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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
 Form 10-K
  ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
    fiscal year ended December 31, 2008
  Commission file number
    000-28539
 DRI CORPORATION
 (Exact name of Registrant as
    specified in its Charter)
  North Carolina(State or other jurisdiction
    of
    incorporation or organization)

56-1362926(I.R.S. Employer
    Identification Number)   13760
    Noel Road, Suite 830
    Dallas, Texas 75240 (Address
    of principal executive offices, Zip Code)
  Registrants telephone number, including area code:
 (214) 378-8992
  Securities registered pursuant to Section 12(b) of the
    Act:
  (Title of Each Class)

(Name of Each Exchange on Which Registered)Common Stock, $.10 Par Value

The NASDAQ Capital
    Market®   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K.  Yes o þ
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company þ   Rule 12b-2 o þ
      Common Stock, par value $.10 per share(Class of Common Stock)

11,466,606Number of Shares   DOCUMENTS
    INCORPORATED BY REFERENCE:




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##### Table of Contents





FORWARD-LOOKING
    STATEMENTS
      
    Statements regarding our ability to meet our capital
    requirements;
    Statements regarding our ability to meet and maintain our
    existing debt obligations, including obligations to make
    payments under such debt instruments;
    Statements regarding our future cash flow position;
    Statements regarding our ability to obtain lender financing
    sufficient to meet our working capital requirements;
    Statements about our efforts to manage and effect certain cost
    reductions;
    Statements regarding the timing or amount of future revenues;
    Statements regarding product sales in future periods;
    Statements regarding the effectiveness of any of
    managements strategic objectives or initiatives or the
    implications thereof on our shareholders, creditors, or other
    constituencies;
    Statements regarding expected results;
    Statements regarding current trends and indicators;
    Statements regarding our ability to comply with Section 404
    of the Sarbanes-Oxley Act of 2002;
    Statements regarding recent legislative action affecting the
    transportation
    and/or
    security industry, including, without limitation, the Safe,
    Accountable, Flexible, Efficient, Transportation Equity
    Act  A Legacy for Users, and any successor
    legislation, and the American Recovery and Reinvestment Act of
    2009 and their impact on the Companys results of
    operations;
    Statements regarding changes in federal or state funding for
    transportation
    and/or
    security-related funding;
    Statements regarding current conditions in the global capital
    markets and the global economy and their impact on the
    Companys results of operation;
    Statements regarding possible growth through acquisitions;
    Statements regarding future sources of capital to fund such
    growth, including sources of additional equity financing;
    Statements regarding anticipated advancements in technology
    related to our products and services;
    Statements regarding future product and service offerings;
    Statements regarding the success of product and service
    introductions;
    Statements regarding the ability to include additional security
    features to existing products and services;
    Statements regarding the potential positive effect such
    additional security features may have on revenues; 1




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
    Statements regarding the expected contribution of sales of new
    and modified security related products to our profitability;
    Statements regarding future events or expectations including the
    expected timing of order deliveries;
    Statements regarding the expected customer acceptance of
    products;
    Statements regarding potential benefits our security features
    may have for our customers;
    Statements regarding the success of special alliances with
    various product partners;
    Statements regarding the availability of alternate suppliers of
    the component parts required to manufacture our products;
    Statements regarding our intellectual property rights and our
    efforts to protect and defend such rights; and
    Statements that contain words like believe,
    anticipate, expect and similar
    expressions that are used to identify forward-looking statements.    
    Risks that we may not be able to meet our capital requirements;
    Risks that we may not be able to meet and maintain our debt
    obligations, including obligations to make payments under such
    debt instruments;
    Risks regarding our future cash flow position;
    Risks that we may be unable to obtain lender financing
    sufficient to meet our working capital requirements;
    Risks that we may not be able to effect desired and planned
    reductions in certain costs;
    Risks that managements strategic objectives or initiatives
    may not be effective;
    Risks that assumptions behind future revenue timing or amounts
    may not prove accurate over time;
    Risks that current trends and indicators may not be indicative
    of future results;
    Risks that we may lose customers or that customer demand for our
    products and services may decline;
    Risks that there will be reductions in federal
    and/or state
    funding for the transportation
    and/or
    security industry;
    Risks that current legislative action affecting the
    transportation
    and/or
    security industry may not have a favorable impact on the
    Companys results of operations;
    Risks that we may be unable to grow through acquisitions;
    Risks that we may be unable to secure additional sources of
    capital to fund growth, including the inability to secure
    additional equity or lender financing;
    Risks that future technological advances may not occur when
    anticipated or that future technological advances will make our
    current product and service offerings obsolete;
    Risks that potential benefits our security products may have for
    our customers do not materialize;
    Risks that we will be unable to meet expected timing of order
    deliveries;
    Risks that product and service offerings may not be accepted by
    our customers;
    Risks that product and service introductions may not produce
    desired revenue results; 2




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
    Risks that we may be unable to create meaningful security
    product features in either new or existing products;
    Risks regarding the uncertainties surrounding our anticipated
    success of special alliances with various product partners;
    Risks that we may be unable to address and remediate any
    deficiencies in our internal controls over financial reporting
    and/or our
    disclosure controls;
    Risks that insufficient internal controls over financial
    reporting may cause us to fail to meet our reporting
    obligations, result in material misstatements in our financial
    statements, and negatively affect investor confidence;
    Risks that our efforts to comply with Section 404 of the
    Sarbanes-Oxley Act of 2002 could fail to be successful;
    Risks that we may be unable to obtain alternate suppliers of our
    component parts if our current suppliers are no longer available
    or cannot meet our future needs for such parts; and
    Risks that our efforts to protect and defend our intellectual
    property rights will not be sufficient.      WHERE YOU
    MAY FIND ADDITIONAL INFORMATION
  www.digrec.com. Form 10-K, Form 10-Q, Form 8-K,
  20549-0102. 1-800-SEC-0330. (http://www.sec.gov)
 3




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##### 



INDEX
   
 Page No.PART IItem 1.


Business


5Item 1A.


Risk Factors


15Item 1B.


Unresolved Staff Comment


22Item 2.


Properties


22Item 3.


Legal Proceedings


23Item 4.


Submission of Matters to a Vote of Security
    Holders


23PART IIItem 5.


Market for the Registrants Common Equity,
    Related Shareholder Matters, and Issuer Purchases of Equity
    Securities


23Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


24Item 8.


Financial Statements and Supplementary Data


39Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


73Item 9A.


Controls and Procedures


74Item 9B.


Other Information


75PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


76Item 11.


Executive Compensation


76Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters


76Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


77Item 14.


Principal Accounting Fees and Services


77PART IVItem 15.


Exhibits


77SIGNATURES


85EX-4.10EX-10.87EX-10.88EX-21.1EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2   4




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PART I  Item 1.
    Business  General
  Form 10-K, ®
    ® ® tm ® ® tm ® ®
    U.S.
    Operations
  U.S.-based
  
    Digital Recorders, Inc. (DR), based in the Research
    Triangle Park area of North Carolina, was established in
    September 1983. DR operated as a business unit of the Company
    under the name Digital Recorders until August 2007,
    at which time it was incorporated as a wholly-owned subsidiary
    of the Company. DR primary products include: computer aided
    dispatch Global Positioning Satellite (GPS)
    tracking; automatic vehicle location (AVL) systems;
    VacTelltm

    video surveillance security systems; automatic vehicle
    monitoring (AVM) systems; and Talking
    Bus®

    automatic voice announcement systems. Some of these products
    feature security related functionality. DRs customers
    include transit operating agencies, commercial transportation
    vehicle operators, and manufacturers of those vehicles primarily
    in the U.S. and Canada.
    TwinVision of North America, Inc. (TVna), a wholly
    owned subsidiary of DRI based in the Research Triangle Park area
    of North Carolina, was established by DRI in May 1996. TVna
    designs, 5




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manufactures, sells, and services electronic destination sign
    systems used on transit and transportation rail, bus and van
    vehicles. Some of these products include security related
    functionality. TVnas customers include transit operating
    agencies, commercial transportation vehicle operators, and
    manufacturers of those vehicles primarily in the U.S. and
    Canada.  
    RTI, Inc., a wholly owned subsidiary of DRI based in Dallas,
    Texas, was established in August 1994 and acquired by DRI in
    July 1998. With the acquisition of RTI, Inc., DRI also acquired
    TwinVision®

    business development and marketing capabilities, as well as an
    exclusive license to the Lite Vision Corporations display
    technology which at the time was the primary display technology
    in use. RTI, Inc. is a marketing consulting and business
    development firm devoted to the public transit industrys
    needs, primarily those of European-based businesses. RTI, Inc.
    presently generates no revenue.  International
    Operations
      
    DRI-Europa AB, based in Göteborg, Sweden, is a wholly owned
    subsidiary of DRI that was established in February 2001 to serve
    as the umbrella organizational structure for DRIs
    international operations.
    Mobitec GmbH (formerly known as Transit-Media GmbH) was
    established in 1995 and acquired by DRI in April 1996. Following
    the acquisition of Mobitec GmbH in June 2001, Transit-Media GmbH
    was merged with Mobitec GmbH in January 2002 and the combined
    company became Transit
    Media-Mobitec
    GmbH (TM-M). In the fourth quarter of 2005, TM-M was
    renamed Mobitec GmbH. Mobitec GmbH, based in Ettlingen, Germany,
    is a wholly owned subsidiary of DRI-Europa AB. Mobitec GmbH
    primarily produces, sells and services
    Mobitec®

    products. Mobitec GmbHs customers include transit
    operating agencies, commercial transportation vehicle operators,
    and the manufacturers of those vehicles in select European,
    Asian-Pacific, and Middle-Eastern markets.
    Mobitec AB, a wholly owned subsidiary of DRI-Europa AB based in
    Göteborg, Sweden, was established in 1987 and acquired by
    DRI in June 2001. Based upon our internal market share
    calculations, we believe Mobitec AB holds the largest market
    share of electronic destination sign systems in the Nordic
    markets. In addition to serving the Nordic markets, Mobitec AB
    also has sales and service offices in Germany and Australia, as
    well as a 50% owned subsidiary in Brazil, Mobitec Brazil Ltda.
    Mobitec ABs customers include transit operating agencies,
    commercial transportation vehicle operators, and the
    manufacturers of those vehicles in the Nordic and select
    European markets. Mobitec AB also owns 51% of the Castmaster
    Mobitec India Private Limited joint venture located in India.
    Mobitec Pty Ltd, a wholly owned subsidiary of Mobitec AB based
    in Peakhurst NSW, Australia, was established in 2000 and
    acquired by DRI in June 2001 as part of the Mobitec AB
    acquisition. Mobitec Pty Ltd imports and sells complete
    Mobitec®

    electronic destination sign systems primarily within the
    Australian market. Based upon our internal market share
    calculations, we believe Mobitec Pty Ltd holds a majority market
    share in the Australian market.
    Mobitec Brazil Ltda, a 50% owned subsidiary of Mobitec AB based
    in Caxias do Sul, Brazil, was established in 1996. Our 50%
    interest was acquired by DRI in June 2001 as part of the Mobitec
    AB acquisition. Mobitec Brazil Ltda is engaged in manufacturing,
    selling and servicing electronic destination sign systems to OEM
    bus manufacturers, and some end customer operating authority
    customers primarily in South America. Its products are also
    shipped throughout Mexico, the Caribbean, and the Middle East.
    The remaining 50% share of Mobitec Brazil Ltda is owned by the
    Companys Brazilian 6




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Managing Director. Mobitec AB, through its representation on a
    supervisory board, has controlling authority over Mobitec Brazil
    Ltda.  
    Castmaster Mobitec India Private Limited (Castmaster
    Mobitec), which began operations in the fourth quarter of
    2007, is a joint venture between Mobitec AB and Castmaster
    Enterprises Private Limited, a company incorporated in India.
    Mobitec AB owns 51% of Castmaster Mobitec, which is based in
    Delhi, India. Castmaster Mobitec has exclusive rights to
    produce, sell and service
    Mobitec®

    destination sign systems in India and selected markets in that
    region.  Divestiture
    of Digital Audio Corporation
      Industry
    and Market Overview
     7




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®
 8




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® tm tm ®
    Key
    Competitors
     9




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Products
    and Product Design
    
    DR600tm,

    a vehicle logic unit for buses that provides automatic vehicle
    monitoring, automatic vehicle location, and automatic vehicle
    schedule adherence communication systems and programs, generally
    including GPS triggering of product features;
    GPS tracking of vehicles;
    Talking
    Bus®

    next stop automatic voice announcement system and next stop
    internal signage;
    A Software Suite that provides modules for customized transit
    applications including computer-aided dispatch, automatic
    vehicle location, vehicle monitoring, wireless data exchange,
    and Central Recording Station;
    Transit Arrival Signs and software;
    Airport Shuttle Automatic Vehicle Location products and Arrival
    Signs;
    Integration of and with vehicle sub-systems including
    destination signs, fare collection, automatic passenger
    counters, engine controllers, transmission, multiplexer, etc.;
    TwinVision®

    all-LED (light-emitting diode) electronic destination sign
    systems;
    TwinVision®

    Chromatic Series family of color electronic destination sign
    systems;
    TwinVision®

    Smart Series family of electronic destination sign systems;
    ELYSÉ®

    and Central Recording Station software;
    Mobitec®

    electronic destination sign systems and electronic information
    display systems; and
    VacTelltm

    video surveillance, recording and actionable intelligence
    products.    ® ®
  ® ® ®
 10




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® ®
  ®
  ®
  Marketing
    and Sales Organization
      Customers
    Seasonality
    and Fluctuation in Results
   11




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Backlog
    Research
    and Development
    ® tm ® ®
 12




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History
    of Research and Development
  ® ®
    ® ® ®
  ® ®
  tm
  stepped-up
   13




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Manufacturing
    Operations
    Buy-America
      Customer
    Service
    Proprietary
    Rights
  ® ® ® ® ® ® ® tm
    Employees
   14




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Item 1A.
    Risk
    Factors    Risks
    Related to Indebtedness, Financial Condition and Results of
    Operations
  Our substantial debt could adversely affect our financial
    position, operations and ability to grow. 180-day
  
    we could be required to dedicate a substantial portion of our
    cash flow from operations to payments on our debt, which would
    reduce amounts available for working capital, capital
    expenditures, research and development and other general
    corporate purposes;
    our flexibility in planning for, or reacting to, changes in our
    business and the industries in which we operate could be limited;
    we may be more vulnerable to general adverse economic and
    industry conditions;
    we may be at a disadvantage compared to our competitors that may
    have less debt than we do;
    it may be more difficult for us to obtain additional financing
    that may be necessary in connection with our business;
    it may be more difficult for us to implement our business and
    growth strategies; and
    we may have to pay higher interest rates on future borrowings.  Some of our debt bears interest at variable
    rates.
  Future cash requirements or restrictions on cash could
    adversely affect our financial position, and an event of default
    under our outstanding debt instruments could impair our ability
    to conduct business operations.
  
    triggering of certain payment obligations, or acceleration of
    payment obligations, under our revolving credit facilities and
    loan agreements;
    costs associated with unanticipated litigation relating to our
    intellectual property or other matters;
    taxes due upon the transfer of cash held in foreign
    locations; and
    taxes assessed by local authorities where we conduct business.   15




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Our operating results may continue to
    fluctuate.
  Difficult conditions in the global capital markets and the
    economy generally may materially adversely affect our business
    and results of operations.
    Risks
    Related to Our Operations and Product Development
  A significant portion of our sales is derived from sales to a
    small number of customers. If we are not able to obtain new
    customers or repeat business from existing customers, our
    business could be seriously harmed.
 16




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We depend on third parties to supply components we need to
    produce our products.
    Many of our customers rely, to some extent, on government
    funding, which subjects us to risks associated with governmental
    budgeting and authorization processes.
    We must continually improve our technology to remain
    competitive.
 17




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We operate in several international locations and, in Brazil
    and India, with less than full ownership
    control.
  We cannot assure you that any new products we develop will be
    accepted by customers.
  Risks
    Related to Human Resources and Employee Relations
  If our former professional employment organization failed to
    discharge with any of its material obligations during the period
    they provided us with our workforce, we might be in a position
    where we assume liability for all or a portion of any unmet
    obligations. U.S.-based
  We may not be able to recruit or retain a qualified
    workforce.
      Risks
    Related to Our International Operations
  There are numerous risks associated with international
    operations, which represent a significant part of our
    business.
 18




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Complying with foreign tax laws can be complicated, and we
    may incur unexpected tax obligations in some
    jurisdictions
  Risks
    Related to Internal Controls
  Required reporting on internal control over financial
    reporting.
  Risks
    Related to Intellectual Property
  We may not be able to defend successfully against claims of
    infringement against the intellectual property rights of others,
    and such defense could be costly.
  Risks
    Related to Our Equity Securities
  The public market for our Common Stock may be volatile,
    especially since market prices for technology stocks often have
    been unrelated to operating performance.
  
    Actual or anticipated variations in our quarterly operating
    results;
    Historical and anticipated operating results;
    Announcements of new product or service offerings;
    Technological innovations; 19




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
    Competitive developments in the public transit industry;
    Changes in financial estimates by securities analysts;
    Conditions and trends in the public transit industry;
    Funding initiatives and other legislative developments affecting
    the transit industry;
    Adoption of new accounting standards affecting the technology
    industry or the public transit industry; and
    General market and economic conditions and other factors.    Our preferred stock has preferential rights over our Common
    Stock.
  Risks
    Related to Anti-Takeover Provisions
  Our articles of incorporation, bylaws and North Carolina law
    contain provisions that may make takeovers more difficult or
    limit the price third parties are willing to pay for our
    stock.
 20




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Our shareholder rights agreement may discourage third parties
    from making takeover offers, including takeover offers that
    might result in a premium being paid for shares of our common
    stock.
    Provisions of our bylaws limit the ability of shareholders to
    call special meetings of shareholders and therefore could
    discourage, delay or prevent a merger, acquisition or other
    change in control of our company.
   21




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Risks
    Associated with Potential Growth
  We may not be able to obtain the financing we will need to
    implement our operating strategy.
  There are many risks associated with potential
    acquisitions.
  
    It may be difficult to assimilate the operations and personnel
    of an acquired business into our own business;
    Management information and accounting systems of an acquired
    business must be integrated into our current systems;
    Our management must devote its attention to assimilating the
    acquired business, which diverts attention from other business
    concerns;
    We may enter markets in which we have limited prior
    experience; and
    We may lose key employees of an acquired business.  Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    City and State

Country

Area


Use

Monthly Rent


ExpirationDurham, NC

USA


49,864
sf

Office, service and repair, warehouse and assembly

$
33,561


April 2011Dallas, TX

USA


3,466
sf

Office(a)

$
5,632


November 2013Peakhurst

Australia


555
sm

Office

$
4,269


September 2012Caxias do Sul

Brazil


880
sm

Office and assembly

$
3,203


Open endedHerrljunga

Sweden


2,351
sm

Office, warehouse and assembly(b)

$
7,476


March 2011Ettlingen

Germany


320
sm

Office

$
3,510


June 2016Delhi

India


140
sm

Office

$
1,320


Open ended  22




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(a)
    
    Used by administration  U.S. corporate(b)
    
    Used by administration  international    Item 3.
    Legal
    Proceedings      Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Shareholder
    Matters, and Issuer Purchases of Equity Securities  ®
  High


LowYear Ended December 31, 2007First Quarter

$
2.20


$
1.16Second Quarter


2.99



1.50Third Quarter


3.61



2.26Fourth Quarter


3.48



2.23Year Ended December 31, 2008First Quarter

$
2.50


$
1.82Second Quarter


3.09



2.12Third Quarter


2.82



2.10Fourth Quarter


2.06



0.80    23




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Equity
    Compensation Plan Information
    Number of SecuritiesRemaining Available forNumber of Securities to


Weighted-Average


Future Issuance Underbe Issued Upon Exercise


Exercise Price of


Equity Compensation Plansof Outstanding Options,


Outstanding Options,


(Excluding SecuritiesWarrants and Rights


Warrants and Rights


Reflected in Column a)Plan Category

(a)


(b)


(c)1993 Incentive Stock Option Plan


140,159


$
2.26



None2003 Stock Option Plan


1,060,020


$
2.58



474,033Total


1,200,179


$
2.54



474,033     *
    
    All options issued under the 1993 Incentive Stock Option Plan
    and the 2003 Stock Option Plan have been approved by the
    Companys shareholders.    Issuance
    of Unregistered Securities
      Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations   24




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Business 
    General
          Results
    of Operations
   25




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##### Table of Contents



Year Ended December 31,2008


2007


2006Net sales


100.0
%


100.0
%


100.0
%Cost of sales


66.1



67.9



71.8Gross profit


33.9



32.1



28.2Operating expenses:Selling, general and administrative


26.9



26.3



31.6Research and development


1.4



2.0



3.0Total operating expenses


28.3



28.3



34.6Operating income (loss)


5.6



3.8



(6.4
)Other income and expense


(1.0
)


(1.5
)


(2.9
)Income (loss) from continuing operations before income tax
    expense and minority interest


4.6



2.3



(9.3
)Income tax expense


(1.6
)


(0.5
)


(0.7
)Income (loss) from continuing operations before minority
    interest in (income) loss of consolidated subsidiary


3.0



1.8



(10.0
)Minority interest in (income) loss of consolidated subsidiary


(0.9
)


(0.3
)


1.3Income (loss) from continuing operations


2.1



1.5



(8.7
)Income (loss) from discontinued operations






(0.4
)


0.7Net income (loss)


2.1
%


1.1
%


(8.0
)%   Comparison
    of Results for the Years Ended December 31, 2008 and
    2007
  Net
    Sales and Gross Profit
      tm ®
 26




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Selling,
    General and Administrative
   27




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Research
    and Development
    Operating
    Income (Loss)
    Other
    Income, Foreign Currency Gain (Loss) and Interest
    Expense
   28




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Income
    Tax Expense
    Discontinued
    Operations
    Net
    Income (Loss) Applicable to Common Shareholders
    Comparison
    of Results for the Years Ended December 31, 2007 and
    2006
  Net
    Sales and Gross Profit
       29




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Selling,
    General and Administrative
     30




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Research
    and Development
      Operating
    Income (Loss)
    Other
    Income, Foreign Currency Gain (Loss) and Interest
    Expense
    Income
    Tax Expense
    Discontinued
    Operations
   31




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Net
    Income (Loss) Applicable to Common Shareholders
    Liquidity
    and Capital Resources
  Cash
    Flows
  No. 95-22,
  build-up
     32




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Significant
    Financing Arrangements
                Fiscal Quarter Ending:

EBITDA:


Leverage Ratio:March 31, 2009

$
3,000,000



5.70 to 1.0June 30, 2009

$
2,500,000



6.25 to 1.0September 30, 2009

$
4,000,000



4.55 to 1.0        33




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i.e
      Management
    Conclusion
      Critical
    Accounting Policies and Estimates
    
    Allowance for doubtful accounts;
    Inventory valuation and warranty reserve;
    Intangible assets and goodwill;
    Income taxes, including deferred tax assets;
    Revenue recognition; and
    Stock-based compensation  Allowance
    for Doubtful Accounts
   34




---



##### Table of Contents



Inventory
    Valuation and Warranty Reserve
    Intangible
    Assets and Goodwill
      Income
    Taxes
   35




---



##### Table of Contents



Revenue
    Recognition
    No. 00-21, No. 00-21). No. 00-21
  97-2, 81-1,
   36




---



##### Table of Contents



Stock-based
    Compensation
    Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements
  No. FAS 157-2,
     37




---



##### Table of Contents



No. 142-3 No. 142-3 No. 142-3 No. 142-3
    Impact of
    Inflation
   38




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  DRI
    CORPORATION AND SUBSIDIARIES
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  Section

PageReport of Independent Registered Public
    Accounting Firm  Grant Thornton LLP


40Report of Independent Registered Public
    Accounting Firm  PricewaterhouseCoopers LLP


41Consolidated Balance Sheets 
    December 31, 2008 and 2007


42Consolidated Statements of Operations 
    Years Ended December 31, 2008, 2007 and 2006


43Consolidated Statements of Shareholders
    Equity and Comprehensive Income (Loss)  Years Ended
    December 31, 2008, 2007 and 2006


44Consolidated Statements of Cash Flows 
    Years Ended December 31, 2008, 2007 and 2006


45Notes to Consolidated Financial Statements


46  39




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm           GRANT
    THORNTON LLP
    40




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
           
    41




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2008


2007(In thousands, except shares and per share amounts)ASSETSCurrent AssetsCash and cash equivalents

$
598


$
729Trade accounts receivable, net


12,403



11,919Current portion of note receivable


86



86Other receivables


431



465Inventories


10,662



9,603Prepaids and other current assets


427



495Total current assets


24,607



23,297Property and equipment, net


3,607



2,890Long-term portion of note receivable


172



258Goodwill


9,034



11,033Intangible assets, net


790



1,097Deferred tax assets, net


94



56Other assets


1,157



283Total assets

$
39,461


$
38,914LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit

$
3,743


$
6,043Notes payable, net






500Loans payable


719



391Current portion of long-term debt and capital leases


193



254Current portion of foreign tax settlement


386



499Accounts payable


5,347



6,246Accrued expenses and other current liabilities


4,359



3,681Preferred stock dividends payable


16



18Total current liabilities


14,763



17,632Long-term debt and capital leases, net


5,149



14Foreign tax settlement, long-term


528



1,043Deferred tax liabilities, net


137



Liability for uncertain tax positions


300



311Minority interest in consolidated subsidiary


852



422Commitments and contingencies (Notes 7, 8, 9, 17, and 18)Shareholders EquitySeries E Redeemable, Nonvoting, Convertible Preferred
    Stock, $.10 par value, liquidation preference of $5,000 per
    share; 500 shares authorized; 80 and 85 shares issued
    and outstanding at December 31, 2008, and December 31,
    2007, respectively; redeemable at the discretion of the Company
    at any time


337



355Series G Redeemable, Convertible Preferred Stock,
    $.10 par value, liquidation preference of $5,000 per share;
    600 shares authorized; 444 and 410 shares issued and
    outstanding at December 31, 2008, and December 31,
    2007, respectively; redeemable at the discretion of the Company
    after five years from date of issuance


1,938



1,768Series H Redeemable, Convertible Preferred Stock,
    $.10 par value, liquidation preference of $5,000 per share;
    600 shares authorized; 64 and 59 shares issued and
    outstanding at December 31, 2008, and December 31,
    2007, respectively; redeemable at the discretion of the Company
    after five years from date of issuance


272



247Series J Redeemable, Convertible Preferred Stock,
    $.10 par value, liquidation preference of $5,000 per share;
    250 shares authorized; 90 shares issued and
    outstanding at December 31, 2008, and December 31,
    2007; redeemable at the discretion of the Company at any time


388



388Series AAA Redeemable, Nonvoting, Convertible Preferred
    Stock, $.10 par value, liquidation preference of $5,000 per
    share; 20,000 shares authorized; 166 and 172 shares
    issued and outstanding at December 31, 2008, and
    December 31, 2007, respectively; redeemable at the
    discretion of the Company at any time


830



860Common stock, $ .10 par value, 25,000,000 shares
    authorized; 11,466,606 and 11,187,993 shares issued and
    outstanding at December 31, 2008 and December 31,
    2007, respectively


1,147



1,119Additional paid-in capital


32,706



32,079Accumulated other comprehensive income  foreign
    currency translation


512



4,570Accumulated deficit


(20,398
)


(21,894
)Total shareholders equity


17,732



19,492Total liabilities, minority interest and shareholders
    equity

$
39,461


$
38,914    42




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2008


2007


2006(In thousands, except share and per share amounts)Net sales

$
70,559


$
57,932


$
49,161Cost of sales


46,671



39,311



35,287Gross profit


23,888



18,621



13,874Operating expensesSelling, general and administrative


19,000



15,216



15,555Research and development


974



1,149



1,463Total operating expenses


19,974



16,365



17,018Operating income (loss)


3,914



2,256



(3,144
)Other income (loss)


188



103



(55
)Foreign currency gain


558



210



152Interest expense


(1,433
)


(1,197
)


(1,508
)Total other income and expense


(687
)


(884
)


(1,411
)Income (loss) from continuing operations before income tax
    expense and minority interest


3,227



1,372



(4,555
)Income tax expense


(1,096
)


(291
)


(331
)Income (loss) from continuing operations before minority
    interest in (income) loss of consolidated subsidiary


2,131



1,081



(4,886
)Minority interest in (income) loss of consolidated subsidiary


(635
)


(188
)


658Income (loss) from continuing operations


1,496



893



(4,228
)(Loss) income from discontinued operations (Note 2)






(219
)


334Net income (loss)


1,496



674



(3,894
)Provision for preferred stock dividends


(303
)


(294
)


(298
)Amortization for discount on preferred stock










(49
)Net income (loss) applicable to common shareholders

$
1,193


$
380


$
(4,241
)Net income (loss) per share  basicContinuing operations

$
0.11


$
0.06


$
(0.47
)Discontinued operations

$
0.00


$
(0.02
)

$
0.03Income (loss) per share applicable to common shareholders

$
0.11


$
0.04


$
(0.43
)Net income (loss) per share  dilutedContinuing operations

$
0.10


$
0.05


$
(0.47
)Discontinued operations

$
0.00


$
(0.02
)

$
0.03Income (loss) per share applicable to common shareholders

$
0.10


$
0.03


$
(0.43
)Weighted average number of common shares and common share
    equivalent outstandingBasic


11,333,984



10,751,220



9,787,599Diluted


11,492,473



11,146,107



9,787,599    43




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
    (LOSS)
  Preferred Stock


Common Stock








AccumulatedNumber





Number





Additional





Other





Totalof Shares


Book


of Shares


Par


Paid-in


Accumulated


Comprehensive


Comprehensive


ShareholdersIssued


Value


Issued


Value


Capital


Deficit


Income (Loss)


Income (Loss)


Equity(In thousands, except shares)Balance as of December 31, 2005


778


$
3,141



9,733,515


$
973


$
30,446


$
(18,520
)

$
1,526






$
17,566Issuance of common stock










272,166



27



304















331Issuance of Series I Preferred Stock, net of discount


100



450











49















499Value of Beneficial Conversion feature of Series I
    Preferred stock


















(49
)














(49
)Amortization of Series I Preferred Beneficial Conversion


















49















49Conversion of Series E Preferred Stock


(24
)


(120
)


39,994



4



116















Issuance of Series G Preferred Stock dividend


36



180



























180Issuance of Series H Preferred Stock dividend


4



20



























20Issuance of Series I Preferred Stock dividend


4



20



























20Issuance of warrants


















638















638Amortization of convertible subordinated debenture beneficial


















212















212Preferred stock dividends


















(298
)














(298
)Stock-based compensation expense


















50















50Comprehensive loss:Net loss






















(3,894
)





$
(3,894
)


(3,894
)Translation adjustment


























1,871



1,871



1,871Total comprehensive loss





























$
(2,023
)Balance as of December 31, 2006


898


$
3,691



10,045,675


$
1,004


$
31,517


$
(22,414
)

$
3,397






$
17,195Issuance of common stock










648,540



65



201















266Issuance of Series G Preferred Stock dividend


31



155



























155Issuance of Series H Preferred Stock dividend


5



25



























25Issuance of Series J Preferred Stock, net of issuance costs


90



411



























411Conversion of Series AAA Preferred Stock


(6
)


(30
)


5,454



1



29















Conversion of Series E Preferred Stock, net of issuance
    costs


(98
)


(411
)


163,324



16



395















Conversion of Series I Preferred Stock, net of discount


(104
)


(471
)


325,000



33



438















Adjustment for prior period Series E Conversions






271











(271
)














Issuance of warrants






(23
)










23















Preferred stock dividends


















(294
)














(294
)Stock-based compensation expense


















41















41Adjustment for prior year liability for uncertain tax positions






















(154
)










(154
)Comprehensive income:Net income






















674






$
674



674Translation adjustment


























1,173



1,173



1,173Total comprehensive income





























$
1,847Balance as of December 31, 2007


816


$
3,618



11,187,993


$
1,119


$
32,079


$
(21,894
)

$
4,570






$
19,492Issuance of common stock










37,553



3



83















86Issuance of Series G Preferred Stock dividend


34



170



























170Issuance of Series H Preferred Stock dividend


5



25



























25Conversion of Series AAA Preferred Stock


(6
)


(30
)


5,454



1



29















Conversion of Series E Preferred Stock, net of issuance
    costs


(5
)


(18
)


8,333



1



17















Conversion of Convertible Subordinated Debenture










227,273



23



227















250Amortization of convertible subordinated debenture beneficial
    conversion feature


















54















54Issuance of warrants


















333















333Preferred stock dividends


















(303
)














(303
)Stock-based compensation expense


















187















187Comprehensive loss:Net income






















1,496






$
1,496



1,496Translation adjustment


























(4,058
)


(4,058
)


(4,058
)Total comprehensive loss





























$
(2,562
)Balance as of December 31, 2008


844


$
3,765



11,466,606


$
1,147


$
32,706


$
(20,398
)

$
512






$
17,732    44




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2008


2007


2006(In thousands)Cash flows from operating activitiesNet income (loss)

$
1,496


$
674


$
(3,894
)(Loss) income from discontinued operations






(219
)


334Income (loss) from continuing operations


1,496



893



(4,228
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activitiesDeferred income taxes


106



(243
)


57Liability for uncertain tax positions


63



149



Depreciation and amortization of property and equipment


933



1,070



1,153Amortization of intangible assets


151



138



111Amortization of deferred financing costs


344



279



271Amortization of debt discount


170



245



278Amortization of beneficial conversion feature


54







212Loan termination fee accrual


123







Bad debt expense


176



26



235Stock issued in lieu of cash compensation


86



76



63Stock-based compensation expense


187



41



50Write-down of inventory for obsolescence


156



141



122Loss (gain) on sale of fixed assets


15



(3
)


11Other, primarily effect of foreign currency gain


(412
)


(274
)


(275
)Minority interest in income (loss) of consolidated subsidiary


635



188



(658
)Changes in operating assets and liabilitiesIncrease in trade accounts receivable


(2,454
)


(1,037
)


(2,176
)Decrease (increase) in other receivables


3



(272
)


25Increase in inventories


(2,330
)


(200
)


(811
)Decrease (increase) in prepaids and other current assets


39



(49
)


57(Increase) decrease in other assets


(11
)






8(Decrease) increase in accounts payable


(416
)


450



24Increase (decrease) in accrued expenses


1,231



530



(44
)(Decrease) increase in foreign tax settlement


(327
)


(208
)


1,502Net cash provided by (used in) continuing operations


18



1,940



(4,013
)Net cash provided by (used in) discontinued operations






(68
)


842Net cash provided by (used in) operating activities


18



1,872



(3,171
)Cash flows from investing activitiesProceeds from sale of fixed assets


4



66



4Purchases of property and equipment


(489
)


(296
)


(232
)Investments in software development


(1,551
)


(669
)


(201
)Proceeds from sale of DAC






1,100



Net cash (used in) provided by continuing operations


(2,036
)


201



(429
)Net cash used in discontinued operations










(29
)Net cash (used in) provided by investing activities


(2,036
)


201



(458
)Cash flows from financing activitiesProceeds from bank borrowings and lines of credit


88,658



66,531



67,376Principal payments on bank borrowings and lines of credit


(85,032
)


(69,025
)


(63,961
)Issuance of common stock


3



189



Proceeds from issuance of Preferred stock, net of costs






411



485Payment of debt issuance costs


(1,304
)






(410
)Payment of dividend to minority interest


(205
)






Payment of dividends on Preferred stock


(110
)


(118
)


(128
)Net cash provided by (used in) financing activities


2,010



(2,012
)


3,362Effect of exchange rate changes on cash and cash equivalents


(123
)


57



71Net (decrease) increase in cash and cash equivalents


(131
)


118



(196
)Cash and cash equivalents at beginning of period


729



611



807Cash and cash equivalents at end of period

$
598


$
729


$
611Supplemental Disclosure of Cash Flow InformationCash paid during the period for interest

$
896


$
682


$
648Cash paid during the period for income taxes

$
799


$
370


$
323Supplemental disclosures of non-cash investing and financing
    activities:Conversion of preferred stock to common stock

$
55


$
1,040


$
120Fair value of warrants issued in connection with new term loan

$
333


$



$
Fair value of warrants issued in connection with sale of
    preferred stock

$



$
23


$
Fair value of warrants issued as part of financing

$



$



$
638Fair value allocated to warrants issued in connection with sale
    of preferred stock

$



$



$
49Note receivable in connection with sale of DAC

$



$
344


$
Conversion of convertible subordinated debenture

$
250


$



$
Amortization of convertible subordinated debenture beneficial
    conversion feature

$
54


$



$
81Amortization of preferred stock beneficial conversion feature

$



$



$
49Purchase of equipment under capital lease obligation

$
21


$



$
Fair value of common stock issued in connection with Laurus
    Omnibus Amendment

$



$



$
268Laurus Omnibus Amendment fee

$



$



$
18Preferred stock dividends

$
195


$
180


$
220   See accompanying notes to
    consolidated financial statements.
 45




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  (1)
    Organization
    and Summary of Significant Accounting Policies  (a)
    Organization
    and Liquidity  Organization. ®
    Liquidity.
    (b)
    Principles
    of Consolidation   46




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (c)
    Use of
    Estimates      (d)
    Cash
    Equivalents    (e)
    Revenue
    Recognition    No. 00-21, No. 00-21
  97-2, 81-1,
 47




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (f)
    Sales
    Taxes    (g)
    Customer
    Concentration    (h)
    Trade
    Accounts Receivable    (i)
    Inventories  first-in, end-of-life
  (j)
    Property
    and Equipment   48




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (k)
    Goodwill
    and Indefinite Life Intangible Assets      (l)
    Intangible
    Assets    (m)
    Research
    and Development Costs    (n)
    Advertising
    Costs    (o)
    Shipping
    and Handling Fees and Costs    (p)
    Stock-Based
    Compensation   49




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (q)
    Foreign
    Currency      (r)
    Income
    Taxes      (s)
    Fair
    Value of Financial Instruments   50




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (t)
    Product
    Warranties    Year Ended December 31,2008


2007


2006Balance at beginning of period

$
491


$
384


$
214Additions charged to costs and expenses


236



225



277Deductions


(164
)


(135
)


(125
)Foreign exchange translation (gain) loss


(68
)


17



18Balance at end of period

$
495


$
491


$
384   (u)
    Recent
    Accounting Pronouncements  No. FAS 157-2,
     51




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        No. 142-3 No. 142-3 No. 142-3 No. 142-3
    (2)
    Discontinued
    Operations   52




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accounting for the
    Impairment or Disposal of Long-Lived Assets
  Year Ended December 31,2007


2006(In thousands)Net sales

$
239


$
2,177Income (loss) before income tax expense


(219
)


334     (3)
    Goodwill
    and Other Intangible Assets      (In thousands)Balance as of January 1, 2006

$
8,801Effect of exchange rates


1,488Balance as of December 31, 2006


10,289Effect of exchange rates


744Balance as of December 31, 2007


11,033Effect of exchange rates


(1,999
)Balance as of December 31, 2008

$
9,034  53




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted


December 31, 2008


December 31, 2007Average


Gross





Net


Gross





NetRemaining Life


Carrying


Accumulated


Carrying


Carrying


Accumulated


Carrying(Years)


Amount


Amortization


Amount


Amount


Amortization


Amount(In thousands)Intangible assets subject to amortization:Patents and development costs


0.0


$
10


$
10


$



$
10


$
10


$
Customer lists


7.55



1,550



769



781



1,857



799



1,058Resale rights to DAC products


0.33



58



49



9



58



19



39$
1,618


$
828


$
790


$
1,925


$
828


$
1,097       (4)
    Accounts
    Receivable  December 31,2008


2007(In thousands)Trade accounts receivable

$
12,582


$
12,007Less: allowance for doubtful accounts


(179
)


(88
)$
12,403


$
11,919   (5)
    Property
    and Equipment  EstimatedDepreciable


December 31,Lives (years)


2008


2007(In thousands)Leasehold improvements


5 - 9


$
286


$
278Automobiles


5



13



16Computer and telecommunications equipment


3



976



857Software


3 - 5



4,592



4,434Test equipment


3 - 5



124



123Furniture and fixtures


3 - 7



2,490



2,730Software projects in progress






1,392



6689,873



9,106Less accumulated depreciation and amortization






6,266



6,216Total property and equipment, net





$
3,607


$
2,890  54




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (6)
    Inventories  December 31,2008


2007(In thousands)Raw materials and system components

$
6,803


$
6,496Work in process


243



176Finished goods


3,616



2,931Total inventories

$
10,662


$
9,603   (7)
    Leases        Capital


OperatingLeases


Leases(In thousands)Year Ending December 31,2009

$
22


$
9032010


7



8142011


7



4512012


2



2282013






173Thereafter






148Total future minimum lease payments


38


$
2,717Less amount representing interest (10.0% interest)


5Present value of future minimum capital lease payments


33Less current portion


19Long-term portion

$
14   (8)  Lines
    of Credit and Loans Payable
  a)
    Domestic
    lines of credit and loan payable   55




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     56




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        and/or
  Risk-free interest rate

2.9%Expected life

3.0 yearsExpected volatility

56%Expected dividends

None     Fiscal Quarter Ending:

EBITDA:


Leverage Ratio:March 31, 2009

$
3,000,000



5.70 to 1.0June 30, 2009

$
2,500,000



6.25 to 1.0September 30, 2009

$
4,000,000



4.55 to 1.0     b)
    International
    lines of credit and loans payable   57




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3-year
     58




---



##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2008


2007(In thousands)Line of credit with Laurus Master Fund dated March 16,
    2006; replaced by line of credit with PNC Bank, National
    Association in June 2008

$



$
3,796Line of credit with PNC Bank, National Association dated
    June 30, 2008; payable in full June 30, 2011; secured
    by all tangible and intangible U.S. assets of the Company; bears
    average interest rate of 6.28% in 2008


1,601



Line of credit with Handelsbanken; renews annually on a
    calendar-year basis; secured by certain assets of the Swedish
    subsidiary, Mobitec AB; bears average interest rate of 6.58% and
    4.92% in 2008 and 2007, respectively


732



1,057Line of credit with Handelsbanken; renews annually on a
    calendar-year basis; secured by accounts receivable of the
    Swedish subsidiary, Mobitec AB; bears average interest rate of
    6.95% and 5.36% in 2008 and 2007, respectively


573



1,087Line of credit with Handelsbanken dated June 23, 2004;
    open-ended term; secured by accounts receivable and inventory of
    the German subsidiary, Mobitec GmbH; bears average interest rate
    of 5.62% and 5.30% in 2008 and 2007, respectively


837



103Total lines of credit

$
3,743


$
6,043   (9)  Long-Term
    Debt
    December 31,2008


2007(In thousands)Term loan with BHC Interim Funding III, L.P., dated
    June 30, 2008; payable in full June 30, 2011; secured
    by substantially all tangible and intangible assets of the
    Company; bears interest rate of 12.75%

$
5,000


$
Term loan with Svenska Handelsbanken AB, dated June 30,
    2008; payable in quarterly installments of $48,000; secured by
    accounts receivable and inventory of the Swedish subsidiary,
    Mobitec AB; bears average interest rate of 7.32%


483



Convertible debenture to a director dated August 26, 2002,
    converted on June 30, 2008






250Other long-term debt






4Total long-term debt


5,483



254Term loan termination fee accrual


123



Less current portion


193



254Less debt discount


278



5,135



Long-term portion of capital leases


14



14Total long-term debt and capital leases, less current portion

$
5,149


$
14    59




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (10)
    Accrued
    Expenses and Other Current Liabilities  December 31,2008


2007(In thousands)Salaries, commissions, and benefits

$
1,428


$
1,429Taxes  payroll, sales, income, and other


817



1,020Warranties


495



491Current portion of capital leases


19



23Interest payable


281



172Deferred revenue


694



303Other


625



243Total accrued expenses

$
4,359


$
3,681   (11)  Preferred
    Stock
    Series E
    Preferred
   60




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Series G
    Preferred
    Series H
    Preferred
    Series I
    Preferred
    Series J
    Preferred
   61




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Series AAA
    Preferred Stock
      Liquidation
    Priority
    (12)
    Common
    Stock Warrants    Outstanding


Exercise


ExpirationWarrants


Price


Date62,500


$
10.25


April 2009125,000


$
8.80


April 2009120,773


$
5.28


October 2009241,546


$
6.00


October 20092,500


$
3.19


January 2010240,000


$
2.21


June 201055,000


$
2.02


October 201093,750


$
1.60


March 201115,929


$
2.26


June 201280,000


$
2.00


April 2013350,000


$
2.99


June 2013   (13)
    Stock-Based
    Compensation     62




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


ValueOutstanding at December 31, 2007


554,239


$
2.35



5.4


$
157,300Granted


486,380



2.69Exercised


(1,980
)


1.38Expired


(133,374
)


2.51Forfeited


(56,000
)


2.67Outstanding at December 31, 2008


849,265


$
2.50



7.9


$
Vested and expected to vest at December 31, 2008


710,837


$
2.46



7.6


$
Exercisable at December 31, 2008


298,115


$
2.32



5.1


$
     Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


ValueOutstanding at December 31, 2007


460,561


$
2.56



1.9


$
70,010Granted


123,020



2.98Exercised






Expired


(232,667
)


2.66Outstanding at December 31, 2008


350,914


$
2.65



3.3


$
Vested and expected to vest at December 31, 2008


347,622


$
2.64



3.2


$
Exercisable at December 31, 2008


234,894


$
2.48



2.4


$
     in-the-money
 63




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        2008

2007

2006Weighted average fair value of grants

$1.59

$1.65

$0.83Risk-free interest rate

3.4%

4.2%

4.7%Expected life

6.8 years

6.9 years

6.5 yearsExpected volatility

70%

72%

64%Expected dividends

None

None

None     Risk-free interest rate.
  Expected life.
  Expected volatility.
  Expected dividends.
        
    Regular monthly retainer fee compensation is paid up to $1,000
    in Common Stock and the remainder paid in cash, with shares
    payable determined as described below.
    Shares of Common Stock payable under this plan are issued on a
    quarterly basis.
    Individual directors may annually (as of each Annual Meeting of
    Shareholders) elect to opt in or out of the
    payment-in-stock
    provision of the plan, effective the following January 1. 64




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     
    Each key executive manager of the Company may make the election
    to receive up to $1,000 per month of
    his/her
    compensation in the form of Common Stock, with shares payable
    determined as described below.
    Shares of Common Stock payable under the plan are issued on a
    quarterly basis.
    The election to participate will be on a yearly basis, effective
    January 1 of each year. If the election is made to participate,
    the commitment is for the full year, unless compelling and
    extenuating circumstances arise supporting doing otherwise.    (14)
    Income
    Taxes        2008


2007Balance as of January 1

$
267


$
110Additions for tax positions related to prior years






Additions for tax positions related to the current year


44



157Foreign exchange translation gain


(47
)


Balance as of December 31

$
264


$
267    65




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended December 31,2008


2007


2006(In thousands)Domestic

$
444


$
(7
)

$
(2,879
)Foreign


2,578



1,160



(1,342
)$
3,022


$
1,153


$
(4,221
)     Year Ended December 31,2008


2007


2006(In thousands)CurrentU.S. federal

$



$
2


$
State


2



4



Foreign


932



384



259934



390



259DeferredU.S. federal






(247
)


11State






(41
)


2Foreign


162



189



59162



(99
)


72$
1,096


$
291


$
331  66




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006Percentage





Percentage





Percentageof pretax





of pretax





of pretaxAmount


earnings (loss)


Amount


earnings (loss)


Amount


earnings (loss)(In thousands)Computed expected tax expense (benefit)

$
1,028



34.0
%

$
392



34.0
%

$
(1,477
)


35.0
%Increase (decrease) in income taxes resulting from:Nondeductible expenses


72



2.4



33



2.9



14



(0.4
)(Increase)/decrease in prior year NOL (correction)


(1,127
)


(37.3
)














Foreign subsidiary losses










(10
)


(0.9
)


32



(0.8
)Higher (lower) rates on earnings of foreign operations


211



7.0



1



0.1



539



(20.3
)State taxes, net of federal benefit


6



0.2



(37
)


(3.2
)


(324
)


7.8Uncertain tax positions


63



2.1



149



12.9







Changes in valuation allowance


843



27.9



(237
)


(20.6
)


1,547



(29.5
)$
1,096



36.3
%

$
291



25.2
%

$
331



(8.1
)%     December 31,2008


2007(In thousands)Deferred tax assetsFederal and state loss carryforwards

$
5,478


$
5,419Federal tax credits


336



357Foreign loss carryforwards


2,274



1,446Inventory reserve and capitalization


114



80Property and equipment






Intangible assets


9



16Other accruals and reserves


207



148Total gross deferred tax assets


8,418



7,466Less valuation allowance


(8,175
)


(7,332
)243



134Deferred tax liabilitiesProperty and equipment


(149
)


Intangible assets






Untaxed foreign reserves


(137
)


(78
)Total deferred tax liabilities


(286
)


(78
)Net deferred assets (liabilities)

$
(43
)

$
56  67




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2008


2007(In thousands)Current assets

$
94


$
56Noncurrent assets

$
149


$
78Noncurrent liabilities


(286
)


(78
)Net noncurrent liabilities

$
(137
)

$
Net deferred assets (liabilities)

$
(43
)

$
56         (15)
    Related
    Party Transactions    out-of-pocket
   68




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (16)
    Segment
    and Geographic Information      2008


2007


2006(In thousands)Net sales  continuing operationsNorth America

$
30,576


$
27,687


$
23,842Europe


20,008



15,899



15,140Asia-Pacific


8,018



4,839



3,754Middle East


948



2,272



1,601South America


11,009



7,235



4,824$
70,559


$
57,932


$
49,161Long-lived assets  continuing operationsNorth America

$
2,982


$
1,345


$
1,770Europe


1,527



1,538



1,718Asia-Pacific


46



44



31South America


209



246



184$
4,764


$
3,173


$
3,703     *
    
    Geographic information regarding net sales was determined based
    upon sales to each geographic area.**
    
    Geographic information regarding long-lived assets was
    determined based upon the recorded value of those assets on the
    balance sheets of each of the geographic locations.  (17)
    Legal
    Proceedings     69




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  U.S.-based
  (18)
    Foreign
    Tax Settlement       70




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (19)
    Per Share
    Amounts    2008


2007


2006(In thousands, except share amounts)Net income (loss) applicable to common shareholders

$
1,193


$
380


$
(4,241
)Effect of dilutive securities on net income (loss):Convertible debt


10







Net income (loss) applicable to common shareholders, assuming
    conversions

$
1,203


$
380


$
(4,241
)Weighted average shares oustanding  Basic


11,333,984



10,751,220



9,787,599Effect of dilutive securities on shares outstanding:Options


26,170



73,078



Warrants


19,925



321,809



Convertible debt


112,394







Weighted average shares outstanding  Diluted


11,492,473



11,146,107



9,787,599    71




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##### Table of Contents



DRI
    CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (20)
    Unaudited
    Quarterly Financial Data    Year Ended December 31, 2008Q1


Q2


Q3


Q4(a)(In thousands, except share and per share amounts)(Unaudited)Net sales

$
17,025


$
19,103


$
18,794


$
15,637Gross profit


6,032



6,543



6,500



4,813Operating income (loss)


1,436



1,492



1,503



(517
)Net income (loss) applicable to common shareholders


648



384



662



(501
)Net income (loss) applicable to common shareholders per common
    share:Basic

$
0.06


$
0.03


$
0.06


$
(0.04
)Diluted

$
0.06


$
0.03


$
0.06


$
(0.04
)Weighted average number of common shares and common share
    equivalents outstandingBasic


11,197,563



11,227,274



11,453,588



11,464,333Diluted


12,873,397



11,610,692



13,052,316



11,464,333   Year Ended December 31, 2007Q1


Q2


Q3


Q4(In thousands, except share and per share amounts)(Unaudited)Net sales

$
12,000


$
14,885


$
13,929


$
17,118Gross profit


3,678



4,533



4,541



5,869Operating income (loss)


(256
)


562



1,038



912Net loss applicable to common shareholders


(846
)


244



500



482Net loss applicable to common shareholders per common shareBasic

$
(0.09
)

$
0.02


$
0.04


$
0.04Diluted

$
(0.09
)

$
0.02


$
0.04


$
0.04Weighted average number of common shares and common share
    equivalents outstandingBasic


10,173,578



10,503,691



11,131,248



11,181,114Diluted


10,173,578



11,434,320



11,702,461



12,023,888     (a)
    During the fourth quarter, within the performance of our
    year-end financial reporting process, we identified two
    adjusting journal entries necessary to properly state our
    financial statements at year-end. One entry, a $90,000 increase
    to selling, general and administrative expenses, corrected an
    understatement of accrued vacation that existed at
    December 31, 2007. Another entry, totaling $68,000,
    resulted in our recognition of revenue during the fourth quarter
    that, under one multiple element contract, should have been
    recorded during the first quarter of 2008. We have concluded
    that these adjustments were not material to either the 2007
    consolidated financial statements or the 2008 first quarter
    operating results. 72




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure              Form 10-K Form 10-K Regulation S-K
    Regulation S-K.
 73




---



##### Table of Contents



Item 9A.
    Controls
    and Procedures  l3a-15(e) Form 10-K,
  Managements
    Report on Internal Control Over Financial
    Reporting
  Rule 13a-15(f). Internal Control- Integrated Framework
    Material
    Weakness  Mobitec Ltda.
     74




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##### Table of Contents



Material
    Weakness  Revenue Recognition
  Form 10-Q
      Changes
    in Internal Control over Financial Reporting
    Item 9B.
    Other
    Information           75




---



##### Table of Contents



i.e
     PART III    Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters   76




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##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits  (1)(2)
    Financial Statements
    (3)
    Exhibits    ExhibitNo.

Document3
.1

Amended and Restated Articles of Incorporation of the Company
    (incorporated herein by reference from the Companys
    Registration Statement on Form S-3, filed with the SEC on
    December 23, 2003)3
.2

Articles of Amendment to Articles of Incorporation of the
    Company containing Certificate of Designation of Series E
    Redeemable Nonvoting Convertible Stock (incorporated herein by
    reference from the Companys Report on Form 8-K, filed with
    the SEC on November 12, 2003)3
.3

Articles of Amendment to Articles of Incorporation of the
    Company containing Amended and Restated Certificate of
    Designation of Series F Convertible Preferred Stock
    (incorporated herein by reference from the Companys Report
    on Form 8-K, filed with the SEC on April 14, 2004)3
.4

Articles of Amendment to the Articles of Incorporation of the
    Company containing Series AAA Preferred Stock Change in
    Quarterly Dividend Accrual and Conversion Price (incorporated
    herein by reference to the Companys Report on Form 10-K
    for the year ended December 31, 2004)3
.5

Articles of Amendment to Articles of Incorporation of the
    Company containing Amended and Restated Certificate of
    Designation of Series G Redeemable Convertible Preferred Stock
    (incorporated herein by reference to the Companys Report
    on Form 8-K filed on June 28, 2005)3
.6

Articles of Correction of Articles of Amendment to the Articles
    of Incorporation of the Company containing a correction to an
    error in the Amended Certificate of Designation of Series G
    Redeemable Convertible Preferred Stock (incorporated herein by
    reference to the Companys Report on Form 10-Q for the
    quarter ended June 30, 2005)3
.7

Articles of Amendment to the Articles of Incorporation of the
    Company containing an amendment to eliminate a staggered
    election of Board members (incorporated herein by reference to
    the Companys Report on Form 10-Q for the quarter ended
    June 30, 2005)3
.8

Articles of Amendment to Articles of Incorporation of the
    Company containing Amended and Restated Certificate of
    Designation of Series H Convertible Preferred Stock
    (incorporated herein by reference to the Companys Report
    on Form 8-K filed on November 4, 2005)3
.9

Articles of Amendment to Articles of Incorporation of the
    Company containing Certificate of Designation of Series I
    Convertible Preferred Stock (incorporated herein by reference to
    the Companys Report on Form 8-K filed on March 23, 2006)3
.10

Amendment No. 1 to the Companys Certificate of Designation
    with respect to its Series D Junior Participating Preferred
    Stock (incorporated herein by reference to the Companys
    Report on Form 8-K filed with the SEC on September 28, 2006)3
.11

Certificate of Designation of Series D Junior Participating
    Preferred Stock (incorporated herein by reference to the
    Companys Form 8-A filed with the SEC on October 2, 2006) 77




---



##### Table of Contents



ExhibitNo.

Document3
.12

Amendment to Certificate of Designation of Series D Junior
    Participating Preferred Stock (incorporated herein by reference
    to the Companys Form 8-A filed with the SEC on October 2,
    2006)3
.13

Amended and Restated Bylaws of the Company (incorporated herein
    by reference to the Companys Report on Form 8-K filed on
    September 18, 2006)3
.14

Amendment to Bylaws of DRI Corporation, dated as of September
    12, 2007 (incorporated herein by reference to the Companys
    Report on Form 8-K filed with the SEC on September 14, 2007)4
.1

Form of specimen certificate for Common Stock of the Company
    (incorporated herein by reference from the Companys
    Registration Statement on Form SB-2, filed with the SEC (SEC
    File No. 33-82870-A)4
.2

Form of Underwriters Warrants issued by the Company to the
    Underwriter (incorporated herein by reference from the
    Companys Report on Form 8-K, filed with the SEC on April
    22, 2004)4
.3

Warrant Agreement between the Company and Continental Stock
    Transfer & Trust Company (incorporated herein by reference
    from the Companys Registration Statement on Form SB-2,
    filed with the SEC (SEC File No. 33-82870-A))4
.4

Rights Agreement, dated as of September 22, 2006, between the
    Company and American Stock Transfer & Trust Company, as
    Rights Agent, together with the following exhibits thereto:
    Exhibit A  Certificate of Designation of Series
    D Junior Participating Preferred Stock of Digital Recorders,
    Inc. and the Amendment to Certificate of Designation of Series D
    Junior Participating Preferred Stock of Digital Recorders, Inc.;
    Exhibit B  Form of Right Certificate; and
    Exhibit C  Summary of Rights to Purchase Shares
    (incorporated herein by reference to the Companys
    Registration Statement on Form 8-A filed with the Securities and
    Exchange Commission on October 2, 2006)4
.5

Omnibus Amendment dated as of January 10, 2007, effective
    December 31, 2006, by and among the Company, TwinVision of North
    America, Inc., Digital Audio Corporation, Robinson-Turney
    International, Inc., and Laurus Master Fund, Ltd. (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed with the SEC on January 16, 2007)4
.6

Amended and Restated Secured Term Note dated as of January 10,
    2007, effective December 31, 2006, by and between the Company,
    TwinVision of North America, Inc., Digital Audio Corporation,
    Robinson-Turney International, Inc., and Laurus Master Fund,
    Ltd. (incorporated herein by reference to the Companys
    Report on Form 8-K filed with the SEC on January 16, 2007)4
.7

Second Amended and Restated Registration Rights Agreement dated
    as of January 10, 2007, effective December 31, 2006, by and
    between the Company and Laurus Master Fund, Ltd. (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed with the SEC on January 16, 2007)4
.8

Certificate of Designation of Series J Convertible Preferred
    Stock of Digital Recorders, Inc. (incorporated herein by
    reference to the Companys Report on Form 10-Q for the
    quarter ended June 30, 2007)4
.9

Warrant, dated as of June 30, 2008, issued by the Company to BHC
    Interim Funding III, L.P. (incorporated herein by reference to
    the Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)4
.10

First Amendment to Warrant issued by the Company to BHC Interim
    Funding III, L.P., dated as of March 26, 2009 (filed herewith)10
.1

Executive Employment Agreement, dated January 1, 1999, between
    the Company and Larry Hagemann (incorporated herein by reference
    from the Companys Proxy Statement for the Annual Meeting
    of Shareholders for fiscal year 2000, filed with the SEC on June
    6, 2001)10
.2

Form of Office Lease Agreement, between the Company and Sterling
    Plaza Limited Partnership (incorporated herein by reference from
    the Companys Form 10-KSB/A, filed with the SEC on
    May 21, 2001)10
.3

Lease Agreement, between the Company and The Prudential Savings
    Bank, F.S.B., dated December 18, 1998 (incorporated herein
    by reference from the Companys Form 10-KSB/A, filed with
    the SEC on June 6, 2001)10
.4

Form of Loan Agreement, dated as of August 26, 2002, between the
    Company and John D. Higgins (incorporated herein by reference to
    the Companys Report on Form 8-K, filed with the SEC on
    August 30, 2002) 78




---



##### Table of Contents



ExhibitNo.

Document10
.5

Form of Digital Recorders, Inc., 8% Convertible Debenture,
    dated August 26, 2002, issued to John D. Higgins
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on August 30, 2002)10
.6

Form of Security Agreement, dated August 26, 2002, between the
    Company and John D. Higgins (incorporated herein by reference to
    the Companys Report on Form 8-K, filed with the SEC on
    August 30, 2002)10
.7

Form of Pledge Agreement, dated August 26, 2002, between the
    Company and John D. Higgins (incorporated herein by reference to
    the Companys Report on Form 8-K, filed with the SEC on
    August 30, 2002)10
.8

Form of Subsidiary Guarantee, dated August 26, 2002, by
    Subsidiaries of the Company in favor of John D. Higgins
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on August 30, 2002)10
.9

Form of Subsidiary Security Agreement, dated August 26, 2002,
    among the Company, TwinVision of North America, Inc. and John D.
    Higgins (incorporated herein by reference to the Companys
    Report on Form 8-K, filed with the SEC on August 30, 2002)10
.10

Share Purchase Agreement, dated as of October 13, 2003, by and
    between Dolphin Offshore Partners, L.P. and the Company
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on November 12, 2003)10
.11

Stock Purchase Warrant, dated as of October 13, 2003, issued by
    the Company to Dolphin Offshore Partners, L.P. (terminated)
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on November 12, 2003) [If the
    warrant has been terminated, is it still material disclosure?]10
.12

Amended and Restated Registration Rights Agreement, dated as of
    April 1, 2004, by and between the Company and Dolphin Offshore
    Partners, L.P. (incorporated herein by reference from the
    Companys Report on Form 8-K, filed with the SEC on April
    14, 2004)10
.13

Securities Purchase Agreement, dated as of November 5, 2003, by
    and between the Company, as seller, and BFSUS Special
    Opportunities Trust PLC and Renaissance US Growth &
    Investment Trust PLC, collectively as purchasers (incorporated
    herein by reference to the Companys Report on Form 8-K,
    filed with the SEC on November 12, 2003)10
.14

Loan and Security Agreement, dated as of November 6, 2003, by
    and between LaSalle Business Credit, LLC, as lender, and the
    Company, as borrower (incorporated herein by reference to the
    Companys Report on Form 8-K, filed with the SEC on
    November 12, 2003)10
.15

Warrant Agreement, dated March 23, 2004, between Digital
    Recorders, Inc. and Fairview Capital Ventures LLC (incorporated
    herein by reference to the Companys Registration Statement
    on Form S-3, filed with the SEC on April 16, 2004)10
.16

Securities Purchase Agreement dated as of April 21, 2004, among
    Digital Recorders, Inc. and the investors named therein
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on April 22, 2004)10
.17

Registration Rights Agreement dated as of April 21, 2004, among
    Digital Recorders, Inc. and the investors named therein
    (incorporated herein by reference to the Companys Report
    on Form 8-K, filed with the SEC on April 22, 2004)10
.18

Form of Warrant dated as of April 21, 2004, issued by Digital
    Recorders, Inc. to each of the Investors named in the Securities
    Purchase Agreement filed as Exhibit 10.16 hereto (incorporated
    herein by reference to the Companys Report on Form 8-K,
    filed with the SEC on April 22, 2004)10
.19

Warrant, dated April 26, 2004, issued by the Company to Roth
    Capital Partners, LLC (incorporated herein by reference to the
    Companys quarterly report on Form 10-Q for the quarter
    ended March 31, 2004)10
.20

Amendment No. 2 to Rights Agreement, dated July 8, 2004, between
    Digital Recorders, Inc. and Continental Stock Transfer &
    Trust Company (incorporated herein by reference to the
    Companys Report on Form 8-K, filed with the SEC on July 8,
    2004) 79




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##### Table of Contents



ExhibitNo.

Document10
.21

Securities Purchase Agreement, dated October 5, 2004, between
    the Company and Riverview Group LLC (incorporated herein by
    reference to the Companys Report on Form 8-K, filed with
    the SEC on October 7, 2004)10
.22

Registration Rights Agreement, dated October 5, 2004, between
    the Company and Riverview Group LLC (incorporated herein by
    reference to the Companys Report on Form 8-K, filed with
    the SEC on October 7, 2004)10
.23

Warrant, dated October 6, 2004, issued by the Company to
    Riverview Group, LLC (incorporated herein by reference to the
    Companys Report on Form 8-K, filed with the SEC on October
    7, 2004)10
.24

Amended and Restated Warrant, dated October 6, 2004, issued by
    the Company to Roth Capital Partners, LLC (incorporated herein
    by reference to the Companys quarterly report on Form 10-Q
    for the quarter ended September 30, 2004)10
.25

Executive Employment Agreement, between the Company and David N.
    Pilotte, dated October 25, 2004 (incorporated herein by
    reference to the Companys Report on Form 8-K, filed with
    the SEC on October 22, 2004)10
.26

First Lease Amendment, between the Company and Property Reserve,
    Inc., f/k/a The Prudential Savings Bank, F.S.B., dated December
    11, 2002 (incorporated herein by reference to the Companys
    Registration Statement of Form S-1, filed with the SEC on
    January 4, 2005)10
.27

Second Lease Amendment, between the Company and Property
    Reserve, Inc., f/k/a The Prudential Savings Bank, F.S.B., dated
    June 18, 2003 (incorporated herein by reference to the
    Companys Registration Statement of Form S-1, filed with
    the SEC on January 4, 2005)10
.28

Third Lease Amendment, between the Company and Property Reserve,
    Inc., f/k/a The Prudential Savings Bank, F.S.B., dated August
    21, 2003 (incorporated herein by reference to the Companys
    Registration Statement of Form S-1, filed with the SEC on
    January 4, 2005)10
.29

Fourth Lease Amendment, between the Company and Property
    Reserve, Inc., f/k/a The Prudential Savings Bank, F.S.B., dated
    September 8, 2003 (incorporated herein by reference to the
    Companys Registration Statement of Form S-1, filed with
    the SEC on January 4, 2005)10
.30

First Amendment, between the Company and Sterling Plaza Limited
    Partnership, d/b/a Dallas Sterling Plaza Limited Partnership,
    dated August 25, 2003 (incorporated herein by reference to the
    Companys Registration Statement of Form S-1, filed with
    the SEC on January 4, 2005)10
.31

Second Amendment, between Sterling Plaza Limited Partnership,
    d/b/a Dallas Sterling Plaza Limited Partnership and the Company,
    dated September 17, 2004 (incorporated herein by reference to
    the Companys Registration Statement of Form S-1, filed
    with the SEC on January 4, 2005)10
.32

Certificate of Designation of Series G Convertible Preferred
    Stock, dated June 23, 2005 (incorporated herein by reference to
    the Companys Report on Form 8-K filed on June 28, 2005)10
.33

Share Purchase Agreement, dated June 23, 2005, by and between
    the Company and Dolphin Offshore Partners, L.P.(incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on June 28, 2005)10
.34

Stock Purchase Warrant, dated June 23, 2005, issued by the
    Company to Dolphin Offshore Partners, L.P. (incorporated herein
    by reference to the Companys Report on Form 8-K filed on
    June 28, 2005)10
.35

Registration Rights Agreement, dated June 23, 2005, by and
    between the Company and Dolphin Offshore Partners, L.P.
    (incorporated herein by reference to the Companys Report
    on Form 8-K filed on June 28, 2005)10
.36

Promissory Note dated July 25, 2005, between the Company and
    John D. Higgins (incorporated herein by reference to the
    Companys Report on Form 10-Q for the quarter ended
    September 30, 2005)10
.37

Share Purchase Agreement, dated October 31, 2005, between John
    D. Higgins and the Company (incorporated herein by reference to
    the Companys Report on Form 8-K filed on November 4, 2005)10
.38

Form of Stock Purchase Warrant between John D. Higgins and the
    Company (incorporated herein by reference to the Companys
    Report on Form 8-K filed on November 4, 2005) 80




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##### Table of Contents



ExhibitNo.

Document10
.39

Form of Registration Rights Agreement between John D. Higgins
    and the Company (incorporated herein by reference to the
    Companys Report on Form 8-K filed on November 4, 2005)10
.40

Form of Certificate of Designation of Series H Convertible
    Preferred Stock (incorporated herein by reference to the
    Companys Report on Form 8-K filed on November 4, 2005)10
.41

Waiver, Consent and Fourth Amendment Agreement between the
    Company and LaSalle Business Credit, LLC, dated March 6, 2006
    (incorporated herein by reference to the Companys Report
    on Form 10-K filed with the SEC on April 17, 2006)10
.42

Secured Non-Convertible Revolving Note between the Company and
    Laurus Master Fund, Ltd., dated March 15, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on March 21, 2006)10
.43

Security Agreement (with Schedules) between the Company and
    Laurus Master Fund, Ltd. dated March 15, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on March 21, 2006)10
.44

Grant of Security Interest in Patents and Trademarks (with
    Schedules) between the Company and Laurus Master Fund, Ltd.,
    dated March 15, 2006 (incorporated herein by reference to the
    Companys Report on Form 8-K filed on March 21, 2006)10
.45

Stock Pledge Agreement (with Schedules) between the Company and
    Laurus Master Fund, Ltd., dated March 15, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on March 21, 2006)10
.46

Registration Rights Agreement between the Company and Laurus
    Master Fund, Ltd., dated March 15, 2006 (incorporated herein by
    reference to the Companys Report on Form 8-K filed on
    March 21, 2006)10
.47

Common Stock Purchase Warrant between the Company and Laurus
    Master Fund, Ltd., dated March 15, 2006 (incorporated herein by
    reference to the Companys Report on Form 8-K filed on
    March 21, 2006)10
.48

Share Purchase Agreement between the Company and Transit Vehicle
    Technology Investments, Inc., dated March 21, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on March 23, 2006)10
.49

Stock Purchase Warrant issued by the Company to Transit Vehicle
    Technology Investments, Inc., dated March 21, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on March 23, 2006)10
.50

Registration Rights Agreement between the Company and Transit
    Vehicle Technology Investments, Inc., dated March 21, 2006
    (incorporated herein by reference to the Companys Report
    on Form 8-K filed on March 23, 2006)10
.51

Securities Purchase Agreement dated as of April 28, 2006, by and
    between Digital Recorders, Inc., TwinVision of North America,
    Inc., Digital Audio Corporation, and Robinson-Turney
    International, Inc., and Laurus Master Fund, Ltd. (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on May 4, 2006)10
.52

Secured Term Note by Digital Recorders, Inc., TwinVision of
    North America, Inc., Digital Audio Corporation, and
    Robinson-Turney International, Inc., issued to Laurus Master
    Fund, Ltd., in the original principal amount of $1,600,000
    (incorporated herein by reference to the Companys Report
    on Form 8-K filed on May 4, 2006)10
.53

Common Stock Purchase Warrant issued by the Company to Laurus
    Master Fund, Ltd., dated as of April 28, 2006 (incorporated
    herein by reference to the Companys Report on Form 8-K
    filed on May 4, 2006)10
.54

Amended and Restated Registration Rights Agreement dated as of
    April 28, 2006, by and between Digital Recorders, Inc. and
    Laurus Master Fund, Ltd. (incorporated herein by reference to
    the Companys Report on Form 8-K filed on May 4, 2006)10
.55

Promissory Note, dated April 30, 2007, by Dolphin Direct Equity
    Partners, LP issued to Digital Recorders, Inc. in the principal
    sum of $285,000 (incorporated herein by reference to the
    Companys Report on Form 10-Q for the quarter ended June
    30, 2007) 81




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##### Table of Contents



ExhibitNo.

Document10
.56

Waiver and Consent, dated as of April 30, 2007, entered into by
    and between Digital Recorders, Inc., TwinVision of North
    America, Inc., Digital Audio Corporation, Robinson-Turney
    International, Inc. and Laurus Master Fund, Ltd. (incorporated
    herein by reference to the Companys Report on Form 10-Q
    for the quarter ended March 31, 2007)10
.57

Share Purchase Agreement, dated as of April 30, 2007, entered
    into by and among Dolphin Direct Equity Partners, LP, Digital
    Audio Corporation and Digital Recorders, Inc. (incorporated
    herein by reference to the Companys Report on Form 10-Q
    for the quarter ended March 31, 2007)10
.58

Form of Registration Rights Agreement, dated June 11, 2007,
    between Digital Recorders, Inc. and holder of Series J
    Convertible Preferred Stock of Digital Recorders, Inc.
    (incorporated herein by reference to the Companys Report
    on Form 10-Q for the quarter ended June 30, 2007)10
.59

Agreement, dated as of June 30, 2008, by and between the Company
    and John D. Higgins (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.60

Revolving Credit and Security Agreement, dated as of June 30,
    2008, by and among PNC Bank, National Association and Digital
    Recorders, Inc., TwinVision of North America, Inc. and DRI
    Corporation (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.61

Amendment No. 2 to Revolving Credit and Security Agreement,
    dated September 29, 2008, by and between Digital Recorders,
    Inc., TwinVision of North America, Inc. and DRI Corporation, and
    PNC Bank (incorporated by reference to the Companys Report
    on Form 10-Q for the quarter ended September 30, 2008)10
.62

Revolving Credit Note, dated as of June 30, 2008, issued by
    Digital Recorders, Inc., TwinVision of North America, Inc. and
    DRI Corporation to PNC Bank, National Association (incorporated
    herein by reference to the Companys Report on Form 8-K/A,
    filed with the SEC on August 14, 2008)10
.63

Loan and Security Agreement, dated as of June 30, 2008, by and
    among Digital Recorders, Inc., TwinVision of North America, Inc.
    and DRI Corporation, and BHC Interim Funding III, L.P.
    (incorporated herein by reference to the Companys Report
    on Form 8-K/A, filed with the SEC on August 14, 2008)10
.64

First Amendment to the Loan and Security Agreement, dated as of
    July 30, 2008, by and among Digital Recorders, Inc., TwinVision
    of North America, Inc. and DRI Corporation, and BHC Interim
    Funding III, L.P. (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.65

Senior Secured Term Note, dated as of June 30, 2008, issued by
    Digital Recorders, Inc. and TwinVision of North America, Inc. to
    BHC Interim Funding III, L.P. (incorporated herein by reference
    to the Companys Report on Form 8-K/A, filed with the SEC
    on August 14, 2008)10
.66

Continuing Unconditional Guaranty, dated as of June 30, 2008,
    granted by the Company in favor of BHC Interim Funding III, L.P.
    (incorporated herein by reference to the Companys Report
    on Form 8-K/A, filed with the SEC on August 14, 2008)10
.67

Stock Pledge Agreement, dated as of June 30, 2008, by and
    between the Company and BHC Interim Funding III, L.P.
    (incorporated herein by reference to the Companys Report
    on Form 8-K/A, filed with the SEC on August 14, 2008)10
.68

Trademark Security Agreement, dated as of June 30, 2008, by and
    between the Company and BHC Interim Funding III, L.P.
    (incorporated herein by reference to the Companys Report
    on Form 8-K/A, filed with the SEC on August 14, 2008)10
.69

Trademark Security Agreement, dated as of June 30, 2008, by and
    between Digital Recorders, Inc. and BHC Interim Funding III,
    L.P. (incorporated herein by reference to the Companys
    Report on Form 8-K/A, filed with the SEC on August 14, 2008)10
.70

Trademark and Security Agreement, dated as of June 30, 2008, by
    and between TwinVision of North America, Inc. and BHC Interim
    Funding III, L.P. (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008) 82




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##### Table of Contents



ExhibitNo.

Document10
.71

Copyright Security Agreement, dated as of June 30, 2008, by and
    between Digital Recorders, Inc. and BHC Interim Funding III,
    L.P. (incorporated herein by reference to the Companys
    Report on Form 8-K/A, filed with the SEC on August 14, 2008)10
.72

Copyright Security Agreement, dated as of June 30, 2008, by and
    between TwinVision of North America, Inc. and BHC Interim
    Funding III, L.P. (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.73

Patent Security Agreement, dated as of June 30, 2008, by and
    between Digital Recorders, Inc. and BHC Interim Funding III,
    L.P. (incorporated herein by reference to the Companys
    Report on Form 8-K/A, filed with the SEC on August 14, 2008)10
.74

Undertaking Concerning Loan Payment for purposes other than
    personal consumption, by and between Handelsbanken and Mobitec
    AB (English translation) (incorporated herein by reference to
    the Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.75

Instrument for Debt A Loan for purposes other than personal
    consumption, by and between Handelsbanken and Mobitec AB
    (English translation) (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.76

Factoring Agreement by and between Handelsbanken and Mobitec AB
    (English translation) (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.77

EURO Short Term Loan Facility by and between Handelsbanken and
    Mobitec GmbH (incorporated herein by reference to the
    Companys Report on Form 8-K/A, filed with the SEC on
    August 14, 2008)10
.78

Form of Share Purchase Agreement, dated June 11, 2007, between
    Digital Recorders, Inc. and buyer of Series J Convertible
    Preferred Stock of Digital Recorders, Inc. with Schedule of
    Differences (incorporated herein by reference to the
    Companys Report on Form 10-Q for the quarter ended
    June 30, 2007)10
.79

Executive Employment Agreement, dated November 15, 2007, between
    Mobitec GmbH and Mobitec AB and Oliver Wels (incorporated herein
    by reference from the Companys Report on Form 10-Q for the
    quarter ended March 31, 2008)10
.80

Executive Employment Agreement, dated December 31, 2007, between
    the Company and Lawrence A. Hagemann (incorporated herein by
    reference from the Companys Report on Form 8-K, filed with
    the SEC on January 10, 2008)10
.81

Executive Employment Agreement, dated December 31, 2007, between
    the Company and Stephen P. Slay (incorporated herein
    by reference from the Companys Report on Form 8-K, filed
    with the SEC on January 10, 2008)10
.82

Executive Employment Agreement, dated December 31, 2007, between
    the Company and Rob R. Taylor (incorporated herein by
    reference from the Companys Report on Form 8-K, filed with
    the SEC on January 10, 2008)10
.83

Executive Employment Agreement, effective January 1, 2008,
    between the Company and David L. Turney (incorporated
    herein by reference from the Companys Report on Form 8-K,
    filed with the SEC on January 18, 2008)10
.84

Executive Employment Agreement, effective December 31, 2007,
    between the Company and Tanya Lind Johnson (incorporated herein
    by reference from the Companys Report on Form 8-K, filed
    with the SEC on January 18, 2008)10
.85

Executive Employment Agreement, effective December 31, 2007,
    between the Company and William F. Fay, Jr.
    (incorporated herein by reference from the Companys Report
    on Form 8-K, filed with the SEC on January 18, 2008)10
.86

Extension Agreement, dated as of April 30, 2008 by and between
    DRI Corporation and Digital Audio Corporation (incorporated
    herein by reference from the Companys Report on Form 8-K,
    filed with the SEC on May 6, 2008)10
.87

Amendment No. 3 to Revolving Credit and Security Agreement,
    dated March 26, 2009, by and between Digital Recorders, Inc.,
    TwinVision of North America, Inc. and DRI Corporation, and PNC
    Bank (filed herewith) 83




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##### Table of Contents



ExhibitNo.

Document10
.88

Second Amendment to the Loan and Security Agreement, dated as of
    March 26, 2009, by and among Digital Recorders, Inc., TwinVision
    of North America, Inc. and DRI Corporation, and BHC Interim
    Funding III, L.P. (filed herewith)21
.1

Listing of Subsidiaries of the Company (filed herewith)23
.1

Consent of Grant Thornton LLP (filed herewith)23
.2

Consent of PricewaterhouseCoopers LLP (filed herewith)31
.1

Section 302 Certification of David L. Turney (filed herewith)31
.2

Section 302 Certification of Stephen P. Slay (filed herewith)32
.1

Section 906 Certification of David L. Turney (filed herewith)32
.2

Section 906 Certification of Stephen P. Slay (filed herewith)  84




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##### Table of Contents



SIGNATURES      By:
    /s/  DAVID
    L. TURNEY   Chairman of the Board, Chief Executive Officer
 and President (Principal Executive Officer)
    In accordance with the Exchange Act, this report has been
    signed below by the following persons on behalf of the
    registrant and in the capacities and on the dates indicated.
  Signature

Title

Date/s/  DAVID
    L. TURNEYDavid
    L. Turney

Chairman of the Board, President and Chief Executive Officer
    (Principal Executive Officer)

March 31, 2009/s/  STEPHEN
    P. SLAYStephen
    P. Slay

Vice President, Chief Financial Officer, Treasurer and
    Secretary
    (Principal Financial and Accounting Officer)

March 31, 2009/s/  HUELON
    ANDREW HARRISONHuelon
    Andrew Harrison

Director

March 31, 2009/s/  JOHN
    D. HIGGINSJohn
    D. Higgins

Director

March 31, 2009/s/  C.
    JAMES MEESE JR.C.
    James Meese Jr.

Director

March 31, 2009/s/  STEPHANIE
    L. PINSONStephanie
    L. Pinson

Director

March 31, 2009/s/  JOHN
    K. PIROTTEJohn
    K. Pirotte

Director

March 31, 2009/s/  JULIANN
    TENNEYJuliann
    Tenney

Director

March 31, 2009  85