a day other than Saturday, Sunday or any day on which
banks located in the State of New York are authorized or obligated to close.

     “Commission” means the United States Securities and Exchange Commission.

     “Common Stock” means the common stock, par value $.10 per share, of the
Company, any securities into which such common stock shall have been changed or
any securities resulting from any reclassification or recapitalization of such
common stock, and all other securities (other than Preferred Stock) of any class
or classes (however designated) of the Company the holders of which have the
right, without limitation as to amount, after payment on any securities entitled
to a preference on dividends or other distributions upon any dissolution,
liquidation or winding up, either to all or to a share of the balance of
payments upon such dissolution, liquidation or winding up.

     “Conversion Shares” means (i) the shares of Common Stock issued or issuable
upon conversion of the 336 shares of Preferred Stock initially issued to the
Holder pursuant to the

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Stock Purchase Agreement, (ii) any additional shares of Common Stock issued or
issuable upon conversion of shares of Preferred Stock hereafter issued as
dividends on shares of Preferred Stock (as contemplated by clause (b) of the
definition of “Preferred Stock” below), the issuance of which does not require
approval by the Company’s shareholders, and (iii) any securities issued or
issuable with respect to such shares of Common Stock pursuant to the adjustment
provisions contained in the Company’s Articles of Incorporation governing the
Preferred Stock in connection with a stock split or combination of shares,
recapitalization, merger, consolidation, or other reorganization.

     “Dividend Shares” means (i) the shares of Common Stock, if any, issued or
issuable upon conversion of shares of Preferred Stock hereafter issued as
dividends on outstanding shares of Series G Convertible Preferred Stock and
which do not constitute Conversion Shares, and (ii) any securities issued or
issuable with respect to such shares of Common Stock pursuant to the adjustment
provisions contained in the Company’s Articles of Incorporation governing the
Preferred Stock in connection with a stock split or combination of shares,
recapitalization, merger, consolidation, or other reorganization.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, or
any similar Federal statute then in effect, and any reference to a particular
section thereof shall include a reference to the equivalent section, if any, of
any such similar Federal statute, and the rules and regulations thereunder.

     “Person” means any individual, corporation, partnership, association, trust
or other entity or organization, including a government or political subdivision
or an agency or instrumentality thereof.

     “Preferred Stock” means the shares of Series G Convertible Preferred Stock
of the Company (a) issued and sold to the Holder by the Company pursuant to the
Stock Purchase Agreement on or before the date hereof and (b) issued to the
Holder as dividends on outstanding shares of Series G Convertible Preferred
Stock pursuant to Section 2 of the Certificate of Designation setting forth the
terms and provisions of the Series G Convertible Preferred Stock.

     “Prospectus” means the prospectus included in any Registration Statement
(including without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective Registration
Statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the securities covered by such Registration
Statement, and all other amendments and supplements to the prospectus, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such prospectus.

     “Registrable Securities” means the Conversion Shares, Warrant Stock and the
Dividend Shares, provided that, as to any particular Registrable Securities,
such securities will cease to be Registrable Securities when they have been
(x) effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement covering them or (y) transferred

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pursuant to Rule 144 (or any similar rule then in force) under the Securities
Act or otherwise transferred and, in each case, new certificates for them not
bearing a restrictive Securities Act legend have been delivered by the Company
and can be sold without complying with the registration requirements of the
Securities Act.

     “Registration Expenses” means, with respect to any registration required
hereunder, all of the reasonable costs and expenses incurred in connection with
such registration, other than (i) underwriting discounts and commissions;
(ii) transfer taxes; and (iii) all attorney’s fees for selling stockholders’
attorneys.

     “Registration Statement” means any registration statement of the Company
which covers any of the Registrable Securities pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits and
all material incorporated by reference in such registration statement.

     “Securities Act” means the Securities Act of 1933, as amended, or any
similar Federal statute then in effect, and any reference to a particular
section thereof shall include a reference to a comparable section, if any, of
any such similar Federal statute, and the rules and regulations thereunder.

     “Warrant Stock” shall have the meaning set forth in the Warrant Agreement.

     6.2 Defined Terms in Corresponding Sections. The following defined terms,
when used in this Agreement, shall have the meaning ascribed to them in the
corresponding Sections of this Agreement listed below:

         
“Agreement”
  —   Preamble
“Company”
  —   Preamble
“Holder Indemnitees”
  —   Section 4.1
“Holder”
  —   Preamble and Section 5.1
“Stock Purchase Agreement”
  —   Recitals
“Target Effective Date”
  —   Section 1.1
“Warrant Agreement”
  —   Recitals

ARTICLE VII
MISCELLANEOUS

     7.1 Remedies. In the event of a breach by any party to this Agreement of
its obligations under this Agreement, any party injured by such breach, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The parties agree that the provisions of this Agreement
shall be specifically enforceable, it being agreed by the parties that the
remedy at law, including monetary damages, for breach of any such provision will
be inadequate

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compensation for any loss and that any defense in any action for specific
performance that a remedy at law would be adequate is waived.

     7.2 Amendments and Waivers. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement will be
effective against the Company or any Holder of Registrable Securities, unless
such modification, amendment or waiver is approved in writing by the Company and
the Holder(s) representing a majority of the Registrable Securities then
outstanding. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.

     7.3 Successors and Assigns. All covenants and agreements in this Agreement
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and permitted assigns of the parties hereto whether
so expressed or not.

     7.4 Notices. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given only if delivered
personally against written receipt or mailed by pre-paid registered or certified
mail, return receipt requested or mailed by overnight courier prepaid to the
parties at the following addresses:

     
If to the Company:
  Digital Recorders, Inc.
 
  5949 Sherry Lane, Suite 1050
 
  Dallas, TX 75225
 
  Attention: CEO & President
 
   
If to Holder:
  Dolphin Offshore Partners, L.P.
 
  c/o Dolphin Asset Management Corp.
 
  129 East 17th Street
 
  New York, NY 10003

All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 7.4, be deemed given upon
delivery, (ii) if delivered by mail in the manner described above to the address
as provided in this Section 7.4, be deemed given on the earlier of the tenth
full Business Day following the day of mailing or upon receipt, and (iii) if
delivered by overnight courier to the address provided in this Section 7.4, be
deemed given on the earlier of the third Business Day following the date sent by
such overnight courier or upon receipt. Any party from time to time may change
its address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other parties hereto.

     7.5 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.

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     7.6 Gender. Whenever the pronouns “he” or “his” are used herein they shall
also be deemed to mean “she” or “hers” or “it” or “its” whenever applicable.
Words in the singular shall be read and construed as though in the plural and
words in the plural shall be construed as though in the singular in all cases
where they would so apply.

     7.7 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.

     7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of North Carolina, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of North Carolina or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of North
Carolina.

     7.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

     7.10 Termination of Prior Agreement. This Agreement is being entered into
for the purpose of amending and restating in its entirety the Original
Agreement, and the Original Agreement is hereby terminated and superceded in its
entirety by this Agreement and shall have no further force or effect.

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     IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the date first above written, intending the same, to the extent
legally permissible, to be effective as of June 23, 2005.

                  COMPANY:    
 
                Digital Recorders, Inc.    
 
           
 
  By:              /s/ David L. Turney    
 
           
 
      Name: David L. Turney
Title: CEO, President and Chairman    
 
                HOLDER:    
 
                Dolphin Offshore Partners, L.P.    
 
  By:   Dolphin Management Inc.
its managing general partner    
 
           
 
  By:   /s/ Peter E. Salas    
 
           
 
      Name: Peter E. Salas
Title: General Partner    

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