##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, 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, 2007
 Commission file number 000-28539
 DRI CORPORATION
 Exact name of registrant as specified in its Charter)
 North Carolina
    
    56-1362926(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 5949 Sherry Lane, Suite 1050
Dallas, Texas 75225  (Address of principal executive offices, Zip Code)
 (214) 378-8992
  Common Stock, $.10 Par Value
    
    The NASDAQ Capital Market®(Title of Each Class)
    
    (Name of Each Exchange on Which Registered)
 None
 o þ
 o þ
 þ o
 o þ
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer  
þ
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
   Common Stock, par value $.10 per share
    
    11,203,181(Class of Common Stock)
    
    Number 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 necessary fixed cost reductions;
    
    Statements regarding our ability to achieve other expense 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 its 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 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;
    
    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.
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
    
    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 fixed
costs;
    
    Risks that we may not be able to achieve other expense reductions;
    
    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 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 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;
    
    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
  3




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##### 



INDEX
 Page No.PART IItem 1.
    
    Business
    
    
    5Item 1A.
    
    Risk Factors
    
    
    13Item 1B.
    
    Unresolved Staff Comment
    
    
    20Item 2.
    
    Properties
    
    
    20Item 3.
    
    Legal Proceedings
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Shareholder Matters,
and Issuer Purchases of Equity Securities
    
    
    20Item 6.
    
    Selected Financial Data
    
    
    23Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    24Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8.
    
    Financial Statements and Supplementary Data
    
    
    38Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    70Item 9A.
    
    Controls and Procedures
    
    
    70PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    71Item 11.
    
    Executive Compensation
    
    
    71Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
    
    
    71Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    71Item 14.
    
    Principal Accounting Fees and Services
    
    
    71PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    71SIGNATURES
    
    
    
    
    76Listing of SubsidiariesConsent of PricewaterhouseCoopers LLPSection 302 Certification of David L. TurneySection 302 Certification of Stephen P. SlaySection 906 Certification of David L. TurneySection 906 Certification of Stephen P. Slay
  4




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PART I
 
 Item 1. Business
 General
 ®
  ® ® ® ® ® ®
  U.S. Operations
  
    
    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;
VacTell 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 USA 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, 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 USA 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
 5




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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% of Mobitec Brazil
Ltda is owned by the Companys Brazilian 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 GmbH 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
  6




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Wall Street
Journal
  Industry and Market Overview
    7




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®
 ® ®
  Key Competitors
   8




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Products and Product Design
  
    
    DR600, 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;
 
    
    ELYSÉ® and Central Recording Station software;
 
    
    Mobitec® electronic destination sign systems; and
 
    
    VacTell video surveillance, recording and actionable intelligence products.
  ® ®
 ® ® ®
 ®
 9




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##### Table of Contents



®
 Marketing and Sales Organization
   Customers
  Seasonality and Fluctuation in Results
    10




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Backlog
  Research and Development
  ® ® ®
 History of Research and Development  Product Pioneer
 ® ®
  ® ® ®
  11




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Manufacturing Operations
     Customer Service
  Proprietary Rights
 ® ® ® ®
  Employees
  12




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Item 1A. Risk Factors
  Risks Related to Indebtedness, Financial Condition and Results of Operations
 Our cash resources may not be sufficient to make payment on our domestic note payable and line
of credit
 Our substantial debt could adversely affect our financial position, operations and ability to
grow.
 
    
    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
have;
    
    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
 
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
    
    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 or our outstanding convertible debentures;
    
    triggering of redemption obligations under our outstanding convertible debentures;
    
    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.
   Our operating results may continue to fluctuate.
 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.
 14




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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.
 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.
 15




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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.
 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.
 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.
 16




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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 and Convertible Debentures
 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;
    
    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 and convertible debentures have preferential rights over our Common Stock.
 17




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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.
  The adoption of 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.
 18




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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.
  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.
 
 19




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  City and State
    
    Country
    
    Area
    
    Use
    
    Monthly Rent
    
    ExpirationDurham, NC
    
    USA
    
    50,136      sf
    
    Office, service and repair, warehouse and assembly
    
    $32,587
    
    April 2011Dallas, TX
    
    USA
    
    3,145       sf
    
    Office (a)
    
    $5,883
    
    April 2008Peakhurst
    
    Australia
    
    271         sm
    
    Office
    
    $3,387
    
    February 2010Caxias do Sul
    
    Brazil
    
    88          sm
    
    Office and assembly
    
    $4,241
    
    Open endedHerrljunga
    
    Sweden
    
    2,000       sm
    
    Office, warehouse and assembly (b)
    
    $6,802
    
    March 2011Ettlingen
    
    Germany
    
    242         sm
    
    Office
    
    $3,115
    
    October 2010
 
 (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
 ®
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High
    
    LowYear Ended December 31, 2006First Quarter
    
    $
    1.81
    
    
    $
    1.25Second Quarter
    
    
    1.43
    
    
    
    1.05Third Quarter
    
    
    1.40
    
    
    
    1.05Fourth Quarter
    
    
    1.49
    
    
    
    1.19Year Ended December 31, 2007First Quarter
    
    $
    2.20
    
    
    $
    1.16Second Quarter
    
    
    2.99
    
    
    
    1.50Third Quarter
    
    
    3.61
    
    
    
    2.26Fourth Quarter
    
    
    3.48
    
    
    
    2.23
   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
    
    
    417,200
    
    
    
    $ 2.53
    
    
    None2003 Stock Option Plan
    
    
    590,600
    
    
    
    $ 2.38
    
    
    
    45,433Total
    
    
    1,007,800
    
    
    
    $ 2.45
    
    
    
    45,433
 
 *
    
    All options issued under the 1993 Incentive Stock Option Plan and the 2003 Stock Option Plan
have been approved by the Companys shareholders.  Performance Graph
 ®
 21




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##### Table of Contents



TOTAL RETURN TO SHAREHOLDERS
(Includes Reinvestment of Dividends)
 ANNUAL RETURN PERCENTAGECompany / Index
    
    Years EndingDec03
    
    Dec04
    
    Dec05
    
    Dec06
    
    Dec07DRI CORPORATION
    
    
    14.17
    
    
    
    42.34
    
    
    
    -60.77
    
    
    
    -22.22
    
    
    
    104.20S&P 500
INFORMATION
TECHNOLOGY
    
    
    47.23
    
    
    
    2.56
    
    
    
    0.99
    
    
    
    8.42
    
    
    
    16.31NASDAQ® INDEX
    
    
    50.36
    
    
    
    8.41
    
    
    
    2.20
    
    
    
    10.27
    
    
    
    9.92
 Base
    
    INDEXED RETURNSCompany / Index
    
    Period
    
    Years EndingDec02
    
    Dec03
    
    Dec04
    
    Dec05
    
    Dec06
    
    Dec07DRI CORPORATION
    
    
    100
    
    
    
    114.17
    
    
    
    162.50
    
    
    
    63.75
    
    
    
    49.58
    
    
    
    101.25S&P 500
INFORMATION
TECHNOLOGY
    
    
    100
    
    
    
    147.23
    
    
    
    150.99
    
    
    
    152.49
    
    
    
    165.33
    
    
    
    192.29NASDAQ® INDEX
    
    
    100
    
    
    
    150.36
    
    
    
    163.00
    
    
    
    166.58
    
    
    
    183.68
    
    
    
    201.91
  Issuance of Unregistered Securities
  22




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Item 6. Selected Financial Data
  23




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Statements of Operations Data
 Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands, except share and per share amounts)Net sales
    
    $
    57,932
    
    
    $
    49,161
    
    
    $
    43,087
    
    
    $
    45,913
    
    
    $
    42,569Gross profit
    
    
    18,621
    
    
    
    13,874
    
    
    
    14,515
    
    
    
    16,818
    
    
    
    15,895Operating income (loss)
    
    
    2,256
    
    
    
    (3,144
    )
    
    
    (4,997
    )
    
    
    (1,686
    )
    
    
    (508
    )Net income (loss) applicable to common
shareholders
    
    
    380
    
    
    
    (4,241
    )
    
    
    (6,450
    )
    
    
    (3,476
    )
    
    
    (2,233
    )Net income (loss) applicable to common
shareholders per common shareBasic
    
    $
    0.04
    
    
    $
    (0.43
    )
    
    $
    (0.67
    )
    
    $
    (0.49
    )
    
    $
    (0.58
    )Diluted
    
    $
    0.03
    
    
    $
    (0.43
    )
    
    $
    (0.67
    )
    
    $
    (0.49
    )
    
    $
    (0.58
    )Weighted average number of common shares
and common share equivalents outstandingBasic
    
    
    10,751,220
    
    
    
    9,787,599
    
    
    
    9,675,580
    
    
    
    7,149,544
    
    
    
    3,873,133Diluted
    
    
    11,146,107
    
    
    
    9,787,599
    
    
    
    9,675,580
    
    
    
    7,149,544
    
    
    
    3,873,133
 Balance Sheet Data
 December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Current assets
    
    $
    23,297
    
    
    $
    22,065
    
    
    $
    20,211
    
    
    $
    22,275
    
    
    $
    19,949Total assets
    
    
    38,914
    
    
    
    37,167
    
    
    
    33,317
    
    
    
    37,893
    
    
    
    34,358Current liabilities
    
    
    17,632
    
    
    
    18,417
    
    
    
    14,640
    
    
    
    12,929
    
    
    
    16,335Long term debt
    
    
    14
    
    
    
    42
    
    
    
    68
    
    
    
    653
    
    
    
    6,647Minority interest
    
    
    422
    
    
    
    234
    
    
    
    892
    
    
    
    441
    
    
    
    338Redeemable Preferred Stock
    
    
    3,618
    
    
    
    3,691
    
    
    
    3,189
    
    
    
    1,845
    
    
    
    3,250Shareholders equity
    
    
    19,492
    
    
    
    17,195
    
    
    
    17,566
    
    
    
    23,641
    
    
    
    11,232
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Restatement
of Fiscal 2007 Quarterly Data
  Business  General
   24




---



##### Table of Contents



Results of Operations
   Year Ended December 31,2007
    
    2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.9
    
    
    
    71.8
    
    
    
    66.3Gross profit
    
    
    32.1
    
    
    
    28.2
    
    
    
    33.7Operating expenses:Selling, general and administrative
    
    
    26.3
    
    
    
    31.6
    
    
    
    41.8Research and development
    
    
    2.0
    
    
    
    3.0
    
    
    
    3.4Total operating expenses
    
    
    28.3
    
    
    
    34.6
    
    
    
    45.2Operating income (loss)
    
    
    3.8
    
    
    
    (6.4
    )
    
    
    (11.5
    )Other income and expense
    
    
    (1.5
    )
    
    
    (2.9
    )
    
    
    (1.1
    )Income (loss) from continuing operations before
income tax expense and minority interest
    
    
    2.3
    
    
    
    (9.3
    )
    
    
    (12.6
    )Income tax expense
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.4
    )Income (loss) from continuing operations before minority interest
in (income) loss of consolidated subsidiary
    
    
    1.8
    
    
    
    (10.0
    )
    
    
    (13.0
    )Minority
interest in (income) loss of consolidated subsidiary
    
    
    (0.3
    )
    
    
    1.3
    
    
    
    (1.0
    )Income (loss) from continuing operations
    
    
    1.5
    
    
    
    (8.7
    )
    
    
    (14.0
    )Income (loss) from discontinued operations
    
    
    (0.4
    )
    
    
    0.7
    
    
    
    0.4Net income (loss)
    
    
    1.1
    %
    
    
    (8.0
    )%
    
    
    (13.6
    )%
 25




---



##### Table of Contents



Comparison of Results for the Years Ended December 31, 2007 and 2006
 Net Sales and Gross Profit
         26




---



##### Table of Contents



Selling, General, and Administrative
   Research and Development
   Operating Income (Loss)
  Other Income, Foreign Currency Gain (Loss) and Interest Expense
  27




---



##### Table of Contents



Income Tax Expense
  Discontinued Operations
  Net Income (Loss) Applicable to Common Shareholders
  Comparison of Results for the Years Ended December 31, 2006 and 2005
 Net Sales and Gross Profit
     28




---



##### Table of Contents



Selling, General, and Administrative
   Research and Development
   Operating Income (Loss)
  Other Income, Foreign Currency Gain (Loss), and Interest Expense
  Income Tax Expense
  29




---



##### Table of Contents



Discontinued Operations
   Net Income (Loss) Applicable to Common Shareholders
  Cash Flows
   30




---



##### Table of Contents



Liquidity and Capital Resources
  Wall
Street Journal
    31




---



##### Table of Contents



Note Payable.
 Long-term Debt.
 Management Conclusion
  32




---



##### Table of Contents



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
  Inventory Valuation and Warranty Reserve
  Intangible Assets and Goodwill
  Income Taxes
  33




---



##### Table of Contents



Revenue Recognition
     Stock-based Compensation
  Off-Balance Sheet Arrangements
  34




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodTotalamounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    committed
    
    
    Less than 1 year
    
    
    2-3 years
    
    
    4-5 years
    
    
    5 years(In thousands)Long-Term Debt Obligations
    
    $
    254
    
    
    $
    254
    
    
    $
    
    
    
    $
    
    
    
    $
    Note payable
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    Loan payable
    
    
    391
    
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    38
    
    
    
    24
    
    
    
    14
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    2,375
    
    
    
    848
    
    
    
    1,261
    
    
    
    266
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities (a)
    
    
    1,542
    
    
    
    499
    
    
    
    689
    
    
    
    354
    
    
    
    5,100
    
    
    
    2,516
    
    
    
    1,964
    
    
    
    620
    
    
    
    Interest Payments (ranging from 5.8% to 10%)
    
    
    89
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,189
    
    
    $
    2,605
    
    
    $
    1,964
    
    
    $
    620
    
    
    $
    
 
 (a)
    
    Represents current and long-term portion of foreign tax settlement  Recent Accounting Pronouncements
    35




---



##### Table of Contents



Impact of Inflation
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Foreign Currency Exchange Rate Risk
   36




---



##### Table of Contents



On-Balance Sheet
    
    Expected Maturity DateFinancial Instruments
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Thereafter(In thousands)Long-term debt:Variable rate (SEK)
    
    $
    2,247
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Average interest rate
    
    
    5.15
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
 37




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 DRI CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 Section
    
    PageReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets  December 31, 2007 and 2006Consolidated Statements of Operations  Years Ended December 31, 2007, 2006 and 2005Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) 
Years Ended December 31, 2007, 2006 and 2005Consolidated Statements of Cash Flows  Years Ended December 31, 2007, 2006 and 2005Notes to Consolidated Financial StatementsFinancial Statement Schedule:Schedule II
 Valuation and Qualifying Accounts
 38




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    
 39




---



##### Table of Contents



December 31,2007
    
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    729
    
    
    $
    611Trade accounts receivable, net
    
    
    11,919
    
    
    
    10,100Current portion of notes receivable
    
    
    86
    
    
    
    Other receivables
    
    
    465
    
    
    
    147Inventories
    
    
    9,603
    
    
    
    9,057Prepaids and other current assets
    
    
    495
    
    
    
    422Assets of discontinued operations
    
    
    
    
    
    
    1,728Total current assets
    
    
    23,297
    
    
    
    22,065Property and equipment, net
    
    
    2,890
    
    
    
    2,906Long-term portion of note receivable
    
    
    258
    
    
    
    Goodwill
    
    
    11,033
    
    
    
    10,289Intangible assets, net
    
    
    1,097
    
    
    
    1,110Deferred tax
assets, net
    
    
    56
    
    
    
    Other assets
    
    
    283
    
    
    
    797Total assets
    
    $
    38,914
    
    
    $
    37,167LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    6,043
    
    
    $
    7,608Notes payable, net
    
    
    500
    
    
    
    1,584Loan payable
    
    
    391
    
    
    
    Current portion of long-term debt
    
    
    254
    
    
    
    254Current portion of foreign tax settlement
    
    
    499
    
    
    
    393Accounts payable
    
    
    6,246
    
    
    
    5,560Accrued expenses
    
    
    3,681
    
    
    
    2,921Preferred stock dividends payable
    
    
    18
    
    
    
    23Liabilities of discontinued operations
    
    
    
    
    
    
    74Total current liabilities
    
    
    17,632
    
    
    
    18,417Long-term debt and capital leases, long-term
    
    
    14
    
    
    
    42Foreign tax settlement, long-term
    
    
    1,043
    
    
    
    1,087Deferred tax liabilities, net
    
    
    
    
    
    
    192Liability
for uncertain tax positions
    
    
    311
    
    
    
    Minority interest in consolidated subsidiary
    
    
    422
    
    
    
    234Commitments and contingencies (Note 7, 8, 9, 19, and 21)Shareholders EquitySeries E Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 500 shares authorized; 85 and 183
shares issued and outstanding at December 31, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company at any time.
    
    
    355
    
    
    
    495Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 410 and 379
shares issued and outstanding at December 31, 2007 and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    1,768
    
    
    
    1,613Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 59 and 54
shares issued and outstanding at December 31, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    247
    
    
    
    222Series I Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 200 shares authorized; 0 and 104
shares issued and outstanding at December 31, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    
    
    
    
    471Series J Redeemable, Convertible Preferred Stock, $.10 par value, liquidation
preference of $5,000 per share; 250 shares authorized; 90 and 0 shares issued
and outstanding at December 31, 2007, and December 31, 2006, respectively;
redeemable at the discretion of the Company at any time.
    
    
    388
    
    
    
    Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 20,000 shares authorized; 172 and 178
shares issued and outstanding at December 31, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company at any time.
    
    
    860
    
    
    
    890Common stock, $.10 par value, 25,000,000 shares authorized; 11,187,993 and
10,045,675 shares issued and outstanding at December 31, 2007 and
December 31, 2006, respectively.
    
    
    1,119
    
    
    
    1,004Additional paid-in capital
    
    
    32,079
    
    
    
    31,517Accumulated other comprehensive income  foreign currency translation
    
    
    4,570
    
    
    
    3,397Accumulated deficit
    
    
    (21,894
    )
    
    
    (22,414
    )Total shareholders equity
    
    
    19,492
    
    
    
    17,195Total liabilities and shareholders equity
    
    $
    38,914
    
    
    $
    37,167
  40




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2006
    
    
    2005Net sales
    
    $
    57,932
    
    
    $
    49,161
    
    
    $
    43,087Cost of sales
    
    
    39,311
    
    
    
    35,287
    
    
    
    28,572Gross profit
    
    
    18,621
    
    
    
    13,874
    
    
    
    14,515Operating expensesSelling, general and administrative
    
    
    15,216
    
    
    
    15,555
    
    
    
    18,029Research and development
    
    
    1,149
    
    
    
    1,463
    
    
    
    1,483Total operating expenses
    
    
    16,365
    
    
    
    17,018
    
    
    
    19,512Operating income (loss)
    
    
    2,256
    
    
    
    (3,144
    )
    
    
    (4,997
    )Other income (loss)
    
    
    103
    
    
    
    (55
    )
    
    
    317Foreign currency gain (loss)
    
    
    210
    
    
    
    152
    
    
    
    (301
    )Interest expense
    
    
    (1,197
    )
    
    
    (1,508
    )
    
    
    (481
    )Total other income and expense
    
    
    (884
    )
    
    
    (1,411
    )
    
    
    (465
    )Income (loss) from continuing operations before income tax
expense and minority interest
    
    
    1,372
    
    
    
    (4,555
    )
    
    
    (5,462
    )Income tax expense
    
    
    (291
    )
    
    
    (331
    )
    
    
    (176
    )Income (loss) from continuing operations before minority
interest in (income) loss of consolidated subsidiary
    
    
    1,081
    
    
    
    (4,886
    )
    
    
    (5,638
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (188
    )
    
    
    658
    
    
    
    (451
    )Income (loss) from continuing operations
    
    
    893
    
    
    
    (4,228
    )
    
    
    (6,089
    )Income (loss) from discontinued operations (Note 2)
    
    
    (219
    )
    
    
    334
    
    
    
    165Net income (loss)
    
    
    674
    
    
    
    (3,894
    )
    
    
    (5,924
    )Provision for preferred stock dividends
    
    
    (294
    )
    
    
    (298
    )
    
    
    (203
    )Amortization for discount on preferred stock
    
    
    
    
    
    
    (49
    )
    
    
    (323
    )Net income (loss) applicable to common shareholders
    
    $
    380
    
    
    $
    (4,241
    )
    
    $
    (6,450
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.06
    
    
    $
    (0.47
    )
    
    $
    (0.68
    )Discontinued operations
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    0.02Income (loss) per share applicable to common shareholders
    
    $
    0.04
    
    
    $
    (0.43
    )
    
    $
    (0.67
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.05
    
    
    $
    (0.47
    )
    
    $
    (0.68
    )Discontinued operations
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    0.02Income (loss) per share applicable to common shareholders
    
    $
    0.03
    
    
    $
    (0.43
    )
    
    $
    (0.67
    )Weighted average number of common shares and common
share equivalent outstandingBasic
    
    
    10,751,220
    
    
    
    9,787,599
    
    
    
    9,675,580Diluted
    
    
    11,146,107
    
    
    
    9,787,599
    
    
    
    9,675,580
  41




---



##### Table of Contents




  Preferred stock
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedNumber
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Additional
    
    
    Accum-
    
    
    Other
    
    
    Compre-
    
    
    Totalof Shares
    
    
    Book
    
    
    of shares
    
    
    Par
    
    
    Paid-in
    
    
    ulated
    
    
    Comprehensive
    
    
    hensive
    
    
    ShareholdersIssued
    
    
    Value
    
    
    issued
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Income (loss)
    
    
    Income (loss)
    
    
    EquityBalance as of January 1, 2005
    
    
    453
    
    
    $
    1,845
    
    
    
    9,599,036
    
    
    $
    960
    
    
    $
    29,815
    
    
    $
    (12,596
    )
    
    $
    3,617
    
    
    
    
    
    
    $
    23,641Reclass from Investment in subsidiary
by Mobitec GmbH
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Issuance of warrants for service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    72,667
    
    
    
    7
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Conversion of Series AAA Preferred
stock, net of costs
    
    
    (68
    )
    
    
    (340
    )
    
    
    61,812
    
    
    
    6
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Issuance of Series G Preferred stock,
net of discount
    
    
    393
    
    
    
    1,648
    
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,923Value of Beneficial Conversion
feature of Series G Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )Amortization of Series G Preferred
Beneficial Conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Value of Beneficial Conversion
feature of Series H Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Amortization of Series H Preferred
Beneficial Conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Rescission of Series G Preferred
stock and associated warrants
    
    
    (50
    )
    
    
    (214
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (249
    )Issuance of Series H Preferred stock
    
    
    50
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,924
    )
    
    
    
    
    
    $
    (5,924
    )
    
    
    (5,924
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,091
    )
    
    
    (2,091
    )
    
    
    (2,091
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,015
    )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
conversion feature
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    $
    19,492
  42




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income (loss)
    
    $
    674
    
    
    $
    (3,894
    )
    
    $
    (5,924
    )(Loss) income from discontinued operations
    
    
    (219
    )
    
    
    334
    
    
    
    165Income (loss) from continuing operations
    
    
    893
    
    
    
    (4,228
    )
    
    
    (6,089
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activitiesDeferred income taxes
    
    
    (243
    )
    
    
    57
    
    
    
    (90
    )Liability
for uncertain tax positions
    
    
    149
    
    
    
    
    
    
    
    Depreciation and amortization of property and equipment
    
    
    1,070
    
    
    
    1,153
    
    
    
    1,103Amortization of intangible assets
    
    
    138
    
    
    
    111
    
    
    
    110Amortization of deferred financing costs
    
    
    279
    
    
    
    271
    
    
    
    122Amortization of beneficial conversion feature
    
    
    
    
    
    
    212
    
    
    
    Amortization of the fair value of warrants
    
    
    245
    
    
    
    278
    
    
    
    Bad debt expense
    
    
    26
    
    
    
    235
    
    
    
    251Stock issued in lieu of cash compensation
    
    
    76
    
    
    
    63
    
    
    
    Stock-based compensation expense
    
    
    41
    
    
    
    50
    
    
    
    Write-down of inventory for obsolescence
    
    
    141
    
    
    
    122
    
    
    
    1,238(Gain) loss on sale of fixed assets
    
    
    (3
    )
    
    
    11
    
    
    
    10Other, primarily effect of foreign currency (gain) loss
    
    
    (274
    )
    
    
    (275
    )
    
    
    220Minority interest in income (loss) of consolidated subsidiary
    
    
    188
    
    
    
    (658
    )
    
    
    451Changes in operating assets and liabilities(Increase) decrease in trade accounts receivable
    
    
    (1,037
    )
    
    
    (2,176
    )
    
    
    1,582(Increase) decrease in other receivables
    
    
    (272
    )
    
    
    25
    
    
    
    41Increase in inventories
    
    
    (200
    )
    
    
    (811
    )
    
    
    (843
    )(Increase) decrease in prepaids and other current assets
    
    
    (49
    )
    
    
    57
    
    
    
    (113
    )Decrease in other assets
    
    
    
    
    
    
    8
    
    
    
    61Increase in accounts payable
    
    
    450
    
    
    
    24
    
    
    
    972Increase (decrease) in accrued expenses
    
    
    530
    
    
    
    (44
    )
    
    
    750Increase (decrease) in foreign tax settlement
    
    
    (208
    )
    
    
    1,502
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    1,940
    
    
    
    (4,013
    )
    
    
    (224
    )Net cash (used in) provided by discontinued operations
    
    
    (68
    )
    
    
    842
    
    
    
    397Net cash provided by (used in) operating activities
    
    
    1,872
    
    
    
    (3,171
    )
    
    
    173Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    66
    
    
    
    4
    
    
    
    10Purchases of property and equipment
    
    
    (296
    )
    
    
    (232
    )
    
    
    (661
    )Investments in software development
    
    
    (669
    )
    
    
    (201
    )
    
    
    (791
    )Proceeds from sale of DAC
    
    
    1,100
    
    
    
    
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    201
    
    
    
    (429
    )
    
    
    (1,442
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (29
    )
    
    
    (242
    )Net cash provided by (used in) investing activities
    
    
    201
    
    
    
    (458
    )
    
    
    (1,684
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    66,531
    
    
    
    67,376
    
    
    
    55,336Principal payments on bank borrowings and lines of credit
    
    
    (69,025
    )
    
    
    (63,961
    )
    
    
    (55,721
    )Issuance of common stock
    
    
    189
    
    
    
    
    
    
    
    149Proceeds from issuance of Preferred stock, net of costs
    
    
    411
    
    
    
    485
    
    
    
    1,887Payments related to financing of new line of credit
    
    
    
    
    
    
    (329
    )
    
    
    Payments related to financing of note payable
    
    
    
    
    
    
    (81
    )
    
    
    Payment of dividends on Preferred stock
    
    
    (118
    )
    
    
    (128
    )
    
    
    (147
    )Net cash (used in) provided by financing activities
    
    
    (2,012
    )
    
    
    3,362
    
    
    
    1,504Effect of exchange rate changes on cash and cash equivalents
    
    
    57
    
    
    
    71
    
    
    
    (27
    )Net increase (decrease) in cash and cash equivalents
    
    
    118
    
    
    
    (196
    )
    
    
    (34
    )Cash and cash equivalents at beginning of year
    
    
    611
    
    
    
    807
    
    
    
    841Cash and cash equivalents at end of year
    
    $
    729
    
    
    $
    611
    
    
    $
    807Supplemental Disclosure of Cash Flow InformationCash paid during the period for interest
    
    $
    682
    
    
    $
    648
    
    
    $
    446Cash paid during the period for income taxes
    
    $
    370
    
    
    $
    323
    
    
    $
    231
  43




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Supplemental disclosures of non-cash investing and
financing activities:Fair value of warrants issued in connection with
sale of preferred stock
    
    $
    23
    
    
    $
    
    
    
    $
    Note receivable in connection with sale of DAC
    
    $
    344
    
    
    $
    
    
    
    $
    Conversion of preferred stock to common stock
    
    $
    1,040
    
    
    $
    120
    
    
    $
    340Fair value of warrants issued as part of financing
    
    $
    
    
    
    $
    638
    
    
    $
    Fair value of common stock issued in connection
with Laurus Omnibus
Amendment
    
    $
    
    
    
    $
    268
    
    
    $
    Laurus Omnibus Amendment fee
    
    $
    
    
    
    $
    18
    
    
    $
    Relative fair value of warrants issued for services
    
    $
    
    
    
    $
    
    
    
    $
    11Rescission of Series G preferred stock in exchange
for note payable
    
    $
    
    
    
    $
    
    
    
    $
    252Rescission
of note payable in exchange for Series H
Preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    250Note receivable from investor
    
    $
    
    
    
    $
    
    
    
    $
    500Fair value allocated to warrants issued in
connection with sale of preferred
stock
    
    $
    
    
    
    $
    49
    
    
    $
    323Amortization of preferred stock beneficial
conversion feature
    
    $
    
    
    
    $
    49
    
    
    $
    323Amortization of convertible subordinated debenture
beneficial conversion
    
    $
    
    
    
    $
    81
    
    
    $
    Preferred stock dividends
    
    $
    180
    
    
    $
    220
    
    
    $
    35
  44




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##### Table of Contents

\

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Organization and Summary of Significant Accounting Policies
 (a) Organization and Liquidity
 Organization. ®
  Liquidity.
 (b) Principles of Consolidation
  (c) Use of Estimates
   45




---



##### Table of Contents



(d) Cash Equivalents
 .
 (e) Revenue Recognition
     (f) Customer Concentration
  (g) Trade Accounts Receivable
  46




---



##### Table of Contents



(h) Inventories
  (i) Property and Equipment
  (j) Goodwill and Indefinite Life Intangible Assets
   (k) Intangible Assets
  (l) Research and Development Costs
  (m) Advertising Costs
  47




---



##### Table of Contents



(n) Shipping and Handling Fees and Costs
  (p) Stock-Based Compensation
  (q) Translation of Foreign Currency
   (r) Income Taxes
  (s) Fair Value of Financial Instruments
  
    
    Cash and Cash Equivalents  the carrying amount approximates fair value due to the relatively
short-term period to maturity of these instruments.
    
    Short- and Long-Term Borrowings  the carrying amount approximates the estimated fair value
for debt with similar terms, interest rates, and remaining maturities currently available to
companies with similar credit ratings.
 (t) Product Warranties
  48




---



##### Table of Contents



Additions
    
    
    
    
    
    ForeignBalance at
    
    charged to
    
    
    
    
    
    exchangebeginning
    
    costs and
    
    
    
    
    
    translation
    
    Balance atof year
    
    expenses
    
    Deductions
    
    (gain) loss
    
    end of year(In thousands)Warranty ReserveYear ended December 31, 2007
    
    $
    384
    
    
    $
    225
    
    
    $
    (135
    )
    
    $
    17
    
    
    $
    491Year ended December 31, 2006
    
    
    214
    
    
    
    277
    
    
    
    (125
    )
    
    
    18
    
    
    
    384Year ended December 31, 2005
    
    
    232
    
    
    
    152
    
    
    
    (126
    )
    
    
    (44
    )
    
    
    214
 (u) Recent Accounting Pronouncements
      49




---



##### Table of Contents



(2) Discontinued Operations
  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
  December 31, 2006Trade accounts receivable, net
    
    $
    268Inventories
    
    
    267Prepaids and other current assets
    
    
    7Property and equipment, net
    
    
    225Goodwill
    
    
    961Total assets
    
    $
    1,728Accounts payable
    
    $
    60Accrued expenses
    
    
    14Total liabilities
    
    $
    74
  (3) Goodwill and Other Intangible Assets
  50




---



##### Table of Contents



(In thousands)Balance as of January 1, 2005
    
    $
    10,675Effect of exchange rates
    
    
    (1,874
    )Balance as of December 31, 2005
    
    
    8,801Effect of exchange rates
    
    
    1,488Balance as of December 31, 2006
    
    
    10,289Effect of exchange rates
    
    
    744Balance as of December 31, 2007
    
    $
    11,033
  December 31, 2007
    
    
    December 31, 2006WeightedAverage
    
    
    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
    
    
    $
    9
    
    
    $
    1Customer lists
    
    
    8.5
    
    
    
    1,857
    
    
    
    799
    
    
    
    1,058
    
    
    
    1,742
    
    
    
    633
    
    
    
    1,109Resale rights to DAC products
    
    
    1.3
    
    
    
    58
    
    
    
    19
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    $
    1,925
    
    
    $
    828
    
    
    $
    1,097
    
    
    $
    1,752
    
    
    $
    642
    
    
    $
    1,110
   (4) Accounts Receivable
 December 31,2007
    
    
    2006(In thousands)Trade accounts receivable
    
    $
    12,007
    
    
    $
    10,452Less: allowance for doubtful accounts
    
    
    (88
    )
    
    
    (352
    )$
    11,919
    
    
    $
    10,100
 51




---



##### Table of Contents



(5) Property and Equipment
 EstimatedDepreciable
    
    December 31,Lives (years)
    
    2007
    
    
    2006(In thousands)Leasehold improvements
    
    5 - 9
    
    $
    278
    
    
    $
    271Automobiles
    
    5
    
    
    16
    
    
    
    16Computer and telecommunications equipment
    
    3
    
    
    857
    
    
    
    1,174Software
    
    3 - 5
    
    
    4,434
    
    
    
    4,123Test equipment
    
    3 - 5
    
    
    123
    
    
    
    189Furniture and fixtures
    
    3 - 7
    
    
    2,730
    
    
    
    2,473Software projects in progress
    
    
    
    
    668
    
    
    
    549,106
    
    
    
    8,300Less accumulated depreciation and amortization
    
    
    
    
    6,216
    
    
    
    5,394Total property and equipment, net
    
    
    
    $
    2,890
    
    
    $
    2,906
  (6) Inventories
 December 31,2007
    
    
    2006(In thousands)Raw materials and system components
    
    $
    6,496
    
    
    $
    5,967Work in process
    
    
    176
    
    
    
    119Finished goods
    
    
    2,931
    
    
    
    2,971Total inventories
    
    $
    9,603
    
    
    $
    9,057
 (7) Leases
    52




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##### Table of Contents



Capital
    
    
    OperatingYear Ending
    
    Leases
    
    
    LeasesDecember 31,
    
    (In thousands)2008
    
    $
    25
    
    
    $
    8482009
    
    
    15
    
    
    
    6882010
    
    
    
    
    
    
    5732011
    
    
    
    
    
    
    2012012
    
    
    
    
    
    
    65Thereafter
    
    
    
    
    
    
    Total future minimum lease payments
    
    
    40
    
    
    $
    2,375Less amount representing interest (7.5% interest)
    
    
    2Present value of future minimum capital lease payments
    
    
    38Less current portion
    
    
    24Long-term portion
    
    $
    14
 (8) Lines of Credit and Notes Payable
 a) Domestic lines of credit and notes payable
 Wall Street Journal
    53




---



##### Table of Contents



b) International lines of credit
   54




---



##### Table of Contents



December 31,2007
    
    
    2006(In thousands)Line of credit with Laurus Master Fund dated March 16, 2006; payable
in full June 30, 2008; secured by all tangible and intangible U.S. assets
of the Company; bears average interest rate of 9.80% and 9.69% in
2007 and 2006, respectively.
    
    $
    3,796
    
    
    $
    4,406Line of credit with Swedish bank dated December 31, 2006; expires on
December 31, 2008; secured by certain assets of the Swedish
subsidiary, Mobitec AB; bears average interest rate of 4.92% and
3.23% in 2007 and 2006, respectively.
    
    
    1,057
    
    
    
    1,450Line of credit with Swedish bank dated December 31, 2006; expires on
December 31, 2008; secured by accounts receivable of the Swedish
subsidiary, Mobitec AB; bears average interest rate of 5.36% and
4.23% in 2007 and 2006, respectively.1,087
    
    
    
    1,116Line of credit with German bank dated June 23, 2004; open-ended term;
secured by accounts receivable and inventory of the German
subsidiary, Mobitec GmbH; bears average interest rate of 5.30% and
4.12% in 2007 and 2006, respectively.
    
    
    103
    
    
    
    636Total lines of credit
    
    $
    6,043
    
    
    $
    7,608
 (9) Long-Term Debt
  December 31,2007
    
    
    2006(In thousands)Convertible debenture to a director dated August 26, 2002, payable in
full August 26, 2009, with an interest rate of 8%.
    
    $
    250
    
    
    $
    250Other long-term debt
    
    
    4
    
    
    
    8Total long-term debt
    
    
    254
    
    
    
    258Less current portion
    
    
    254
    
    
    
    254
    
    
    
    4Long-term portion of capital leases
    
    
    14
    
    
    
    38Total long-term debt and capital leases, less current portion
    
    $
    14
    
    
    $
    42
  55




---



##### Table of Contents



(10) Accrued Expenses
 December 31,2007
    
    
    2006(In thousands)Salaries, commissions, and benefits
    
    $
    1,429
    
    
    $
    1,176Taxes  payroll, sales, income, and other
    
    
    1,020
    
    
    
    620Warranties
    
    
    491
    
    
    
    384Current portion of capital leases
    
    
    23
    
    
    
    22Interest payable
    
    
    172
    
    
    
    51Deferred revenue
    
    
    303
    
    
    
    196Other
    
    
    243
    
    
    
    472Total accrued expenses
    
    $
    3,681
    
    
    $
    2,921
 (11) Preferred Stock
  Series AAA Preferred Stock
   Series D Preferred
  56




---



##### Table of Contents



Series E Preferred
    Series G Preferred
 ®
  Series H Preferred
   Series I Preferred
  57




---



##### Table of Contents



Series J Preferred
   Liquidation Priority
  (12) Common Stock Warrants
   58




---



##### Table of Contents



®
   (13) Stock-Based Compensation
     59




---



##### Table of Contents



Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2006
    
    
    656,403
    
    
    $
    2.29
    
    
    
    5.1
    
    
    $
    3,000Granted
    
    
    86,600
    
    
    
    2.38Exercised
    
    
    (45,300
    )
    
    
    2.43Expired
    
    
    (97,764
    )
    
    
    2.49Forfeited
    
    
    (45,700
    )
    
    
    1.17Outstanding at December 31, 2007
    
    
    554,239
    
    
    $
    2.35
    
    
    
    5.4
    
    
    $
    157,300Vested and expected to vest at December 31, 2007
    
    
    550,884
    
    
    $
    2.35
    
    
    
    5.4
    
    
    $
    155,253Exercisable at December 31, 2007
    
    
    418,659
    
    
    $
    2.46
    
    
    
    4.1
    
    
    $
    81,545
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2006
    
    
    487,597
    
    
    $
    2.66
    
    
    
    3.2
    
    
    $
    Granted
    
    
    5,000
    
    
    
    2.44Exercised
    
    
    (10,000
    )
    
    
    2.35Expired
    
    
    (29,036
    )
    
    
    4.18Outstanding at December 31, 2007
    
    
    453,561
    
    
    $
    2.57
    
    
    
    2.0
    
    
    $
    70,010Vested and expected to vest at December 31, 2007
    
    
    453,561
    
    
    $
    2.57
    
    
    
    2.0
    
    
    $
    70,010Exercisable at December 31, 2007
    
    
    453,561
    
    
    $
    2.57
    
    
    
    2.0
    
    
    $
    70,010
     60




---



##### Table of Contents



2005(In thousands,except per shareamounts)Net loss applicable to common shareholders
    
    $
    (6,450
    )Deduct: Stock based employee compensation expense
determined under fair value method
    
    
    (868
    )Pro forma net loss applicable to common shareholders
    
    $
    (7,318
    )Basic and diluted net loss:As reported
    
    $
    (0.67
    )Pro forma
    
    $
    (0.76
    )
  2007
    
    2006
    
    2005Weighted average fair value of grants
    
    $
    1.65
    
    
    $
    0.83
    
    
    $
    1.70Risk-free interest rate
    
    
    4.2
    %
    
    
    4.7
    %
    
    
    4.1
    %Expected life
    
    6.9 years
    
    6.5 years
    
    5.2 yearsExpected volatility
    
    
    72
    %
    
    
    64
    %
    
    
    72
    %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.
 61




---



##### Table of Contents




    
    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


Balance at beginning of period
    
    $
    110Additions for tax positions related to prior years
    
    
    Additions for tax positions related to the current year
    
    
    157Balance as of December 31, 2007
    
    $
    267






Year Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Domestic
    
    $
    (7
    )
    
    $
    (2,879
    )
    
    $
    (5,422
    )Foreign
    
    
    1,160
    
    
    
    (1,342
    )
    
    
    125$
    1,153
    
    
    $
    (4,221
    )
    
    $
    (5,297
    )


62



---



##### Table of Contents



Year Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)CurrentU.S. federal
    
    $
    2
    
    
    $
    
    
    
    $
    State
    
    
    4
    
    
    
    
    
    
    
    Foreign
    
    
    384
    
    
    
    259
    
    
    
    40390
    
    
    
    259
    
    
    
    40DeferredU.S. federal
    
    
    (247
    )
    
    
    11
    
    
    
    96State
    
    
    (41
    )
    
    
    2
    
    
    
    16Foreign
    
    
    189
    
    
    
    59
    
    
    
    24(99
    )
    
    
    72
    
    
    
    136$
    291
    
    
    $
    331
    
    
    $
    176
  Year Ended December 31,2007
    
    
    2006
    
    
    2005Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof pretax
    
    
    
    
    
    
    of pretax
    
    
    
    
    
    
    of pretaxAmount
    
    
    earnings (loss)
    
    
    Amount
    
    
    earnings (loss)
    
    
    Amount
    
    
    earnings (loss)(In thousands)Computed expected tax expense (benefit)
    
    $
    392
    
    
    
    34.0
    %
    
    $
    (1,477
    )
    
    
    35.0
    %
    
    $
    (1,854
    )
    
    
    35.0
    %Increase (decrease) in income taxes
resulting from:Nondeductible expenses
    
    
    33
    
    
    
    2.9
    
    
    
    14
    
    
    
    (0.4
    )
    
    
    20
    
    
    
    (0.4
    )Foreign subsidiary losses
    
    
    (10
    )
    
    
    (0.9
    )
    
    
    32
    
    
    
    (0.8
    )
    
    
    182
    
    
    
    (3.4
    )Higher (lower) rates on earnings
of foreign operations
    
    
    1
    
    
    
    0.1
    
    
    
    539
    
    
    
    (20.3
    )
    
    
    (218
    )
    
    
    4.1State taxes, net of federal benefit
    
    
    (37
    )
    
    
    (3.2
    )
    
    
    (324
    )
    
    
    7.8
    
    
    
    (75
    )
    
    
    1.4Uncertain tax positions


149



12.9















Changes in valuation allowance
    
    
    (237
    )
    
    
    (20.6
    )
    
    
    1,547
    
    
    
    (29.5
    )
    
    
    2,121
    
    
    
    (40.0
    )$
    291
    
    
    
    25.2
    %
    
    $
    331
    
    
    
    (8.1)
    %
    
    $
    176
    
    
    
    (3.3)
    %
 63




---



##### Table of Contents



December 31,2007
    
    
    2006(In thousands)Deferred tax assetsFederal and state loss carryforwards
    
    $
    5,419
    
    
    $
    5,519Federal tax credits
    
    
    357
    
    
    
    379Foreign loss carryforwards
    
    
    1,446
    
    
    
    1,513Inventory reserve and capitalization
    
    
    80
    
    
    
    94Property and equipment
    
    
    
    
    
    
    Intangible assets
    
    
    16
    
    
    
    Other accruals and reserves
    
    
    148
    
    
    
    255Total gross deferred tax assets
    
    
    7,466
    
    
    
    7,760Less valuation allowance
    
    
    (7,332
    )
    
    
    (7,569
    )134
    
    
    
    191Deferred tax liabilitiesProperty and equipment
    
    
    
    
    
    
    (79
    )Intangible assets
    
    
    
    
    
    
    (209
    )Untaxed foreign reserves
    
    
    (78
    )
    
    
    (95
    )Total deferred tax liabilities
    
    
    (78
    )
    
    
    (383
    )Net deferred
assets (liabilities)
    
    $
    56
    
    
    $
    (192
    )
   December 31,2007
    
    
    2006(In thousands)Current assets
    
    $
    56
    
    
    $
    Noncurrent assets
    
    $
    78
    
    
    $
    191Noncurrent liabilities
    
    
    (78
    )
    
    
    (383
    )$
    
    
    
    $
    (192
    )
    (15) Largest Customers
  64




---



##### Table of Contents



(16) Related Party Transactions
   ®
  (17) Segment and Geographic Information
   65




---



##### Table of Contents



2007
    
    
    2006
    
    
    2005(In thousands)Geographic information  net sales*North America
    
    $
    27,687
    
    
    $
    23,842
    
    
    $
    21,664Europe
    
    
    15,899
    
    
    
    15,140
    
    
    
    10,826Asia-Pacific
    
    
    4,839
    
    
    
    3,754
    
    
    
    3,967Middle East
    
    
    2,272
    
    
    
    1,601
    
    
    
    679South America
    
    
    7,235
    
    
    
    4,824
    
    
    
    5,951$
    57,932
    
    
    $
    49,161
    
    
    $
    43,087Geographic information  long-lived assets**North America
    
    $
    1,345
    
    
    $
    1,770
    
    
    $
    1,562Europe
    
    
    1,538
    
    
    
    1,718
    
    
    
    1,744Asia-Pacific
    
    
    44
    
    
    
    31
    
    
    
    27South America
    
    
    246
    
    
    
    184
    
    
    
    176$
    3,173
    
    
    $
    3,703
    
    
    $
    3,509
 
 *
    
    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. (18) Shareholders Rights
     (19) Legal Proceedings
   66




---



##### Table of Contents



(20) Foreign Tax Settlement
    (21) Per Share Amounts
  67




---



##### Table of Contents



2007
    
    
    2006(In thousands, except share amounts)Net income (loss) applicable to common shareholders
    
    $
    380
    
    
    $
    (4,241
    )Weighted
average shares outstanding  Basic
    
    
    10,751,220
    
    
    
    9,787,599Effect of dilutive securities on shares outstanding:Options
    
    
    73,078
    
    
    
    Warrants
    
    
    321,809
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    11,146,107
    
    
    
    9,787,599
  (22) Quarterly Financial Data (Unaudited)
   Warranty reserves.
 Capitalized labor and overhead in inventory.
 Allowance for doubtful accounts.
 Intercompany profits in inventory.
 Liability for uncertain tax positions.
  68




---



##### Table of Contents



June 30, 2007
    
    
    June 30, 2007(Unaudited)
    
    
    (Unaudited)
    
    
    December 31, 2006(As restated)
    
    
    (As originally reported)
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    422
    
    
    $
    422
    
    
    $
    611Trade accounts receivable, net
    
    
    12,444
    
    
    
    12,476
    
    
    
    10,100Current portion of note receivable
    
    
    86
    
    
    
    86
    
    
    
    Other receivables
    
    
    391
    
    
    
    391
    
    
    
    147Inventories
    
    
    8,759
    
    
    
    8,985
    
    
    
    9,057Prepaids and other current assets
    
    
    433
    
    
    
    433
    
    
    
    422Assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,728Total current assets
    
    
    22,535
    
    
    
    22,793
    
    
    
    22,065Property and equipment, net
    
    
    2,688
    
    
    
    2,688
    
    
    
    2,906Long-term portion of note receivable
    
    
    258
    
    
    
    258
    
    
    
    Goodwill
    
    
    10,303
    
    
    
    10,303
    
    
    
    10,289Intangible assets, net
    
    
    1,106
    
    
    
    1,106
    
    
    
    1,110Other assets
    
    
    554
    
    
    
    554
    
    
    
    797Total assets
    
    $
    37,444
    
    
    $
    37,702
    
    
    $
    37,167LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    7,408
    
    
    $
    7,408
    
    
    $
    7,608Notes payable, net
    
    
    500
    
    
    
    500
    
    
    
    1,584Current portion of long-term debt
    
    
    250
    
    
    
    250
    
    
    
    254Current portion of foreign tax settlement
    
    
    452
    
    
    
    452
    
    
    
    393Accounts payable
    
    
    5,192
    
    
    
    5,192
    
    
    
    5,560Accrued expenses
    
    
    4,817
    
    
    
    4,584
    
    
    
    2,921Preferred stock dividends payable
    
    
    17
    
    
    
    17
    
    
    
    23Liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    74Total current liabilities
    
    
    18,636
    
    
    
    18,403
    
    
    
    18,417Long-term debt and capital leases, long-term
    
    
    33
    
    
    
    33
    
    
    
    42Foreign tax settlement, long-term
    
    
    1,120
    
    
    
    1,120
    
    
    
    1,087Deferred tax liabilities, net
    
    
    
    
    
    
    98
    
    
    
    192Liability for uncertain tax positions
    
    
    204
    
    
    
    
    
    
    
    Minority interest in consolidated subsidiary
    
    
    212
    
    
    
    264
    
    
    
    234Commitments and contingencies (Notes 7 and 8)Shareholders EquitySeries E Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par
value, liquidation preference of $5,000 per share; 500 shares authorized;
127 and 183 shares issued and outstanding at June 30, 2007, and December
31, 2006, respectively; redeemable at the discretion of the Company at
any time.
    
    
    215
    
    
    
    215
    
    
    
    495Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 394
and 379 shares issued and outstanding at June 30, 2007 and December 31,
2006, respectively; redeemable at the discretion of the Company after
five years from date of issuance.
    
    
    1,688
    
    
    
    1,688
    
    
    
    1,613Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 57 and
54 shares issued and outstanding at June 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company after five
years from date of issuance.
    
    
    237
    
    
    
    237
    
    
    
    222Series I Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 200 shares authorized; 0 and
104 shares issued and outstanding at June 30, 2007, and December 31,
2006, respectively; redeemable at the discretion of the Company after
five years from date of issuance.
    
    
    
    
    
    
    
    
    
    
    471Series J Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 250 shares authorized; 90 and
0 shares issued and outstanding at June 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company at any time.
    
    
    388
    
    
    
    388
    
    
    
    Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par
value, liquidation preference of $5,000 per share; 20,000 shares
authorized; 178 shares issued and outstanding at June 30, 2007 and
December 31, 2006; redeemable at the discretion of the Company at any time.
    
    
    890
    
    
    
    890
    
    
    
    890Common stock, $.10 par value, 25,000,000 shares authorized; 11,045,386
and 10,045,675 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively.
    
    
    1,105
    
    
    
    1,105
    
    
    
    1,004Additional paid-in capital
    
    
    32,181
    
    
    
    32,181
    
    
    
    31,517Accumulated other comprehensive income  foreign currency translation
    
    
    3,561
    
    
    
    3,561
    
    
    
    3,397Accumulated deficit
    
    
    (23,026
    )
    
    
    (22,481
    )
    
    
    (22,414
    )Total shareholders equity
    
    
    17,239
    
    
    
    17,784
    
    
    
    17,195Total liabilities and shareholders equity
    
    $
    37,444
    
    
    $
    37,702
    
    
    $
    37,167




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)Net sales
    
    $
    14,885
    
    
    $
    14,885
    
    
    $
    12,960
    
    
    $
    26,885
    
    
    $
    26,885
    
    
    $
    23,714Cost of sales
    
    
    10,352
    
    
    
    9,895
    
    
    
    8,815
    
    
    
    18,675
    
    
    
    18,218
    
    
    
    16,235Gross profit
    
    
    4,533
    
    
    
    4,990
    
    
    
    4,145
    
    
    
    8,210
    
    
    
    8,667
    
    
    
    7,479Operating expensesSelling, general and administrative
    
    
    3,608
    
    
    
    3,576
    
    
    
    3,761
    
    
    
    7,209
    
    
    
    7,177
    
    
    
    7,291Research and development
    
    
    363
    
    
    
    363
    
    
    
    346
    
    
    
    695
    
    
    
    695
    
    
    
    599Total operating expenses
    
    
    3,971
    
    
    
    3,939
    
    
    
    4,107
    
    
    
    7,904
    
    
    
    7,872
    
    
    
    7,890Operating income (loss)
    
    
    562
    
    
    
    1,051
    
    
    
    38
    
    
    
    306
    
    
    
    795
    
    
    
    (411
    )Other income (loss)
    
    
    28
    
    
    
    28
    
    
    
    35
    
    
    
    39
    
    
    
    39
    
    
    
    (41
    )Foreign currency gain
    
    
    45
    
    
    
    45
    
    
    
    63
    
    
    
    21
    
    
    
    21
    
    
    
    89Interest expense
    
    
    (333
    )
    
    
    (333
    )
    
    
    (275
    )
    
    
    (648
    )
    
    
    (648
    )
    
    
    (488
    )Total other income and expense
    
    
    (260
    )
    
    
    (260
    )
    
    
    (177
    )
    
    
    (588
    )
    
    
    (588
    )
    
    
    (440
    )Income (loss) from continuing operations before income tax expense
and minority interest
    
    
    302
    
    
    
    791
    
    
    
    (139
    )
    
    
    (282
    )
    
    
    207
    
    
    
    (851
    )Income tax benefit (expense)
    
    
    57
    
    
    
    10
    
    
    
    (70
    )
    
    
    23
    
    
    
    (24
    )
    
    
    (116
    )Income (loss) from continuing operations before minority interest in
(income) loss of consolidated subsidiary
    
    
    359
    
    
    
    801
    
    
    
    (209
    )
    
    
    (259
    )
    
    
    183
    
    
    
    (967
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (5
    )
    
    
    (56
    )
    
    
    (118
    )
    
    
    20
    
    
    
    (31
    )
    
    
    (70
    )Income (loss) from continuing operations
    
    
    354
    
    
    
    745
    
    
    
    (327
    )
    
    
    (239
    )
    
    
    152
    
    
    
    (1,037
    )Income (loss) from discontinued operations (Note 2)
    
    
    (42
    )
    
    
    (42
    )
    
    
    160
    
    
    
    (219
    )
    
    
    (219
    )
    
    
    121Net income (loss)
    
    
    312
    
    
    
    703
    
    
    
    (167
    )
    
    
    (458
    )
    
    
    (67
    )
    
    
    (916
    )Provision for preferred stock dividends
    
    
    (68
    )
    
    
    (68
    )
    
    
    (76
    )
    
    
    (144
    )
    
    
    (144
    )
    
    
    (144
    )Amortization for discount on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )Net income (loss) applicable to common shareholders
    
    $
    244
    
    
    $
    635
    
    
    $
    (243
    )
    
    $
    (602
    )
    
    $
    (211
    )
    
    $
    (1,109
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    0.00
    
    
    $
    (0.13
    )Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    0.01Income (loss) per share applicable to common shareholders
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    (0.04
    )
    
    $
    0.00
    
    
    $
    (0.13
    )Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    0.01Income (loss) per share applicable to common shareholders
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )Weighted average number of common shares and common share equivalent outstandingBasic
    
    
    10,503,691
    
    
    
    10,503,691
    
    
    
    9,777,499
    
    
    
    10,339,546
    
    
    
    10,339,546
    
    
    
    9,764,467Diluted
    
    
    11,434,320
    
    
    
    12,434,354
    
    
    
    9,777,499
    
    
    
    10,339,546
    
    
    
    10,339,546
    
    
    
    9,764,467




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##### Table of Contents



Six Months Ended June 30,2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)Cash flows from operating activitiesNet loss
    
    $
    (458
    )
    
    $
    (67
    )
    
    $
    (916
    )(Loss) income from discontinued operations
    
    
    (219
    )
    
    
    (219
    )
    
    
    121(Loss) income from continuing operations
    
    
    (239
    )
    
    
    152
    
    
    
    (1,037
    )Adjustments to reconcile net income (loss) to net cash
used in operating activitiesDeferred income taxes
    
    
    (191
    )
    
    
    (94
    )
    
    
    16Liability for uncertain tax positions
    
    
    50
    
    
    
    
    
    
    
    Depreciation and amortization of property and equipment
    
    
    556
    
    
    
    556
    
    
    
    578Amortization of intangible assets
    
    
    63
    
    
    
    63
    
    
    
    54Amortization of deferred financing costs
    
    
    128
    
    
    
    128
    
    
    
    141Amortization of beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    81Amortization of the fair value of warrants
    
    
    131
    
    
    
    131
    
    
    
    107Bad debt expense
    
    
    54
    
    
    
    22
    
    
    
    Stock issued in lieu of cash compensation
    
    
    21
    
    
    
    21
    
    
    
    28Stock-based compensation expense
    
    
    26
    
    
    
    26
    
    
    
    2Write-down of inventory for obsolescence
    
    
    41
    
    
    
    41
    
    
    
    Loss on sale of fixed assets
    
    
    1
    
    
    
    1
    
    
    
    10Other, primarily effect of foreign currency gain/loss
    
    
    (101
    )
    
    
    (100
    )
    
    
    (109
    )Minority interest in income (loss) of consolidated subsidiary
    
    
    (20
    )
    
    
    31
    
    
    
    70Changes in operating assets and liabilitiesIncrease in trade accounts receivable
    
    
    (2,147
    )
    
    
    (2,147
    )
    
    
    (3,052
    )Increase in other receivables
    
    
    (226
    )
    
    
    (226
    )
    
    
    (333
    )(Increase) decrease in inventories
    
    
    440
    
    
    
    214
    
    
    
    (267
    )Increase in prepaids and other current assets
    
    
    (8
    )
    
    
    (8
    )
    
    
    (185
    )Increase in other assets
    
    
    
    
    
    
    
    
    
    
    (7
    )Decrease in accounts payable
    
    
    (402
    )
    
    
    (402
    )
    
    
    (54
    )Increase in accrued expenses
    
    
    1,836
    
    
    
    1,604
    
    
    
    11Decrease in foreign tax settlement
    
    
    (66
    )
    
    
    (66
    )
    
    
    Net cash used in continuing operations
    
    
    (53
    )
    
    
    (53
    )
    
    
    (3,946
    )Net cash (used in) provided by discontinued operations
    
    
    (68
    )
    
    
    (68
    )
    
    
    335Net cash used in operating activities
    
    
    (121
    )
    
    
    (121
    )
    
    
    (3,611
    )Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    41
    
    
    
    41
    
    
    
    2Purchases of property and equipment
    
    
    (131
    )
    
    
    (131
    )
    
    
    (103
    )Investments in software development
    
    
    (225
    )
    
    
    (225
    )
    
    
    (92
    )Proceeds from sale of DAC
    
    
    1,100
    
    
    
    1,100
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    785
    
    
    
    785
    
    
    
    (193
    )Net cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (16
    )Net cash provided by (used in) investing activities
    
    
    785
    
    
    
    785
    
    
    
    (209
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    33,350
    
    
    
    33,350
    
    
    
    34,063Principal payments on bank borrowings and lines of credit
    
    
    (34,678
    )
    
    
    (34,678
    )
    
    
    (30,082
    )Issuance of common stock
    
    
    87
    
    
    
    87
    
    
    
    Proceeds from issuance of Preferred stock, net of costs
    
    
    411
    
    
    
    411
    
    
    
    485Payments related to financing of new line of credit
    
    
    
    
    
    
    
    
    
    
    (329
    )Payments related to financing of note payable
    
    
    
    
    
    
    
    
    
    
    (74
    )Payment of dividends on Preferred stock
    
    
    (60
    )
    
    
    (60
    )
    
    
    (57
    )Net cash (used in) provided by financing activities
    
    
    (890
    )
    
    
    (890
    )
    
    
    4,006Effect of exchange rate changes on cash and cash equivalents
    
    
    37
    
    
    
    37
    
    
    
    59Net (decrease) increase in cash and cash equivalents
    
    
    (189
    )
    
    
    (189
    )
    
    
    245Cash and cash equivalents at beginning of period
    
    
    611
    
    
    
    611
    
    
    
    807Cash and cash equivalents at end of period
    
    $
    422
    
    
    $
    422
    
    
    $
    1,052Supplemental Disclosure of Cash Flow InformationCash paid during the period for interest
    
    
    144
    
    
    
    144
    
    
    
    120Cash paid during the period for income taxes
    
    
    76
    
    
    
    76
    
    
    
    74




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##### Table of Contents



Six Months Ended June 30,2007
    
    
    2006Supplemental disclosures of non-cash investing and financing activities:Conversion of preferred stock to common stock
    
    $
    800
    
    
    $
    120Fair value of warrants issued in connection with sale of preferred stock
    
    $
    23
    
    
    $
    Note receivable in connection with sale of DAC
    
    $
    344
    
    
    $
    Fair value allocated to warrants issued in connection with sale of preferred stock
    
    $
    
    
    
    $
    49Amortization of preferred stock beneficial conversion feature
    
    $
    
    
    
    $
    49Amortization of convertible subordinated debenture beneficial conversion feature
    
    $
    
    
    
    $
    81Fair value of warrants issued in connection with financing of new line of credit
    
    $
    
    
    
    $
    590




---



##### Table of Contents



DRI CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (TM)
  (1) BASIS OF PRESENTATION AND DISCLOSURE




---



##### Table of Contents



Product Warranties
  Six Months ended June 30,2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)Balance at beginning of period
    
    $
    384
    
    
    $
    384
    
    
    $
    214Additions charged to costs and expenses
    
    
    252
    
    
    
    19
    
    
    
    98Deductions
    
    
    (96
    )
    
    
    (96
    )
    
    
    (27
    )Foreign exchange translation loss
    
    
    4
    
    
    
    4
    
    
    
    10Balance at end of period
    
    $
    544
    
    
    $
    311
    
    
    $
    295
 Recent Accounting Pronouncements




---



##### Table of Contents



(2) DISCONTINUED OPERATIONS
   Accounting for the Impairment or Disposal of Long-Lived
Assets
 Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Net sales
    
    $
    72
    
    
    $
    598
    
    
    $
    239
    
    
    $
    955Income (loss) before income tax expense
    
    
    (42
    )
    
    
    160
    
    
    
    (219
    )
    
    
    121
  December 31, 2006Trade accounts receivable, net
    
    $
    268Inventories
    
    
    267Prepaids and other current assets
    
    
    7Property and equipment, net
    
    
    225Goodwill
    
    
    961Total assets
    
    $
    1,728Accounts payable
    
    $
    60Accrued expenses
    
    
    14Total liabilities
    
    $
    74




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##### Table of Contents



(3) GOODWILL AND OTHER INTANGIBLE ASSETS
  (4) INVENTORIES
 June 30, 2007June 30, 2007
    
    
    (Unaudited)(Unaudited)
    
    
    (As originally
    
    
    December 31,(As restated)
    
    
    reported)
    
    
    2006(In thousands)Raw materials and system components
    
    $
    6,065
    
    
    $
    6,065
    
    
    $
    5,966Work in process
    
    
    112
    
    
    
    112
    
    
    
    119Finished goods
    
    
    2,582
    
    
    
    2,808
    
    
    
    2,972Total inventories
    
    $
    8,759
    
    
    $
    8,985
    
    
    $
    9,057
 (5) PROPERTY AND EQUIPMENT
 Estimated
    
    
    June 30,Depreciable
    
    
    2007
    
    
    December 31,Lives (years)
    
    
    (Unaudited)
    
    
    2006(In thousands)Leasehold improvements
    
    
    5 - 9
    
    
    $
    271
    
    
    $
    271Automobiles
    
    
    5
    
    
    
    16
    
    
    
    16Computer and telecommunications equipment
    
    
    3
    
    
    
    1,180
    
    
    
    1,174Software
    
    
    3 - 5
    
    
    
    4,137
    
    
    
    4,123Test equipment
    
    
    3 - 5
    
    
    
    192
    
    
    
    189Furniture and fixtures
    
    
    3 - 7
    
    
    
    2,581
    
    
    
    2,473Software projects in progress
    
    
    
    
    
    
    279
    
    
    
    548,656
    
    
    
    8,300Less accumulated depreciation and amortization
    
    
    
    
    
    
    5,968
    
    
    
    5,394Total property and equipment, net
    
    
    
    
    
    $
    2,688
    
    
    $
    2,906
 (6) ACCRUED EXPENSES
 June 30, 2007June 30, 2007
    
    
    (Unaudited)(Unaudited)
    
    
    (As originally
    
    
    December 31,(As restated)
    
    
    reported)
    
    
    2006(In thousands)Salaries, commissions, and benefits
    
    $
    1,470
    
    
    $
    1,470
    
    
    $
    1,176Taxes  payroll, sales, income, and other
    
    
    771
    
    
    
    771
    
    
    
    620Warranties
    
    
    544
    
    
    
    311
    
    
    
    384Current portion of capital leases
    
    
    23
    
    
    
    23
    
    
    
    22Interest payable
    
    
    111
    
    
    
    111
    
    
    
    51Deferred revenue
    
    
    1,508
    
    
    
    1,508
    
    
    
    196Other
    
    
    390
    
    
    
    390
    
    
    
    472Total accrued expenses
    
    $
    4,817
    
    
    $
    4,584
    
    
    $
    2,921




---



##### Table of Contents



(7) LINES OF CREDIT AND NOTE PAYABLE
 (a) Domestic lines of credit and notes payable
 U.S. Working Capital Line of Credit.




---



##### Table of Contents



b) International lines of credit




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Line of credit with Laurus Master Fund dated March 16, 2006; payable in full June
30, 2008; secured by all tangible and intangible U.S. assets of the Company; bears
average interest rate of 9.17% and 9.69% in 2007 and 2006, respectively.
    
    $
    4,718
    
    
    $
    4,406Line of credit with Swedish bank, certain borrowings dated December 31, 2006
which renew annually and certain borrowings dated June 30, 2007 which renew at
various periods agreed-to by the bank and the Company; expiration dates of
December 31, 2007 for borrowings under annual renewal and August 31, 2007 for
borrowings renewing at various periods; secured by certain assets of the Swedish
subsidiary, Mobitec AB; bears average interest rate of 4.20% and 3.23% in 2007
and 2006, respectively.
    
    
    909
    
    
    
    1,450Line of credit with Swedish bank dated December 31, 2006; expires on December
31, 2007; secured by accounts receivable of the Swedish subsidiary, Mobitec AB;
bears average interest rate of 5.15% and 4.23% in 2007 and 2006, respectively.
    
    
    1,120
    
    
    
    1,116Line of credit with German bank dated June 23, 2004; open-ended term; secured by
accounts receivable and inventory of the German subsidiary, Mobitec GmbH
(formerly known as Transit Media-Mobitec GmbH); bears average interest rate of
5.07% and 4.12% in 2007 and 2006, respectively.
    
    
    661
    
    
    
    636Total lines of credit
    
    $
    7,408
    
    
    $
    7,608
 (8) LONG-TERM DEBT




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Convertible debenture to a director dated August 26, 2002, payable
in full August 26, 2009, with an interest rate of 8%.
    
    $
    250
    
    
    $
    250Other long-term debt
    
    
    6
    
    
    
    8Total long-term debt
    
    
    256
    
    
    
    258Less current portion
    
    
    250
    
    
    
    2546
    
    
    
    4Long-term portion of capital leases
    
    
    27
    
    
    
    38Total long-term debt and capital leases, less current portion
    
    $
    33
    
    
    $
    42
  (9) PREFERRED STOCK




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##### Table of Contents



(10) PER SHARE AMOUNTS
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)(Unaudited)
    
    
    
    
    
    
    
    
    
    
    (Unaudited)(In thousands, except share amounts)
    
    
    (In thousands, except share amounts)Net income (loss) applicable
to common shareholders
    
    $
    244
    
    
    $
    635
    
    
    $
    (243
    )
    
    $
    (602
    )
    
    $
    (211
    )
    
    $
    (1,109
    )Effect of dilutive securities
on net income (loss):Convertible preferred stock
    
    
    2
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible debt
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) applicable
to common shareholders,
assuming conversions
    
    $
    251
    
    
    $
    708
    
    
    $
    (243
    )
    
    $
    (602
    )
    
    $
    (211
    )
    
    $
    (1,109
    )Weighted average shares
oustanding  Basic
    
    
    10,503,691
    
    
    
    10,503,691
    
    
    
    9,777,499
    
    
    
    10,339,546
    
    
    
    10,339,546
    
    
    
    9,764,467Effect of dilutive securities
on shares outstanding:Options
    
    
    15,366
    
    
    
    15,366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    481,148
    
    
    
    481,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    227,503
    
    
    
    1,227,537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible debt
    
    
    206,612
    
    
    
    206,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares
outstanding  Diluted
    
    
    11,434,320
    
    
    
    12,434,354
    
    
    
    9,777,499
    
    
    
    10,339,546
    
    
    
    10,339,546
    
    
    
    9,764,467
  (11) COMPREHENSIVE INCOME (LOSS)




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)(Unaudited)
    
    
    
    
    
    
    
    
    
    
    (Unaudited)(In thousands)
    
    
    
    
    
    
    
    
    
    
    (In thousands)Net income (loss)
    
    $
    312
    
    
    $
    703
    
    
    $
    (167
    )
    
    $
    (458
    )
    
    $
    (67
    )
    
    $
    (916
    )Foreign currency
translation
adjustment
    
    
    367
    
    
    
    367
    
    
    
    672
    
    
    
    164
    
    
    
    164
    
    
    
    956Total comprehensive
income (loss)
    
    $
    679
    
    
    $
    1,070
    
    
    $
    505
    
    
    $
    (294
    )
    
    $
    97
    
    
    $
    40
 (12) SEGMENT AND GEOGRAPHIC INFORMATION
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net sales  continuing operationsNorth America
    
    $
    8,377
    
    
    $
    7,310
    
    
    $
    14,371
    
    
    $
    13,262Europe
    
    
    3,320
    
    
    
    3,182
    
    
    
    6,941
    
    
    
    5,673Asia-Pacific
    
    
    1,068
    
    
    
    746
    
    
    
    2,116
    
    
    
    1,761Middle East
    
    
    669
    
    
    
    331
    
    
    
    967
    
    
    
    742South America
    
    
    1,451
    
    
    
    1,391
    
    
    
    2,490
    
    
    
    2,276$
    14,885
    
    
    $
    12,960
    
    
    $
    26,885
    
    
    $
    23,714
 June 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands)Long-lived assets  continuing operationsNorth America
    
    $
    1,528
    
    
    $
    1,770Europe
    
    
    1,475
    
    
    
    1,718Asia-Pacific
    
    
    31
    
    
    
    31South America
    
    
    208
    
    
    
    184$
    3,242
    
    
    $
    3,703
 (13) INCOME TAXES




---



##### Table of Contents



Balance at beginning of period, as restated
    
    $
    110Additions for tax positions related to prior years
    
    
    Additions for tax positions related to the current year
    
    
    50Balance as of June 30, 2007, as restated
    
    $
    160
   (14) SUBSEQUENT EVENT




---



##### Table of Contents



September 30, 2007
    
    
    September 30, 2007(Unaudited)
    
    
    (Unaudited)(As restated)
    
    
    (As originally reported)
    
    
    December 31, 2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    238
    
    
    $
    238
    
    
    $
    611Trade accounts receivable, net
    
    
    11,024
    
    
    
    11,056
    
    
    
    10,100Current portion of note receivable
    
    
    86
    
    
    
    86
    
    
    
    Other receivables
    
    
    489
    
    
    
    489
    
    
    
    147Inventories
    
    
    8,937
    
    
    
    9,078
    
    
    
    9,057Prepaids and other current assets
    
    
    473
    
    
    
    473
    
    
    
    422Assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,728Total current assets
    
    
    21,247
    
    
    
    21,420
    
    
    
    22,065Property and equipment, net
    
    
    2,833
    
    
    
    2,833
    
    
    
    2,906Long-term portion of note receivable
    
    
    258
    
    
    
    258
    
    
    
    Goodwill
    
    
    10,967
    
    
    
    10,967
    
    
    
    10,289Intangible assets, net
    
    
    1,130
    
    
    
    1,130
    
    
    
    1,110Other assets
    
    
    404
    
    
    
    404
    
    
    
    797Total assets
    
    $
    36,839
    
    
    $
    37,012
    
    
    $
    37,167LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    5,440
    
    
    $
    5,440
    
    
    $
    7,608Notes payable, net
    
    
    500
    
    
    
    500
    
    
    
    1,584Loan payable
    
    
    466
    
    
    
    466
    
    
    
    Current portion of long-term debt
    
    
    250
    
    
    
    250
    
    
    
    254Current portion of foreign tax settlement
    
    
    477
    
    
    
    477
    
    
    
    393Accounts payable
    
    
    5,014
    
    
    
    5,014
    
    
    
    5,560Accrued expenses
    
    
    4,176
    
    
    
    3,990
    
    
    
    2,921Preferred stock dividends payable
    
    
    17
    
    
    
    17
    
    
    
    23Liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    74Total current liabilities
    
    
    16,340
    
    
    
    16,154
    
    
    
    18,417Long-term debt and capital leases, long-term
    
    
    26
    
    
    
    26
    
    
    
    42Foreign tax settlement, long-term
    
    
    1,089
    
    
    
    1,089
    
    
    
    1,087Deferred tax liabilities, net
    
    
    59
    
    
    
    132
    
    
    
    192Liability for uncertain tax positions
    
    
    241
    
    
    
    
    
    
    
    Minority interest in consolidated subsidiary
    
    
    332
    
    
    
    392
    
    
    
    234Commitments and contingencies (Notes 7 and 8)Shareholders EquitySeries E Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 500 shares authorized; 85 and 183
shares issued and outstanding at September 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company at any time.
    
    
    355
    
    
    
    355
    
    
    
    495Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 402 and 379
shares issued and outstanding at September 30, 2007 and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    1,728
    
    
    
    1,728
    
    
    
    1,613Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 58 and 54
shares issued and outstanding at September 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    242
    
    
    
    242
    
    
    
    222Series I Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 200 shares authorized; 0 and 104
shares issued and outstanding at September 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    
    
    
    
    
    
    
    
    471Series J Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 250 shares authorized; 90 and 0
shares issued and outstanding at September 30, 2007, and December 31, 2006,
respectively; redeemable at the discretion of the Company at any time.
    
    
    388
    
    
    
    388
    
    
    
    Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 20,000 shares authorized; 178 shares
issued and outstanding at September 30, 2007 and December 31, 2006;
redeemable at the discretion of the Company at any time.
    
    
    890
    
    
    
    890
    
    
    
    890Common stock, $.10 par value, 25,000,000 shares authorized; 11,168,145 and
10,045,675 shares issued and outstanding at September 30, 2007 and
December 31, 2006, respectively.
    
    
    1,117
    
    
    
    1,117
    
    
    
    1,004Additional paid-in capital
    
    
    32,077
    
    
    
    32,077
    
    
    
    31,517Accumulated other comprehensive income  foreign currency translation
    
    
    4,404
    
    
    
    4,404
    
    
    
    3,397Accumulated deficit
    
    
    (22,449
    )
    
    
    (21,982
    )
    
    
    (22,414
    )Total shareholders equity
    
    
    18,752
    
    
    
    19,219
    
    
    
    17,195Total liabilities and shareholders equity
    
    $
    36,839
    
    
    $
    37,012
    
    
    $
    37,167




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)Net sales
    
    $
    13,929
    
    
    $
    13,929
    
    
    $
    12,371
    
    
    $
    40,814
    
    
    $
    40,814
    
    
    $
    36,085Cost of sales
    
    
    9,388
    
    
    
    9,520
    
    
    
    9,011
    
    
    
    28,063
    
    
    
    27,738
    
    
    
    25,246Gross profit
    
    
    4,541
    
    
    
    4,409
    
    
    
    3,360
    
    
    
    12,751
    
    
    
    13,076
    
    
    
    10,839Operating expensesSelling, general and administrative
    
    
    3,174
    
    
    
    3,174
    
    
    
    3,756
    
    
    
    10,383
    
    
    
    10,351
    
    
    
    11,047Research and development
    
    
    329
    
    
    
    329
    
    
    
    314
    
    
    
    1,024
    
    
    
    1,024
    
    
    
    913Total operating expenses
    
    
    3,503
    
    
    
    3,503
    
    
    
    4,070
    
    
    
    11,407
    
    
    
    11,375
    
    
    
    11,960Operating income (loss)
    
    
    1,038
    
    
    
    906
    
    
    
    (710
    )
    
    
    1,344
    
    
    
    1,701
    
    
    
    (1,121
    )Other income (loss)
    
    
    4
    
    
    
    4
    
    
    
    24
    
    
    
    43
    
    
    
    43
    
    
    
    (17
    )Foreign currency gain
    
    
    130
    
    
    
    130
    
    
    
    11
    
    
    
    151
    
    
    
    151
    
    
    
    100Interest expense
    
    
    (276
    )
    
    
    (276
    )
    
    
    (330
    )
    
    
    (924
    )
    
    
    (924
    )
    
    
    (818
    )Total other income and expense
    
    
    (142
    )
    
    
    (142
    )
    
    
    (295
    )
    
    
    (730
    )
    
    
    (730
    )
    
    
    (735
    )Income (loss) from continuing operations before income tax expense
and minority interest
    
    
    896
    
    
    
    764
    
    
    
    (1,005
    )
    
    
    614
    
    
    
    971
    
    
    
    (1,856
    )Income tax expense
    
    
    (200
    )
    
    
    (138
    )
    
    
    (59
    )
    
    
    (177
    )
    
    
    (162
    )
    
    
    (175
    )Income (loss) from continuing operations before minority interest in
income of consolidated subsidiary
    
    
    696
    
    
    
    626
    
    
    
    (1,064
    )
    
    
    437
    
    
    
    809
    
    
    
    (2,031
    )Minority interest in income of consolidated subsidiary
    
    
    (120
    )
    
    
    (127
    )
    
    
    (159
    )
    
    
    (99
    )
    
    
    (158
    )
    
    
    (229
    )Income (loss) from continuing operations
    
    
    576
    
    
    
    499
    
    
    
    (1,223
    )
    
    
    338
    
    
    
    651
    
    
    
    (2,260
    )Income (loss) from discontinued operations (Note 2)
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    (219
    )
    
    
    (219
    )
    
    
    333Net income (loss)
    
    
    576
    
    
    
    499
    
    
    
    (1,011
    )
    
    
    119
    
    
    
    432
    
    
    
    (1,927
    )Provision for preferred stock dividends
    
    
    (76
    )
    
    
    (76
    )
    
    
    (77
    )
    
    
    (220
    )
    
    
    (220
    )
    
    
    (221
    )Amortization for discount on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )Net income (loss) applicable to common shareholders
    
    $
    500
    
    
    $
    423
    
    
    $
    (1,088
    )
    
    $
    (101
    )
    
    $
    212
    
    
    $
    (2,197
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.26
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    0.03Income (loss) per share applicable to common shareholders
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.22
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.13
    )
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.26
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    0.03Income (loss) per share applicable to common shareholders
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.22
    )Weighted average number of common shares and common
share equivalent outstandingBasic
    
    
    11,131,248
    
    
    
    11,131,248
    
    
    
    9,801,789
    
    
    
    10,606,347
    
    
    
    10,606,347
    
    
    
    9,777,044Diluted
    
    
    11,702,461
    
    
    
    11,711,753
    
    
    
    9,801,789
    
    
    
    11,020,059
    
    
    
    11,020,059
    
    
    
    9,777,044




---



##### Table of Contents



Nine Months Ended September 30,2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)Cash flows from operating activitiesNet income (loss)
    
    $
    119
    
    
    $
    432
    
    
    $
    (1,927
    )(Loss) income from discontinued operations
    
    
    (219
    )
    
    
    (219
    )
    
    
    333Income (loss) from continuing operations
    
    
    338
    
    
    
    651
    
    
    
    (2,260
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activitiesDeferred income taxes
    
    
    (124
    )
    
    
    (53
    )
    
    
    3Liability for uncertain tax positions
    
    
    87
    
    
    
    
    
    
    
    Depreciation and amortization of property and equipment
    
    
    810
    
    
    
    810
    
    
    
    873Amortization of intangible assets
    
    
    100
    
    
    
    100
    
    
    
    83Amortization of deferred financing costs
    
    
    216
    
    
    
    216
    
    
    
    210Amortization of beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    81Amortization of the fair value of warrants
    
    
    188
    
    
    
    188
    
    
    
    192Bad debt expense
    
    
    22
    
    
    
    22
    
    
    
    300Stock issued in lieu of cash compensation
    
    
    57
    
    
    
    57
    
    
    
    63Stock-based compensation expense
    
    
    28
    
    
    
    28
    
    
    
    5Write-down of inventory for obsolescence
    
    
    119
    
    
    
    119
    
    
    
    114(Gain) loss on sale of fixed assets
    
    
    (3
    )
    
    
    (3
    )
    
    
    9Other, primarily effect of foreign currency gain/loss
    
    
    (275
    )
    
    
    (272
    )
    
    
    (124
    )Minority interest in income of consolidated subsidiary
    
    
    99
    
    
    
    158
    
    
    
    229Changes in operating assets and liabilitiesIncrease in trade accounts receivable
    
    
    (312
    )
    
    
    (344
    )
    
    
    (2,636
    )Increase in other receivables
    
    
    (301
    )
    
    
    (301
    )
    
    
    (238
    )(Increase) decrease in inventories
    
    
    443
    
    
    
    302
    
    
    
    (650
    )Increase in prepaids and other current assets
    
    
    (34
    )
    
    
    (34
    )
    
    
    (55
    )Increase in other assets
    
    
    
    
    
    
    
    
    
    
    (6
    )Increase (decrease) in accounts payable
    
    
    (729
    )
    
    
    (729
    )
    
    
    135Increase (decrease) in accrued expenses
    
    
    1,063
    
    
    
    877
    
    
    
    (11
    )Decrease in foreign tax settlement
    
    
    (128
    )
    
    
    (128
    )
    
    
    Net cash provided by (used in) continuing operations
    
    
    1,664
    
    
    
    1,664
    
    
    
    (3,683
    )Net cash (used in) provided by discontinued operations
    
    
    (68
    )
    
    
    (68
    )
    
    
    754Net cash provided by (used in) operating activities
    
    
    1,596
    
    
    
    1,596
    
    
    
    (2,929
    )Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    65
    
    
    
    65
    
    
    
    3Purchases of property and equipment
    
    
    (195
    )
    
    
    (195
    )
    
    
    (142
    )Investments in software development
    
    
    (472
    )
    
    
    (472
    )
    
    
    (153
    )Proceeds from sale of DAC
    
    
    1,100
    
    
    
    1,100
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    498
    
    
    
    498
    
    
    
    (292
    )Net cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (21
    )Net cash provided by (used in) investing activities
    
    
    498
    
    
    
    498
    
    
    
    (313
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    48,267
    
    
    
    48,267
    
    
    
    49,849Principal payments on bank borrowings and lines of credit
    
    
    (51,264
    )
    
    
    (51,264
    )
    
    
    (47,056
    )Issuance of common stock
    
    
    173
    
    
    
    173
    
    
    
    Proceeds from issuance of Preferred stock, net of costs
    
    
    411
    
    
    
    411
    
    
    
    485Payments related to financing of new line of credit
    
    
    
    
    
    
    
    
    
    
    (329
    )Payments related to financing of note payable
    
    
    
    
    
    
    
    
    
    
    (81
    )Payment of dividends on Preferred stock
    
    
    (92
    )
    
    
    (92
    )
    
    
    (101
    )Net cash (used in) provided by financing activities
    
    
    (2,505
    )
    
    
    (2,505
    )
    
    
    2,767Effect of exchange rate changes on cash and cash equivalents
    
    
    38
    
    
    
    38
    
    
    
    52Net decrease in cash and cash equivalents
    
    
    (373
    )
    
    
    (373
    )
    
    
    (423
    )Cash and cash equivalents at beginning of period
    
    
    611
    
    
    
    611
    
    
    
    807Cash and cash equivalents at end of period
    
    $
    238
    
    
    $
    238
    
    
    $
    384Supplemental Disclosure of Cash Flow InformationCash paid during the period for interest
    
    
    144
    
    
    
    144
    
    
    
    120Cash paid during the period for income taxes
    
    
    76
    
    
    
    76
    
    
    
    74




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##### Table of Contents



Nine Months Ended September 30,2007
    
    
    2006Supplemental disclosures of non-cash investing and
financing activities:Conversion of preferred stock to common stock
    
    $
    1,010
    
    
    $
    120Fair value of warrants issued in
connection with sale of preferred stock
    
    $
    23
    
    
    $
    Note receivable in connection with sale of DAC
    
    $
    344
    
    
    $
    Fair value allocated to warrants issued
in connection with sale of preferred stock
    
    $
    
    
    
    $
    49Amortization of preferred stock beneficial
conversion feature
    
    $
    
    
    
    $
    49Amortization of convertible subordinated
debenture beneficial conversion feature
    
    $
    
    
    
    $
    81Fair value of warrants
issued in connection with promissory note
    
    $
    
    
    
    $
    48Fair value of warrants issued in connection
with financing of new line of credit
    
    $
    
    
    
    $
    590Preferred stock dividends
    
    $
    135
    
    
    $
    170




---



##### Table of Contents



DRI CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (TM)
  (1) BASIS OF PRESENTATION AND DISCLOSURE




---



##### Table of Contents



Product Warranties
  Nine Months ended September 30,2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)Balance at beginning of period
    
    $
    384
    
    
    $
    384
    
    
    $
    214Additions charged to costs and expenses
    
    
    474
    
    
    
    54
    
    
    
    145Deductions
    
    
    (351
    )
    
    
    (118
    )
    
    
    (113
    )Foreign exchange translation loss
    
    
    15
    
    
    
    15
    
    
    
    11Balance at end of period
    
    $
    522
    
    
    $
    335
    
    
    $
    257
 Recent Accounting Pronouncements
   (2) DISCONTINUED OPERATIONS




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##### Table of Contents



Accounting for the Impairment or Disposal of Long-Lived
Assets
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Net sales
    
    $
    
    
    
    $
    725
    
    
    $
    239
    
    
    $
    1,680Income (loss) before income tax expense
    
    
    
    
    
    
    212
    
    
    
    (219
    )
    
    
    333
  December 31, 2006Trade accounts receivable, net
    
    $
    268Inventories
    
    
    267Prepaids and other current assets
    
    
    7Property and equipment, net
    
    
    225Goodwill
    
    
    961Total assets
    
    $
    1,728Accounts payable
    
    $
    60Accrued expenses
    
    
    14Total liabilities
    
    $
    74
  (3) GOODWILL AND OTHER INTANGIBLE ASSETS




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(4) INVENTORIES
 September 30, 2007September 30, 2007
    
    
    (Unaudited)(Unaudited)
    
    
    (As originally
    
    
    December 31,(As restated)
    
    
    reported)
    
    
    2006(In thousands)Raw materials and system components
    
    $
    6,564
    
    
    $
    6,564
    
    
    $
    5,966Work in process
    
    
    129
    
    
    
    129
    
    
    
    119Finished goods
    
    
    2,244
    
    
    
    2,385
    
    
    
    2,972Total inventories
    
    $
    8,937
    
    
    $
    9,078
    
    
    $
    9,057
 (5) PROPERTY AND EQUIPMENT
 Estimated
    
    
    September 30,Depreciable
    
    
    2007
    
    
    December 31,Lives (years)
    
    
    (Unaudited)
    
    
    2006(In thousands)Leasehold improvements
    
    
    5 - 9
    
    
    $
    271
    
    
    $
    271Automobiles
    
    
    5
    
    
    
    16
    
    
    
    16Computer and telecommunications equipment
    
    
    3
    
    
    
    1,190
    
    
    
    1,174Software
    
    
    3 - 5
    
    
    
    4,400
    
    
    
    4,123Test equipment
    
    
    3 - 5
    
    
    
    194
    
    
    
    189Furniture and fixtures
    
    
    3 - 7
    
    
    
    2,708
    
    
    
    2,473Software projects in progress
    
    
    
    
    
    
    470
    
    
    
    549,249
    
    
    
    8,300Less accumulated depreciation and amortization
    
    
    
    
    
    
    6,416
    
    
    
    5,394Total property and equipment, net
    
    
    
    
    
    $
    2,833
    
    
    $
    2,906
 (6) ACCRUED EXPENSES
 September 30, 2007September 30, 2007
    
    
    (Unaudited)(Unaudited)
    
    
    (As originally
    
    
    December 31,(As restated)
    
    
    reported)
    
    
    2006(In thousands)Salaries, commissions, and benefits
    
    $
    1,328
    
    
    
    1,328
    
    
    $
    1,176Taxes  payroll, sales, income, and other
    
    
    822
    
    
    
    822
    
    
    
    620Warranties
    
    
    522
    
    
    
    335
    
    
    
    384Current portion of capital leases
    
    
    23
    
    
    
    23
    
    
    
    22Interest payable
    
    
    130
    
    
    
    130
    
    
    
    51Deferred revenue
    
    
    921
    
    
    
    921
    
    
    
    196Other
    
    
    430
    
    
    
    431
    
    
    
    472Total accrued expenses
    
    $
    4,176
    
    
    
    3,990
    
    
    $
    2,921
 (7) LINES OF CREDIT AND NOTE PAYABLE
 (a) Domestic lines of credit and notes payable
 U.S. Working Capital Line of Credit.




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b) International lines of credit
    September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Line of credit with Laurus Master Fund dated March 16, 2006; payable in full June
30, 2008; secured by all tangible and intangible U.S. assets of the Company; bears
average interest rate of 9.98% and 9.69% in 2007 and 2006, respectively.
    
    $
    3,150
    
    
    $
    4,406Line of credit with Swedish bank dated December 31, 2006, expires on December
31, 2007; secured by certain assets of the Swedish subsidiary, Mobitec AB; bears
average interest rate of 5.60% and 3.23% in 2007 and 2006, respectively.
    
    
    785
    
    
    
    1,450Line of credit with Swedish bank dated December 31, 2006; expires on December
31, 2007; secured by accounts receivable of the Swedish subsidiary, Mobitec AB;
bears average interest rate of 5.60% and 4.23% in 2007 and 2006, respectively.
    
    
    1,062
    
    
    
    1,116Line of credit with German bank dated June 23, 2004; open-ended term; secured by
accounts receivable and inventory of the German subsidiary, Mobitec GmbH
(formerly known as Transit Media-Mobitec GmbH); bears average interest rate of
5.27% and 4.12% in 2007 and 2006, respectively.
    
    
    443
    
    
    
    636Total lines of credit
    
    $
    5,440
    
    
    $
    7,608
 (8) LONG-TERM DEBT




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##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Convertible debenture to a director dated August 26, 2002, payable
in full August 26, 2009, with an interest rate of 8%.
    
    $
    250
    
    
    $
    250Other long-term debt
    
    
    5
    
    
    
    8Total long-term debt
    
    
    255
    
    
    
    258Less current portion
    
    
    250
    
    
    
    2545
    
    
    
    4Long-term portion of capital leases
    
    
    21
    
    
    
    38Total long-term debt and capital leases, less current portion
    
    $
    26
    
    
    $
    42
  (9) PREFERRED STOCK




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##### Table of Contents



(10) PER SHARE AMOUNTS
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)(Unaudited)
    
    
    (Unaudited)(In thousands, except share amounts)
    
    
    (In thousands, except share amounts)Net income (loss) applicable to common shareholders
    
    $
    500
    
    
    $
    423
    
    
    $
    (1,088
    )
    
    $
    (101
    )
    
    $
    212
    
    
    $
    (2,197
    )Effect of dilutive securities on net income (loss):Convertible debt
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) applicable to common
shareholders, assuming conversions
    
    $
    505
    
    
    $
    428
    
    
    $
    (1,088
    )
    
    $
    (101
    )
    
    $
    212
    
    
    $
    (2,197
    )Weighted average shares oustanding  Basic
    
    
    11,131,248
    
    
    
    11,131,248
    
    
    
    9,801,789
    
    
    
    10,606,347
    
    
    
    10,606,347
    
    
    
    9,777,044Effect of dilutive securities on shares outstanding:Options
    
    
    188,268
    
    
    
    188,268
    
    
    
    
    
    
    
    41,623
    
    
    
    41,623
    
    
    
    Warrants
    
    
    176,333
    
    
    
    176,333
    
    
    
    
    
    
    
    372,089
    
    
    
    372,089
    
    
    
    Convertible debt
    
    
    206,612
    
    
    
    206,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    9,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    11,702,461
    
    
    
    11,711,753
    
    
    
    9,801,789
    
    
    
    11,020,059
    
    
    
    11,020,059
    
    
    
    9,777,044




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##### Table of Contents



(11) COMPREHENSIVE INCOME (LOSS)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(As restated)
    
    
    (As originally reported)
    
    
    
    
    
    
    (As restated)
    
    
    (As originally reported)(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    576
    
    
    $
    499
    
    
    $
    (1,011
    )
    
    $
    119
    
    
    $
    432
    
    
    $
    (1,927
    )Foreign currency translation
adjustment
    
    
    843
    
    
    
    843
    
    
    
    120
    
    
    
    1,007
    
    
    
    1,007
    
    
    
    1,076Total comprehensive income (loss)
    
    $
    1,419
    
    
    $
    1,342
    
    
    $
    (891
    )
    
    $
    1,126
    
    
    $
    1,439
    
    
    $
    (851
    )
 (12) SEGMENT AND GEOGRAPHIC INFORMATION
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net sales  continuing operationsNorth America
    
    $
    6,580
    
    
    $
    5,511
    
    
    $
    20,951
    
    
    $
    18,772Europe
    
    
    3,446
    
    
    
    3,746
    
    
    
    10,387
    
    
    
    9,419Asia-Pacific
    
    
    1,103
    
    
    
    952
    
    
    
    3,219
    
    
    
    2,712Middle East
    
    
    481
    
    
    
    482
    
    
    
    1,448
    
    
    
    1,225South America
    
    
    2,319
    
    
    
    1,680
    
    
    
    4,809
    
    
    
    3,957$
    13,929
    
    
    $
    12,371
    
    
    $
    40,814
    
    
    $
    36,085
 September 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands)Long-lived assets  continuing
operationsNorth America
    
    $
    1,378
    
    
    $
    1,770Europe
    
    
    1,598
    
    
    
    1,718Asia-Pacific
    
    
    31
    
    
    
    31South America
    
    
    230
    
    
    
    184$
    3,237
    
    
    $
    3,703
 (13) INCOME TAXES




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##### Table of Contents



Balance at beginning of period, as restated
    
    $
    110Additions for tax positions related to prior years
    
    
    Additions for tax positions related to the current year
    
    
    87Balance as of September 30, 2007, as restated
    
    $
    197
   (14) SUBSEQUENT EVENT




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##### Table of Contents



Year Ended December 31, 2007Q1
    
    Q2
    
    Q3
    
    Q4(As restated)
    
    (As restated)(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 income (loss) applicable to common
shareholders
    
    
    (846
    )
    
    
    244
    
    
    
    500
    
    
    
    482Net income (loss) applicable to common
shareholders per common share:Basic
    
    $
    (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
 Year Ended December 31, 2006Q1
    
    Q2
    
    Q3
    
    Q4(In thousands, except share and per share amounts)(Unaudited)Net sales
    
    $
    10,755
    
    
    $
    12,960
    
    
    $
    12,371
    
    
    $
    13,075Gross profit
    
    
    3,334
    
    
    
    4,145
    
    
    
    3,360
    
    
    
    3,035Operating income (loss)
    
    
    (449
    )
    
    
    38
    
    
    
    (710
    )
    
    
    (2,023
    )Net loss applicable to common
shareholders
    
    
    (866
    )
    
    
    (243
    )
    
    
    (1,088
    )
    
    
    (2,044
    )Net loss applicable to common
shareholders per common shareBasic
    
    $
    (0.09
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )
    
    $
    (0.21
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )
    
    $
    (0.21
    )Weighted average number of common shares
and common share equivalents outstandingBasic
    
    
    9,751,290
    
    
    
    9,777,499
    
    
    
    9,801,789
    
    
    
    9,818,919Diluted
    
    
    9,751,290
    
    
    
    9,777,499
    
    
    
    9,801,789
    
    
    
    9,818,919
 69




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A.
    
    Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
 Internal Control- Integrated Framework
  (1)
    
    Ensure direct production labor and overhead costs were properly capitalized in inventory.(2)
    
    Ensure an accurate and complete physical inventory was achieved and that the Companys
inventory records were appropriately updated for the results of the annual physical
inventory.(3)
    
    Ensure intercompany profits in ending inventories are properly eliminated.
   Remediation of Material Weakness
  Changes in Internal Control over Financial Reporting
  70




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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
  
 Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
  
 Item 14.
    
    Principal Accounting Fees and Services
  
 PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules
 (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)
 71




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##### Table of Contents



ExhibitNo.
    
    Document3.7
    
    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)3.12
    
    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 Report
on Form 8-K, filed with the SEC on April 14, 2004)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
14, 2004)4.3
    
    Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company (incorporated herein by reference
from the Companys Report on Form 8-K, filed with the SEC on
April 14, 2004)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)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, 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 Registration
Statement on Form SB-2, filed with the SEC (SEC File No.
33-82870-A))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)
 72




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##### Table of Contents



ExhibitNo.
    
    Document10.5
    
    Form of Digital Recorders, Inc., 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(R) 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)10.12
    
    Amended and Restated Registration Rights Agreement, dated as
of April 1, 2004, by and between 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 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)10.14
    
    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 10.18
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)10.21
    
    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)
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##### Table of Contents



ExhibitNo.
    
    Document10.26
    
    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, 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)10.33
    
    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 Agreement, 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)10.39
    
    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 16, 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 16, 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 16, 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 16, 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 16, 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 16, 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)
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##### Table of Contents



ExhibitNo.
    
    Document10.49
    
    Stock Purchase Warrant 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)10.50
    
    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 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 $344,184.50 (incorporated herein by
reference to the Companys Report on Form 10-Q for the
quarter ended June 30, 2007)10.56
    
    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
    
    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)10.60
    
    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 18, 2008)10.61
    
    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)10.62
    
    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 18, 2008)10.63
    
    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)21.1
    
    Listing of Subsidiaries of the Company (filed herewith)23.1
    
    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)
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##### Table of Contents



SIGNATURES
  DRI CORPORATIONBy:
    
    /s/ DAVID L. TURNEY       

David L. TurneyChairman of the Board, Chief Executive Officerand 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. TURNEY                 

David L. Turney
    
    Chairman of the Board, President and 
Chief Executive Officer
(Principal Executive Officer)
    
    March 31, 2008/s/ STEPHEN P. SLAY                  

Stephen P. Slay
    
    Vice President, Chief Financial Officer, 
Treasurer and Secretary
(Principal Financial and Accounting Officer)
    
    March 31, 2008/s/ JOHN D. HIGGINS                   

John D. Higgins
    
    Director
    
    March 31, 2008/s/ C. JAMES MEESE JR.              

C. James Meese Jr.
    
    Director
    
    March 31, 2008/s/ STEPHANIE L. PINSON           

Stephanie L. Pinson
    
    Director
    
    March 31, 2008/s/ JOHN K. PIROTTE                   

John K. Pirotte
    
    Director
    
    March 31, 2008/s/ JULIANN TENNEY                  

Juliann Tenney
    
    Director
    
    March 31, 2008
 76




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##### Table of Contents



SCHEDULE II
 DRI CORPORATION AND SUBSIDIARIES
 VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005
 AdditionsBalance at
    
    charged tobeginning
    
    costs and
    
    
    
    
    
    Balance atof year
    
    expenses
    
    Deductions
    
    end of year(In thousands)Allowance for Doubtful AccountsYear ended December 31, 2007
    
    $
    352
    
    
    $
    (39
    ) (b)
    
    $
    (225
    ) (a)
    
    $
    88Year ended December 31, 2006
    
    
    379
    
    
    
    235
    
    
    
    (262
    ) (a)
    
    
    352Year ended December 31, 2005
    
    
    170
    
    
    
    317
    
    
    
    (108
    ) (a)
    
    
    379Deferred Tax Asset Valuation AllowanceYear ended December 31, 2007
    
    $
    7,569
    
    
    $
    
    
    
    $
    (237
    )
    
    $
    7,332Year ended December 31, 2006
    
    
    6,022
    
    
    
    1,547
    
    
    
    
    
    
    
    7,569Year ended December 31, 2005
    
    
    3,720
    
    
    
    2,302
    
    
    
    
    
    
    
    6,022
 
 (a)
    
    Write-off of uncollectible accounts.(b)
    
    Includes recovery of accounts previously deemed uncollectible 77