EXHIBIT 10.2

REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement (this “Agreement”) is made and
entered into as of October 5, 2004, by and among Digital Recorders, Inc., a
North Carolina corporation (the “Company”), and the investors signatory hereto
(each an “Investor” and collectively, the “Investors”).

         This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Investors (the “Purchase
Agreement”).

         The Company and the Investors hereby agree as follows:

     1. Definitions. Capitalized terms used and not otherwise defined herein
that are defined in the Purchase Agreement will have the meanings given such
terms in the Purchase Agreement. As used in this Agreement, the following terms
have the respective meanings set forth in this Section 1:

         “Effective Date” means the date that the Registration Statement is
first declared effective by the Commission.

         “Effectiveness Date” means the earlier of: (i) the 180th day following
the Closing Date and (ii) the fifth Trading Day following the date on which the
Company is notified by the Commission that the Registration Statement will not
be reviewed or is no longer subject to further review and comments.

         “Effectiveness Period” has the meaning set forth in Section 2(a).

         “Exchange Act” means the Securities Exchange Act of 1934, as amended.

         “Filing Date” means the 31st day following the Closing Date.

         “Holder” or “Holders” means the holder or holders, as the case may be,
from time to time of Registrable Securities.

         “Indemnified Party” has the meaning set forth in Section 5(c).

         “Indemnifying Party” has the meaning set forth in Section 5(c).

         “Losses” has the meaning set forth in Section 5(a).

         “New York Courts” means the state and federal courts sitting in the
City of New York, Borough of Manhattan.

         “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

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         “Prospectus” means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any 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 Registrable Securities covered by a
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: (i) the Shares, (ii) the Warrant
Shares, (iii) any shares of Common Stock issuable upon the exercise of warrants
issued to any placement agent as compensation in connection with the financing
subject of the Purchase Agreement and (iv) any securities issued or issuable
upon any stock split, dividend or other distribution, recapitalization or
similar event, or any exercise price adjustment with respect to any of the
securities referenced in (i), (ii) and (iii) above, without regard to any
limitations on exercises of the Warrants.

         “Registration Statement” means the registration statement of the
Company filed under the Securities Act covering the Registrable Securities,
including the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference therein.

         “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

         “Rule 415” means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

         “Rule 424” means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

         “Securities Act” means the Securities Act of 1933, as amended.

         “Shares” means the shares of Common Stock issued or issuable by the
Company to the Investors pursuant to the Purchase Agreement.

         “Warrants” means the Common Stock purchase warrants issued or issuable
to the Investors pursuant to the Purchase Agreement.

         “Warrant Shares” means the shares of Common Stock issued or issuable
upon exercise of the Warrants.

     2. Registration.

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         (a) Filing and Effectiveness. On or prior to the Filing Date, the
Company shall prepare and file with the Commission a Registration Statement
covering the resale of all Registrable Securities. The Registration Statement
shall be on Form S-1 (subject to the provisions of Section 2(e)), and shall
contain (except if otherwise required pursuant to written comments received from
the Commission upon a review of such Registration Statement) the “Selling
Stockholders” and “Plan of Distribution” attached hereto as Annex A. The
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the number of Registrable
Securities as of the Trading Day immediately preceding the date the Registration
Statement is initially filed with the Commission, subject to adjustment as
provided in Section 2(f). The Company shall cause such Registration Statement to
be declared effective under the Securities Act as soon as possible but, in any
event, no later than its Effectiveness Date. The Company shall use its
reasonable best efforts to keep the Registration Statement continuously
effective under the Securities Act until the date which is the earlier of
(i) such time as all of the Registrable Securities covered by such Registration
Statement have been sold pursuant to the Registration Statement or otherwise
publicly sold by the Holders, or (ii) such time as all of the Registrable
Securities covered by such Registration Statement may be sold by the Holders
pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to
a written opinion letter to such effect, addressed and acceptable to the
Company’s transfer agent and the affected Holders (the “Effectiveness Period”).

         (b) Liquidated Damages. If: (i) the Registration Statement is not filed
on or prior to the Filing Date (if the Company files a Registration Statement
without affording the Holders the opportunity to review and comment on the same
as required by Section 3(a) hereof, the Company shall not be deemed to have
satisfied this clause (i)), or (ii) the Registration Statement covering all of
the Registrable Securities is not declared effective by the Commission on or
prior to the Effectiveness Date, or (iii) after the Effective Date, without
regard for the reason thereunder or efforts therefore, such Registration
Statement ceases for any reason to be effective and available to the Holders as
to all Registrable Securities to which it is required to cover at any time prior
to the expiration of the Effectiveness Period (other than during an Allowable
Grace Period, as defined in Section 3(r)) (any such failure or breach being
referred to as an “Event,” and for purposes of clauses (i) or (ii) the date on
which such Event occurs, or for purposes of clause (iii) the date which such
Allowable Grace Period is exceeded, being referred to as “Event Date”), then in
addition to any other rights the Holders may have hereunder or under applicable
law: (x) on each such Event Date the Company shall pay to each Holder an amount
in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of
the product of the number of Shares then held by such Holder and the Per Unit
Purchase Price; and (y) on each monthly anniversary of each such Event Date (if
the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company shall pay to each Holder an amount in
cash, as partial liquidated damages and not as a penalty, equal to 1.5% of the
product of the number of Shares then held by such Holder and the Per Unit
Purchase Price. The parties agree that the Company will not be liable for
liquidated damages under this Section in respect of the Warrants or Warrant
Shares. If the Company fails to pay any partial liquidated damages pursuant to
this Section in full within seven days after the date payable, the Company will
pay interest thereon at a rate of 10% per annum (or such lesser maximum amount
that is permitted to be paid by applicable law) to the Holder, accruing daily
from the date such partial liquidated damages are due until such amounts, plus
all such interest thereon, are paid in full. The partial

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liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata
basis for any portion of a month prior to the cure of an Event, except in the
case of the first Event Date.

         (c) Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Holders based on the number of Registrable Securities held by
each Holder at the time the Registration Statement covering such initial number
of Registrable Securities or increase thereof is declared effective by the
Commission. In the event that a Holder sells or otherwise transfers any of such
Holder’s Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Holders, pro rata based on the number of
Registrable Securities then held by such Holders which are covered by such
Registration Statement. In no event shall the Company include any securities
other than Registrable Securities on any Registration Statement without the
prior written consent of Investors holding at least a majority of the
Registrable Securities.

         (d) Selling Holder Questionnaire. Each Holder agrees to furnish to the
Company a completed Questionnaire in the form attached to this Agreement as
Annex B (a “Selling Holder Questionnaire”). The Company shall not be required to
include the Registrable Securities of a Holder in a Registration Statement and
shall not be required to pay any liquidated or other damages under Section 2(b)
to any Holder who fails to furnish to the Company a fully completed Selling
Holder Questionnaire at least two Trading Days prior to the Filing Date (subject
to the requirements set forth in Section 3(a)).

         (e) Ineligibility for Form S-3. The Company shall undertake to register
the Registrable Securities on Form S-3 as soon as such form is available,
provided that the Company shall maintain the effectiveness of the Registration
Statement then in effect until such time as a Registration Statement on Form S-3
covering the Registrable Securities has been declared effective by the
Commission.

         (f) Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities required to be
covered by such Registration Statement or a Holder’s allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall amend the
applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least
100% of the number of such Registrable Securities as of the Trading Day
immediately preceding the date of the filing of such amendment or new
Registration Statement, in each case, as soon as practicable, but in any event
not later than 15 days after the Company becomes aware of the necessity
therefor. The Company shall use its reasonable best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed “insufficient to cover all of the Registrable Securities” if at any
time the number of shares of Common Stock available for resale under such
Registration Statement is less than the

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number of Registrable Securities. The calculation set forth in the foregoing
sentence shall be made without regard to any limitations on the exercise of the
Warrants and such calculation shall assume that the Warrants are then
exercisable into shares of Common Stock.

     3. Registration Procedures

         In connection with the Company’s registration obligations hereunder,
the Company shall:

         (a) (A) permit legal counsel designated by a majority in interest of
the Holders, which shall initially be Schulte Roth & Zabel LLP (“Legal Counsel”)
to review and comment upon (i) the Registration Statement at least five Business
Days prior to its filing with the Commission and (ii) all amendments and
supplements to all Registration Statements (except for amendments or supplements
filed solely for the purpose of adding information included in Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
any similar or successor reports) within a reasonable number of days prior to
their filing with the Commission, and (B) not file any Registration Statement or
amendment or supplement thereto in a form to which Legal Counsel reasonably
objects. The Company shall not submit a request for acceleration of the
effectiveness of a Registration Statement or of any amendment thereto without
the prior approval of Legal Counsel, which consent shall not be unreasonably
withheld. The Company shall furnish to Legal Counsel, without charge, (i) copies
of any correspondence from the Commission or the staff of the Commission to the
Company or its representatives relating to any Registration Statement,
(ii) promptly after the same is prepared and filed with the Commission, one copy
of any Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, if
requested by a Holder and not otherwise available on the EDGAR system, and all
exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto.

         (b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep such Registration Statement
continuously effective as to the Registrable Securities for the Effectiveness
Period; (ii) cause the related Prospectus to be amended or supplemented by any
required Prospectus supplement, and as so supplemented or amended to be filed
pursuant to Rule 424; (iii) respond as promptly as reasonably possible, but in
any event no later than five Business Days after receipt thereof, to any
comments received from the Commission with respect to the Registration Statement
or any amendment thereto and, as promptly as reasonably possible provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to such Registration Statement that would not result in the
disclosure to the Holders of material and non-public information concerning the
Company; (iv) submit to the Commission, within two Business Days after the
Company learns that no review of a particular Registration Statement will be
made by the staff of the Commission or that the staff of the Commission has no
further comments on a particular Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request; and
(v) comply in all material respects with the provisions of the Securities Act
and the Exchange Act with respect to the Registration Statement and the
disposition of all Registrable Securities

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covered by any Registration Statement. In the case of amendments and supplements
to a Registration Statement which are required to be filed pursuant to this
Agreement (including pursuant to this Section 3(b)) by reason of the Company
filing a report on Form 10-K, Form 10-Q or Form 8-K or any analogous report
under the Exchange Act, the Company shall have incorporated such report by
reference into such Registration Statement, if permissible, or shall file such
amendments or supplements with the Commission not later than one Business Day
after the day on which the Exchange Act report is filed which created the
requirement for the Company to amend or supplement such Registration Statement.

         (c) Notify the Holders as promptly as reasonably possible (and, in the
case of (i)(A) below, not less than three Trading Days prior to such filing) and
(if requested by any such Holder) confirm such notice in writing no later than
one Trading Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a “review” of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the Holders
that pertain to the Holders as a Selling Stockholder or to the Plan of
Distribution, but not information which the Company reasonably believes would
constitute material and non-public information); and (C) with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (v) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in such Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to such
Registration Statement, Prospectus or other documents so that, in the case of
such Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any 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
(provided that in no event shall such notice contain any material and non-public
information).

         (d) (i) Use its reasonable best efforts to avoid the issuance of, or,
if issued, obtain the withdrawal of (A) any order suspending the effectiveness
of the Registration Statement, or (B) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment and (ii) notify Legal
Counsel and each Holder of Registrable Securities being sold of the issuance of
such order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.

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         (e) Furnish to each Holder, without charge, at least one conformed copy
of each Registration Statement and each amendment thereto and all exhibits to
the extent requested by such Person (including those previously furnished)
promptly after the filing of such documents with the Commission.

         (f) Promptly deliver to each Holder, without charge, upon the
effectiveness of any Registration Statement, as many copies of each Prospectus
or Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request. The Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the selling Holders in connection with the offering and sale of the
Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.

         (g) Prior to any public offering of Registrable Securities, to register
or qualify or cooperate with the selling Holders in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
Holders may reasonably request (provided that the Company shall not be required
to register as a foreign corporation or qualify to do business generally in any
jurisdiction in which it is not otherwise required to be so registered or
qualified), to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement.

         (h) If any Holder is required under applicable securities law to be
described in the Registration Statement as an underwriter (which does not
include statements in the Registration Statement that a Holder may be deemed to
be an underwriter), at the reasonable request of such Holder, the Company shall
furnish to such Holder, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as an Holder may
reasonably request (i) a letter, dated such date, from the Company’s independent
certified public accountants in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the Holders, and (ii) an opinion, dated as of such
date, of counsel representing the Company for purposes of such Registration
Statement, in form, scope and substance as is customarily given in an
underwritten public offering, addressed to the Holders.

         (i) Upon the written request of any Holder in connection with any
Holder’s due diligence requirements, if any, the Company shall make available
for inspection by (i) any Holder, (ii) Legal Counsel and (iii) one firm of
accountants or other agents retained by the Holders (collectively, the
“Inspectors”), all pertinent financial and other records, and pertinent
corporate documents and properties of the Company (collectively, the “Records”),
as shall be reasonably deemed necessary by each Inspector, and cause the
Company’s officers, directors and employees to supply all information which any
Inspector may reasonably request; provided, however, that each Inspector shall
agree in writing to hold in strict confidence and shall not make any disclosure
(except to an Holder) or use of any Record or other information which the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the

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Securities Act, (b) the release of such Records is ordered pursuant to a final,
non-appealable subpoena or order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement of which the Inspector has knowledge. Each Holder agrees that it
shall, upon learning that disclosure of such Records is required or is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential. Such Holder shall, at the
Company’s sole expense, cooperate with the Company in connection with any such
action. Nothing herein (or in any other confidentiality agreement between the
Company and any Holder) shall be deemed to limit the Holders’ ability to sell
Registrable Securities in a manner which is otherwise consistent with applicable
laws and regulations.

         (j) The Company shall hold in confidence and not make any disclosure of
information concerning a Holder provided to the Company and determined in good
faith by such Holder to be confidential, and of which determination the Company
is so notified, unless (i) disclosure of such information is necessary to comply
with federal or state securities laws, (ii) the disclosure of such information
is necessary to avoid or correct a misstatement or omission in any Registration
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other final, non-appealable order from a court or governmental body
of competent jurisdiction, or (iv) such information has been made generally
available to the public other than by disclosure in violation of this Agreement
or any other agreement of which the Company has knowledge. The Company agrees
that it shall, upon learning that disclosure of such information concerning a
Holder is sought in or by a court or governmental body of competent jurisdiction
or through other means, give prompt written notice to such Holder and allow such
Holder, at the Holder’s expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.

         (k) The Company shall use its reasonable best efforts either to
(i) cause all the Registrable Securities covered by a Registration Statement to
be listed on each securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation and quotation of all the Registrable Securities covered
by a Registration Statement on the Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to use its
reasonable best efforts to arrange for at least two market makers to register
with the National Association of Securities Dealers, Inc. (“NASD”) as such with
respect to such Registrable Securities. The Company shall pay all fees and
expenses in connection with satisfying its obligation under this Section 3(k).

         (l) Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.

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         (m) Upon the occurrence of any event contemplated by Section 3(c)(v),
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to the affected Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, no Registration Statement nor any Prospectus will
contain 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, in
light of the circumstances under which they were made, not misleading and
deliver such number of copies of such supplement or amendment to Legal Counsel
and each Holder as they may reasonably request.

         (n) If requested by a Holder, the Company shall (i) as soon as
practicable incorporate in a prospectus supplement or post-effective amendment
such information as a Holder reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering
and (ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment.

         (o) The Company shall use its reasonable best efforts to cause the
Registrable Securities covered by a Registration Statement to be registered with
or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.

         (p) The Company shall make generally available to its security holders
as soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with, and in the
manner provided by, the provisions of Rule 158 under the Securities Act)
covering a twelve-month period beginning not later than the first day of the
Company’s fiscal quarter next following the effective date of a Registration
Statement.

         (q) Within two Business Days after a Registration Statement which
covers Registrable Securities is ordered effective by the Commission, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Holders whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the Commission in the form attached hereto as Exhibit A.

         (r) Notwithstanding anything to the contrary herein, at any time after
the Registration Statement has been declared effective by the Commission, the
Company may delay the disclosure of material, non-public information concerning
the Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company and its counsel, in the best
interest of the Company and, in the opinion of counsel to the Company, otherwise
required (a “Grace Period”); provided, that the Company shall promptly
(i) notify the Holders in writing of the existence of a Grace Period in
conformity with the provisions of this Section 3(r)(provided that in each notice
the Company will not disclose the content of such

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material, non-public information to the Holders) and the date on which the Grace
Period will begin, and (ii) notify the Holders in writing of the date on which
the Grace Period ends; and, provided further, that no Grace Period shall exceed
ten consecutive days and during any 365 day period such Grace Periods shall not
exceed an aggregate of 30 days (each, an “Allowable Grace Period”). For purposes
of determining the length of a Grace Period above, the Grace Period shall begin
on and include the date the Holders receive the notice referred to in clause
(i) and shall end on and include the later of the date the Holders receive the
notice referred to in clause (ii) and the date referred to in such notice. The
provisions of Section 3(d) hereof shall not be applicable during the period of
any Allowable Grace Period. Upon expiration of the Grace Period, the Company
shall again be bound by the first sentence of Section 3(c)(v) with respect to
the information giving rise thereto unless such material, non-public information
is no longer applicable. The Holder shall adhere to its obligation to trade in
accordance with the rules and regulations of the Commission during such
Allowable Grace Period. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
purchaser of Registrable Securities from a Holder in accordance with the terms
of the Purchase Agreement in connection with any sale of Registrable Securities
with respect to which a Holder has entered into a binding contract for sale, and
delivered a copy of the prospectus included as part of the applicable
Registration Statement, prior to the Holder’s receipt of the notice of a Grace
Period and for which the Holder has not yet settled.

     4. Registration Expenses. All fees and expenses incident to the performance
of or compliance with this Agreement by the Company shall be borne by the
Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with any Trading Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing prospectuses
if the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable Securities included in the Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
Trading Market as required hereunder.

     5. Indemnification.

         (a) Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, investment advisors, partners, members, employees
and representatives of each of them, each Person who controls any such Holder
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) and the officers, directors, agents and

10

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employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs (including, without
limitation, reasonable costs of preparation and reasonable attorneys’ fees),
amounts paid in settlement or expenses (collectively, “Losses”), as arising out
of, relate to or are based upon: (i) any untrue statement or alleged untrue
statement of a material fact in a Registration Statement or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under the securities or other “blue sky” laws of any jurisdiction
in which Registrable Securities are offered, or the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or
contained in the Prospectus or the omission or alleged omission to state therein
any material fact necessary to make the statements made therein, in the light of
the circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities pursuant to a Registration Statement or
(iv) any material violation of this Agreement, except to the extent, but only to
the extent, that (1) such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by Legal
Counsel or otherwise by or on behalf of such Holder expressly for use therein,
or to the extent that such information relates to such Holder or such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by Legal Counsel or otherwise by or on behalf of
such Holder or provided to the Company by Legal Counsel or otherwise by or on
behalf of such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
(it being understood that the Holder has approved Annex A hereto for this
purpose) or (2) such Holder uses an outdated or defective Prospectus after the
Company has notified such Holder in writing that the Prospectus is outdated or
defective and prior to the receipt by such Holder of an Advice (as hereinafter
defined) or an amended or supplemented Prospectus, but only if and to the extent
that following the receipt of the Advice or the amended or supplemented
Prospectus the misstatement or omission giving rise to such Loss would have been
corrected. The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.

         (b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, each of its
officers who signs the Registration Statement and, each Person who controls the
Company (within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), to the fullest extent permitted by applicable law, from
and against all Losses, as incurred, arising solely out of or based solely upon:
(x) such Holder’s failure to comply with the prospectus delivery requirements of
the Securities Act or (y) any untrue statement of a material fact contained in
any Registration Statement, any Prospectus, or any form of prospectus, or in any
amendment or supplement thereto, or arising solely out of or based solely upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein not misleading to the extent, but only to the extent
that, (1) such untrue statements or omissions are based solely upon information
regarding such Holder furnished in writing to the Company by Legal Counsel or
otherwise by or on behalf of such Holder expressly for use therein, or to the
extent that such information relates

11

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to such Holder or such Holder’s proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder or
provided to the Company by Legal Counsel or otherwise by or on behalf of such
Holder expressly for use in the Registration Statement (it being understood that
the Holder has approved Annex A hereto for this purpose), such Prospectus or
such form of Prospectus or in any amendment or supplement thereto or (2) such
Holder uses an outdated or defective Prospectus after the Company has notified
such Holder in writing that the Prospectus is outdated or defective and prior to
the receipt by such Holder of an Advice or an amended or supplemented
Prospectus, but only if and to the extent that following the receipt of the
Advice or the amended or supplemented Prospectus the misstatement or omission
giving rise to such Loss would have been corrected. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 5(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party (as hereinafter defined) if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.

         (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
“Indemnified Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that such failure shall have prejudiced the
Indemnifying Party.

         An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). In the case of Indemnified Parties consisting of
Holders,, legal counsel referred to in the immediately preceding sentence shall
be selected by the Holders holding at least a majority in interest of the
Registrable Securities included in the Registration Statement to which the Loss
relates. The Indemnified Party shall cooperate fully with the Indemnifying Party
in connection with any negotiation or defense of any Proceeding or Loss by the
Indemnifying Party and shall furnish to the Indemnifying Party all information
reasonably available to the Indemnified Party which relates to such Proceeding
or

12

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Loss. The Indemnifying Party shall keep the Indemnified Party fully apprized at
all times as to the status of the defense or any settlement negotiations with
respect thereto. The Indemnifying Party shall not be liable for any settlement
of any such Proceeding effected without its prior written consent, which consent
shall not be unreasonably withheld. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
Following indemnification as provided for hereunder, the Indemnifying Party
shall be subrogated to all rights of the Indemnified Party with respect to all
third parties, firms or corporations relating to the matter for which
indemnification has been made.

         All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within thirty days
of written notice thereof to the Indemnifying Party (regardless of whether it is
ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).

         (d) Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations;
provided, however, that no Person involved in the sale of Registrable Securities
which Person is guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) in connection with such sale shall be
entitled to contribution from any Person involved in such sale of Registrable
Securities who was not guilty of fraudulent misrepresentation The relative fault
of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys’ or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.

         The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no

13

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Holder shall be required to contribute, in the aggregate, any amount in excess
of the amount by which the proceeds actually received by such Holder from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that such Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission.

         The indemnity and contribution agreements contained in this Section are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties, but without duplication of recovery.

     6. Reports Under The Exchange Act.

         With a view to making available to the Holders the benefits of
Rule 144, the Company agrees to:

         (a) make and keep public information available, as those terms are
understood and defined in Rule 144;

         (b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Exchange Act so long as the Company
remains subject to such requirements and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and

         (c) furnish to each Holder so long as such Holder owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144 and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Holders to
sell such securities pursuant to Rule 144 without registration.

     7. Miscellaneous.

         (a) Remedies. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.

         (b) No Piggyback on Registrations. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in a Registration Statement other than the
Registrable Securities, and the Company shall not during the Registration Period
enter into any agreement providing any such right to any of its security
holders.

14

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

 

         (c) Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.

         (d) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Section 3(c), such Holder
will forthwith discontinue disposition of such Registrable Securities under the
Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph. Neither the obligation of the Holders to discontinue disposition of
Registrable Securities pursuant to this Section 7(d) nor any event giving rise
thereto shall constitute an Event for purposes of Section 2(b) unless the
effectiveness of the Registration Statement is suspended or terminated as a
result thereof during the Effectiveness Period. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended
Shares of Common Stock to a purchaser of Registrable Securities from a Holder in
accordance with the terms of the Purchase Agreement in connection with any sale
of Registrable Securities with respect to which a Holder has entered into a
binding contract for sale prior to the Holder’s receipt of a notice from the
Company of the happening of any event of the kind described in Section 3(c) and
for which the Holder has not yet settled.

         (e) Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered, subject to customary underwriter cutbacks
applicable to all holders of registration rights.

         (f) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this Section 6(f), may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of no less than a majority in interest of the then outstanding
Registrable Securities. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of certain Holders and that does not directly or
indirectly affect the rights of other Holders may be given by Holders of at
least a majority of the Registrable Securities to which such waiver or consent
relates. No consideration shall be offered or paid to any Person to amend or
consent to a

15

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waiver or modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.

         (g) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 6:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (d) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:

     
If to the Company:
  Digital Recorders, Inc.

  5949 Sherry Lane, Suite 1050

  Dallas, Texas 75225

  Attn: Chief Financial Officer

  Facsimile: (214) 378-8437
 
   
With a copy to:
  Carrington, Coleman, Sloman & Blumenthal, L.L.P.

  200 Crescent Court, Suite 1500

  Dallas, Texas 75201

  Attn: Kenn W. Webb, Esq.

  Facsimile: (214) 855-1333
 
   
If to an Investor:
  To the address and facsimile number set forth on the Schedule of Investors
attached hereto, with copies to such Investor’s representatives as set forth on
the Schedule of Investors.
 
   
If to any other Person who is then the registered Holder:
 
   

  To the address of such Holder as it appears in the stock transfer books of the
Company
 
   
If to Legal Counsel:
  Schulte Roth & Zabel LLP

  919 Third Avenue

  New York, New York 10022

  Attn: Eleazer Klein, Esq.

  Facsimile: (212) 593-5955

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

         (h) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the

16

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benefit of each Holder. The Company may not assign its rights or obligations
hereunder without the prior written consent of a majority in interest of the
Holders. Each Holder may assign its respective rights hereunder in the manner
and to the Persons as permitted under the Purchase Agreement.

         (i) Execution and Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.

         (j) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement (whether brought
against a party hereto or its respective Affiliates, employees or agents) will
be commenced in the New York Courts. Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts 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 Proceeding, any claim that it is not
personally subject to the jurisdiction of any New York Court, or that such
Proceeding has been commenced in an improper or inconvenient forum. Each party
hereto hereby irrevocably waives personal service of process and consents to
process being served in any such Proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any Proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby. If either
party shall commence a Proceeding to enforce any provisions of this Agreement,
then the prevailing party in such Proceeding shall be reimbursed by the other
party for its attorney’s fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.

         (k) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.

         (l) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that

17

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they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.

         (m) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

         (n) Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under this Agreement are several and not joint with
the obligations of each other Investor, and no Investor shall be responsible in
any way for the performance of the obligations of any other Investor under this
Agreement. Nothing contained herein or in any Transaction Document, and no
action taken by any Investor pursuant thereto, shall be deemed to constitute the
Investors as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Investors are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by this Agreement or any other Transaction Document. Each Investor
acknowledges that no other Investor will be acting as agent of such Investor in
enforcing its rights under this Agreement. Each Investor shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement, and it shall not be necessary for any
other Investor to be joined as an additional party in any Proceeding for such
purpose. The Company acknowledges that each of the Investors has been provided
with the same Registration Rights Agreement for the purpose of closing a
transaction with multiple Investors and not because it was required or requested
to do so by any Investors.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES TO FOLLOW]

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     IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

            DIGITAL RECORDERS, INC.
      By:   /s/ DAVID L. TURNEY       Name:   David L. Turney       Title:  
Chairman, CEO and President    

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES OF HOLDERS TO FOLLOW]

 

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

 

     IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

            NAME OF INVESTING ENTITY

RIVERVIEW GROUP, LLC     By:   /s/ TERRY FEENEY       Name:   Terry Feeney      
Title:   Chief Operating Officer    

 

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

 

SCHEDULE OF INVESTORS

              Investor Address   Investor’s Representative’s Address Investor

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

  and Facsimile Number

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

  and Facsimile Number

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

Riverview Group, LLC
  666 Fifth Avenue, 8th floor   Schulte Roth & Zabel LLP

  New York, New York 10103   919 Third Avenue

  Attention: Manager   New York, NY 10022

  Facsimile: (212) 841-4141   Attn: Eleazer Klein, Esq.

  Telephone: (212) 841-4100   Facsimile: (212) 593-5955

      Telephone: (212) 756-2000

 

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EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Transfer Agent]

Attn:

Re: Digital Recorders, Inc.

Ladies and Gentlemen:

     We are counsel to Digital Recorders, Inc., a North Carolina corporation
(the “Company”), and have represented the Company in connection with that
certain Securities Purchase Agreement, dated as of October 5, 2004 (the
“Securities Purchase Agreement”), entered into by and among the Company and the
buyers named therein (collectively, the “Holders”) pursuant to which the Company
issued to the Holders its shares of the Company’s Common Stock, par value $.1
per share (the “Common Stock”) and warrants exercisable for shares of Common
Stock (the “Warrants”). Pursuant to the Securities Purchase Agreement, the
Company also has entered into a Registration Rights Agreement with the Holders
(the “Registration Rights Agreement”) pursuant to which the Company agreed,
among other things, to register the resale of the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon exercise of the Warrants under the Securities Act of 1933,
as amended (the “Securities Act”). In connection with the Company’s obligations
under the Registration Rights Agreement, on
                                                             , 2004, the Company
filed a Registration Statement on Form S-1 (File
No. 333-                                        ) (the “Registration Statement”)
with the Securities and Exchange Commission (the “Commission”) relating to the
Registrable Securities which names each of the Holders as a selling stockholder
thereunder.

     In connection with the foregoing, we advise you that a member of the
Commission’s staff has advised us by telephone that the Commission has entered
an order declaring the Registration Statement effective under the Securities Act
at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no
knowledge, after telephonic inquiry of a member of the Commission’s staff, that
any stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the
Commission and the Registrable Securities are available for resale under the
Securities Act pursuant to the Registration Statement.

     This letter shall serve as our standing opinion to you that the shares of
Common Stock are freely transferable by the Holders pursuant to the Registration
Statement. You need not require further letters from us to effect any future
legend-free issuance or reissuance of shares of Common Stock in connection with
sales or transfers thereof by the Holders as contemplated by the Company’s
Irrevocable Transfer Agent Instructions dated October 6, 2004. This letter shall
serve as our standing opinion with regard to this matter.

Very truly yours,

 

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

 

[ISSUER’S COUNSEL]

By:                                                            

CC: [LIST NAMES OF HOLDERS]

 

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ANNEX A

SELLING STOCKHOLDERS

     The shares of common stock being offered by the selling stockholders are
those previously issued to the selling stockholders and those issuable to the
selling stockholders upon exercise of the warrants. For additional information
regarding the issuance of common stock and the warrants, see “Private Placement
of Common Shares and Warrants” above. We are registering the shares of common
stock in order to permit the selling stockholders to offer the shares for resale
from time to time. Except for the ownership of the shares of common stock and
the warrants, the selling stockholders have not had any material relationship
with us within the past three years.

     The table below lists the selling stockholders and other information
regarding the beneficial ownership of the shares of common stock by each of the
selling stockholders. The second column lists the number of shares of common
stock beneficially owned by each selling shareholder, based on its ownership of
the shares of common stock and the warrants, as of                     ,
200                  , assuming exercise of the warrants held by the selling
stockholders on that date, without regard to any limitations on exercise.

     The third column lists the shares of common stock being offered by this
prospectus by the selling stockholders.

     In accordance with the terms of registration rights agreements with the
holders of the shares of common stock and the warrants, this prospectus
generally covers the resale of at least 100% of that number of shares of common
stock equal to the number of shares of common stock issued and the shares of
common stock issuable upon exercise of the related warrants, determined as if
the outstanding warrants were exercised in full as of the trading day
immediately preceding the date this registration statement was initially filed
with the Commission. Because the exercise price of the warrants may be adjusted,
the number of shares that will actually be issued may be more or less than the
number of shares being offered by this prospectus. The fourth column assumes the
sale of all of the shares offered by the selling stockholders pursuant to this
prospectus.

     Under the terms of the warrants, a selling shareholder may not exercise the
warrants, to the extent such exercise would cause such selling shareholder,
together with its affiliates, to beneficially own a number of shares of common
stock which would exceed 9.99% of our then outstanding shares of common stock
following such exercise, excluding for purposes of such determination shares of
common stock issuable upon exercise of the warrants which have not been
exercised. The number of shares in the second column does not reflect this
limitation. In addition, the warrants provide that a selling stockholder may not
exercise the warrants if the issuance of shares of common stock upon exercise
would exceed the number of shares that we can issue without exceeding certain
limitations contained in the rules of The Nasdaq Stock Market. That maximum
number of shares currently issuable under the warrants, or that are likely to
become issuable under the warrants, do not exceed such limitation. The selling
stockholders may sell all, some or none of their shares in this offering. See
“Plan of Distribution.”

 

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                          Name of Selling Shareholder

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

  Number of Shares
Owned Prior to
Offering

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

  Maximum Number of
Shares to be Sold
Pursuant to this
Prospectus

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

    Number of Shares
Owned After
Offering

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Riverview Group, LLC (1)
  (3)           0    
Roth Capital Partners (2)
  (4)                  

     (1) The sole member of Riverview is Millennium Holding Group, L.P., a
Delaware limited partnership (“Holding”). Millennium Management, LLC, a Delaware
limited liability company (“Millennium Management”), is the general partner of
Holding and consequently has voting control and investment discretion over
securities owned by Holding and by Riverview. Israel A. Englander
(“Mr. Englander”) is the sole managing member of Millennium Management. As a
result, Mr. Englander may be considered the beneficial owner of any shares
deemed to be beneficially owned by Millennium Management. The foregoing should
not be construed in and of itself as an admission by any of Holding, Millennium
Management or Mr. Englander as to beneficial ownership of the shares owned by
Riverview.

     (2) Describe Roth

     (3) Describe securities

     (4) Describe securities

On October 5, 2004, we engaged Roth Capital Partners, LLC, which is one of the
selling stockholders listed above, to serve as our exclusive placement agent in
connection with a private placement of our common stock. We issued the warrant
described in footnote 4 to the table above to Roth Capital Partners, LLC and
also paid that firm a cash fee in the amount of $400,000 as compensation for its
services as placement agent in connection with a private placement completed
pursuant to that agreement. That private placement related to the shares of
common stock covered by this prospectus, including the 1,207,730 shares that are
presently outstanding and the 241,546 shares issuable upon the exercise of the
warrant described in footnote 3 to the table above.

 

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PLAN OF DISTRIBUTION

     We are registering the shares of common stock previously issued and the
shares of common stock issuable upon exercise of the warrants to permit the
resale of these shares of common stock by the holders of the common stock and
warrants from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling stockholders of the
shares of common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.

     The selling stockholders may sell all or a portion of the shares of common
stock beneficially owned by them and offered hereby from time to time directly
or through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,

•   on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;   •   in the
over-the-counter market;   •   in transactions otherwise than on these exchanges
or systems or in the over-the-counter market;   •   through the writing of
options, whether such options are listed on an options exchange or otherwise;  
•   in ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;   •   block trades in which the broker-dealer
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;   •   purchases by a
broker-dealer as principal and resale by the broker-dealer for its account;   •
  an exchange distribution in accordance with the rules of the applicable
exchange;   •   privately negotiated transactions;   •   to cover short sales
made after the date that this Registration Statement is declared effective by
the Commission;   •   broker-dealers may agree with the selling securityholders
to sell a specified number of such shares at a stipulated price per share;   •  
a combination of any such methods of sale; and

 

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•   any other method permitted pursuant to applicable law.

     The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.

     If the selling stockholders effect such transactions by selling shares of
common stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the shares of common stock or otherwise, the selling stockholders
may enter into hedging transactions with broker-dealers, which may in turn
engage in short sales of the shares of common stock in the course of hedging in
positions they assume. The selling stockholders may also sell shares of common
stock short and deliver shares of common stock covered by this prospectus to
close out short positions. The selling stockholders may also loan or pledge
shares of common stock to broker-dealers that in turn may sell such shares.

     The selling stockholders may pledge or grant a security interest in some or
all of the warrants or shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933, as amended, amending, if
necessary, the list of selling stockholders to include the pledgee, transferee
or other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer and donate the shares of common stock
in other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.

     The selling stockholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be “underwriters”
within the meaning of the Securities Act, and any commission paid, or any
discounts or concessions allowed to, any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.

     Under the securities laws of some states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.

 

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

 

     We have advised each selling stockholder that under current interpretations
it may not use shares registered on this registration statement to cover short
sales of our common stock made prior to the date on which this registration
statement shall have been declared effective by the Securities and Exchange
Commission. If a selling stockholder uses this prospectus for any sale of our
common stock, it will be subject to the prospectus delivery requirements of the
Securities Act of 1933, as amended.

     There can be no assurance that any selling stockholder will sell any or all
of the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.

     The selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of purchases and sales of any of the shares of common stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.

     We will not receive any proceeds from the sale of our common stock pursuant
to this prospectus. We will pay all expenses of the registration of the shares
of common stock pursuant to the registration rights agreement, estimated to be
$[                    ] in total, including, without limitation, Securities and
Exchange Commission filing fees and expenses of compliance with state securities
or “blue sky” laws; provided, however, that a selling shareholder will pay all
underwriting discounts and selling commissions, if any. We will indemnify the
selling stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholder specifically for use in this prospectus, in
accordance with the related registration rights agreements, or we may be
entitled to contribution.

     Once sold under the shelf registration statement, of which this prospectus
forms a part, the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.

     One of the selling stockholders, Roth Capital Partners, LLC, is a
broker-dealer registered with the National Association of Securities Dealers,
Inc. The shares being offered by it pursuant to this prospectus are being
offered for sale for its own account, and such firm is not serving as an
underwriter, broker or dealer, and is not receiving any compensation, in
connection with the offer or sale of any of the securities being offered
pursuant to this prospectus. We issued the warrant to Roth Capital Partners, LLC
and also paid that firm a cash fee in the amount of $400,000 as compensation for
its services as placement agent in connection with a private placement of our
common stock.

 

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

 

Annex B

DIGITAL RECORDERS, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock (the “Common Stock”), of
Digital Recorders, Inc. (the “Company”) understands that the Company has filed
or intends to file with the Securities and Exchange Commission (the
“Commission”) a Registration Statement for the registration and resale of the
Registrable Securities, in accordance with the terms of the Registration Rights
Agreement, dated as of October 5, 2004 (the “Registration Rights Agreement”),
among the Company and the Investor[s] named therein. A copy of the Registration
Rights Agreement is available from the Company upon request at the address set
forth below. All capitalized terms used and not otherwise defined herein shall
have the meanings ascribed thereto in the Registration Rights Agreement.

The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:

QUESTIONNAIRE

         
1.
  Name.    
 
       

  (a)   Full Legal Name of Selling Securityholder
 
       

     

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

 
       

  (b)   Full Legal Name of Registered Holder (if not the same as (a) above)
through which Registrable Securities Listed in Item 3 below are held:
 
       

     

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

 
       

  (c)   Full Legal Name of Natural Control Person (which means a natural person
who directly you indirectly alone or with others has power to vote or dispose of
the securities covered by the questionnaire):
 
       

     

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

 

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

 

     2. Address for Notices to Selling Securityholder:

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

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

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

Telephone:
Fax:
Contact Person:

3. Beneficial Ownership of Registrable Securities:

  (a)   Type and Principal Amount of Registrable Securities beneficially owned:

 

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

 

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

 

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

4. Broker-Dealer Status:

  (a)   Are you a broker-dealer?

Yes o No o

Note:  If yes, the Commission’s staff has indicated that you should be
identified as an underwriter in the Registration Statement.

  (b)   Are you an affiliate of a broker-dealer?

Yes o No o

  (c)   If you are an affiliate of a broker-dealer, do you certify that you
bought the Registrable Securities in the ordinary course of business, and at the
time of the purchase of the Registrable Securities to be resold, you had no
agreements or understandings, directly or indirectly, with any person to
distribute the Registrable Securities?

Yes o No o

Note:  If no, the Commission’s staff has indicated that you should be identified
as an underwriter in the Registration Statement.

 

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

 

5. Beneficial Ownership of Other Securities of the Company Owned by the Selling
Securityholder.

Except as set forth below in this Item 5, the undersigned is not the beneficial
or registered owner of any securities of the Company other than the Registrable
Securities listed above in Item 3.

  (a)   Type and Amount of Other Securities beneficially owned by the Selling
Securityholder:

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

6. Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates,
officers, directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has had
any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.

     State any exceptions here:

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

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

The undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the date
hereof and prior to the Effective Date for the Registration Statement.

By signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus. The
undersigned understands that such information will be relied upon by the Company
in connection with the preparation or amendment of the Registration Statement
and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by its
duly authorized agent.

     
Dated:
  Beneficial Owner:
 
   

  By:

 

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

 

Name:

Title:

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

Tracy Reynolds, Esq.
Carrington, Coleman, Sloman & Blumenthal, L.L.P.
200 Crescent Court, Suite 1500
Dallas, Texas 75201
Telephone: (214) 855-3050
Facsimile: (214) 855-1333