##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2008
 Commission File Number 000-28539
 DRI CORPORATION
 Exact name of Registrant as specified in its Charter)
 North Carolina(State or other jurisdiction of 
incorporation or organization)
    
    56-1362926(I.R.S. Employer
Identification Number)
 13760 Noel Road, Suite 830
Dallas, Texas 75240  (Address of principal executive offices, Zip Code)
 (214) 378-8992
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting
company þ o þ
  Common Stock, par value $.10 per share
(Class of Common Stock)
    
    11,448,703
Number of Shares




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##### 



DRI CORPORATION AND SUBSIDIARIES
 INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations  Three and Six Months Ended June 30, 2008 and
2007 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2008 and 2007
(Unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Securityholders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    27SIGNATURES
    
    
    31Section 302 Certification of David L. TurneySection 302 Certification of Stephen P. SlaySection 906 Certification of David L. TurneySection 906 Certification of Stephen P. Slay
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
  
 
 December 31, 2007June 30, 2008
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,476
    
    
    $
    729Trade accounts receivable, net
    
    
    16,038
    
    
    
    11,919Current portion of note receivable
    
    
    86
    
    
    
    86Other receivables
    
    
    654
    
    
    
    465Inventories
    
    
    11,611
    
    
    
    9,603Prepaids and other current assets
    
    
    751
    
    
    
    495Total current assets
    
    
    30,616
    
    
    
    23,297Property and equipment, net
    
    
    3,458
    
    
    
    2,890Long-term portion of note receivable
    
    
    258
    
    
    
    258Goodwill
    
    
    11,842
    
    
    
    11,033Intangible assets, net
    
    
    1,087
    
    
    
    1,097Deferred tax assets, net
    
    
    10
    
    
    
    56Other assets
    
    
    332
    
    
    
    283Total assets
    
    $
    47,603
    
    
    $
    38,914LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    8,248
    
    
    $
    6,043Notes payable, net
    
    
    
    
    
    
    500Loans payable
    
    
    817
    
    
    
    391Current portion of long-term debt
    
    
    2
    
    
    
    254Current portion of foreign tax settlement
    
    
    557
    
    
    
    499Accounts payable
    
    
    8,064
    
    
    
    6,246Accrued expenses
    
    
    5,202
    
    
    
    3,681Preferred stock dividends payable
    
    
    22
    
    
    
    18Total current liabilities
    
    
    22,912
    
    
    
    17,632Long-term debt and capital leases, long-term
    
    
    18
    
    
    
    14Foreign tax settlement, long-term
    
    
    962
    
    
    
    1,043Liability for uncertain tax positions
    
    
    605
    
    
    
    311Minority interest in consolidated subsidiary
    
    
    762
    
    
    
    422Commitments 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; 80 and 85
shares issued and outstanding at June 30, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company at any time.
    
    
    337
    
    
    
    355Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 426 and 410
shares issued and outstanding at June 30, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    1,848
    
    
    
    1,768Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 61 and 59
shares issued and outstanding at June 30, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company after five years
from date of issuance.
    
    
    257
    
    
    
    247Series J Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 250 shares authorized; 90 shares
issued and outstanding at June 30, 2008, and December 31, 2007; redeemable
at the discretion of the Company at any time.
    
    
    388
    
    
    
    388Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 20,000 shares authorized; 166 and 172
shares issued and outstanding at June 30, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company at any time.
    
    
    830
    
    
    
    860Common stock, $.10 par value, 25,000,000 shares authorized; 11,448,703 and
11,187,993 shares issued and outstanding at June 30, 2008 and December 31,
2007, respectively.
    
    
    1,145
    
    
    
    1,119Additional paid-in capital
    
    
    32,345
    
    
    
    32,079Accumulated other comprehensive income  foreign currency translation
    
    
    5,698
    
    
    
    4,570Accumulated deficit
    
    
    (20,504
    )
    
    
    (21,894
    )Total shareholders equity
    
    
    22,344
    
    
    
    19,492Total liabilities, minority interest and shareholders equity
    
    $
    47,603
    
    
    $
    38,914
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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    19,403
    
    
    $
    14,885
    
    
    $
    36,428
    
    
    $
    26,885Cost of sales
    
    
    12,651
    
    
    
    10,352
    
    
    
    23,644
    
    
    
    18,675Gross profit
    
    
    6,752
    
    
    
    4,533
    
    
    
    12,784
    
    
    
    8,210Operating expensesSelling, general and administrative
    
    
    4,814
    
    
    
    3,608
    
    
    
    9,123
    
    
    
    7,209Research and development
    
    
    237
    
    
    
    363
    
    
    
    524
    
    
    
    695Total operating expenses
    
    
    5,051
    
    
    
    3,971
    
    
    
    9,647
    
    
    
    7,904Operating income
    
    
    1,701
    
    
    
    562
    
    
    
    3,137
    
    
    
    306Other income (loss)
    
    
    (114
    )
    
    
    28
    
    
    
    (22
    )
    
    
    39Foreign currency gain
    
    
    1
    
    
    
    45
    
    
    
    164
    
    
    
    21Interest expense
    
    
    (358
    )
    
    
    (333
    )
    
    
    (661
    )
    
    
    (648
    )Total other income and expense
    
    
    (471
    )
    
    
    (260
    )
    
    
    (519
    )
    
    
    (588
    )Income (loss) from continuing operations before income tax
(expense) benefit
    
    
    1,230
    
    
    
    302
    
    
    
    2,618
    
    
    
    (282
    )Income tax (expense) benefit
    
    
    (518
    )
    
    
    57
    
    
    
    (888
    )
    
    
    23Income (loss) from continuing operations before minority interest in
(income) loss of consolidated subsidiary
    
    
    712
    
    
    
    359
    
    
    
    1,730
    
    
    
    (259
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (44
    )
    
    
    (5
    )
    
    
    (340
    )
    
    
    20Income (loss) from continuing operations
    
    
    668
    
    
    
    354
    
    
    
    1,390
    
    
    
    (239
    )Loss from discontinued operations (Note 2)
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (219
    )Net income (loss)
    
    
    668
    
    
    
    312
    
    
    
    1,390
    
    
    
    (458
    )Provision for preferred stock dividends
    
    
    (75
    )
    
    
    (68
    )
    
    
    (149
    )
    
    
    (144
    )Net income (loss) applicable to common shareholders
    
    $
    593
    
    
    $
    244
    
    
    $
    1,241
    
    
    $
    (602
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (0.04
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.02
    )Income (loss) per share applicable to common shareholders
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    (0.06
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (0.04
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.02
    )Income (loss) per share applicable to common shareholders
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    (0.06
    )Weighted average number of common shares and common
share equivalent outstandingBasic
    
    
    11,227,274
    
    
    
    10,503,691
    
    
    
    11,207,633
    
    
    
    10,339,546Diluted
    
    
    13,053,576
    
    
    
    11,434,320
    
    
    
    12,979,343
    
    
    
    10,339,546
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Six Months Ended June 30,2008
    
    
    2007Cash flows from operating activitiesNet income (loss)
    
    $
    1,390
    
    
    $
    (458
    )Loss from discontinued operations
    
    
    
    
    
    
    (219
    )Income (loss) from continuing operations
    
    
    1,390
    
    
    
    (239
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activitiesDeferred income taxes
    
    
    76
    
    
    
    (191
    )Liability for uncertain tax positions
    
    
    239
    
    
    
    50Depreciation and amortization of property and equipment
    
    
    476
    
    
    
    556Amortization of intangible assets
    
    
    79
    
    
    
    63Amortization of deferred financing costs
    
    
    127
    
    
    
    128Amortization of the fair value of warrants
    
    
    115
    
    
    
    131Amortization of beneficial conversion feature
    
    
    54
    
    
    
    Bad debt expense
    
    
    57
    
    
    
    54Stock issued in lieu of cash compensation
    
    
    41
    
    
    
    21Stock-based compensation expense
    
    
    46
    
    
    
    26Write-down of inventory for obsolescence
    
    
    4
    
    
    
    41Loss on sale of fixed assets
    
    
    2
    
    
    
    1Other, primarily effect of foreign currency gain
    
    
    (178
    )
    
    
    (101
    )Minority interest in income (loss) of consolidated subsidiary
    
    
    340
    
    
    
    (20
    )Changes in operating assets and liabilitiesIncrease in trade accounts receivable
    
    
    (3,467
    )
    
    
    (2,147
    )Increase in other receivables
    
    
    (121
    )
    
    
    (226
    )(Increase) decrease in inventories
    
    
    (1,607
    )
    
    
    440Increase in prepaids and other current assets
    
    
    (243
    )
    
    
    (8
    )Decrease in other assets
    
    
    4
    
    
    
    Increase (decrease) in accounts payable
    
    
    1,540
    
    
    
    (402
    )Increase in accrued expenses
    
    
    1,379
    
    
    
    1,836Decrease in foreign tax settlement
    
    
    (174
    )
    
    
    (66
    )Net cash provided by (used in) continuing operations
    
    
    179
    
    
    
    (53
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (68
    )Net cash provided by (used in) operating activities
    
    
    179
    
    
    
    (121
    )Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    
    
    
    
    41Purchases of property and equipment
    
    
    (234
    )
    
    
    (131
    )Investments in software development
    
    
    (654
    )
    
    
    (225
    )Proceeds from sale of DAC
    
    
    
    
    
    
    1,100Net cash (used in) provided by investing activities
    
    
    (888
    )
    
    
    785Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    41,079
    
    
    
    33,350Principal payments on bank borrowings and lines of credit
    
    
    (39,404
    )
    
    
    (34,678
    )Issuance of common stock
    
    
    3
    
    
    
    87Proceeds from issuance of Preferred stock, net of costs
    
    
    
    
    
    
    411Payments related to new debt financing
    
    
    (163
    )
    
    
    Payment of dividends on Preferred stock
    
    
    (55
    )
    
    
    (60
    )Net cash provided by (used in) financing activities
    
    
    1,460
    
    
    
    (890
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (4
    )
    
    
    37Net increase (decrease) in cash and cash equivalents
    
    
    747
    
    
    
    (189
    )Cash and cash equivalents at beginning of period
    
    
    729
    
    
    
    611Cash and cash equivalents at end of period
    
    $
    1,476
    
    
    $
    422
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Six Months Ended June 30,2008
    
    
    2007Supplemental disclosures of non-cash investing and financing activities:Conversion of preferred stock to common stock
    
    $
    55
    
    
    $
    800Fair value of warrants issued in connection with sale of preferred stock
    
    $
    
    
    
    $
    23Note receivable in connection with sale of DAC
    
    $
    
    
    
    $
    344Conversion of convertible subordinated debenture
    
    $
    250
    
    
    $
    Amortization of convertible subordinated debenture beneficial conversion feature
    
    $
    54
    
    
    $
    Purchase of equipment under capital lease obligation
    
    $
    21
    
    
    $
    Preferred stock dividends
    
    $
    90
    
    
    $
    90
  6




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DRI CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 ()
  (1) BASIS OF PRESENTATION AND DISCLOSURE
    Product Warranties
  Six Months ended June 30,2008
    
    
    2007Balance at beginning of period
    
    $
    491
    
    
    $
    384Additions charged to costs and expenses
    
    
    68
    
    
    
    252Deductions
    
    
    (116
    )
    
    
    (96
    )Foreign exchange translation loss
    
    
    23
    
    
    
    4Balance at end of period
    
    $
    466
    
    
    $
    544
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Recent Accounting Pronouncements
        8




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(2) DISCONTINUED OPERATIONS
    Accounting for the Impairment or Disposal of Long-Lived
Assets
 Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2007(In thousands)
    
    (In thousands)Net sales
    
    $
    72
    
    
    $
    239Loss before income tax expense
    
    
    (42
    )
    
    
    (219
    )
 (3) GOODWILL AND OTHER INTANGIBLE ASSETS
  (4) INVENTORIES
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Raw materials and system components
    
    $
    7,709
    
    
    $
    6,496Work in process
    
    
    429
    
    
    
    176Finished goods
    
    
    3,473
    
    
    
    2,931Total inventories
    
    $
    11,611
    
    
    $
    9,603
 9




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(5) PROPERTY AND EQUIPMENT
 EstimatedDepreciable
    
    
    June 30,
    
    
    December 31,Lives (years)
    
    
    2008
    
    
    2007(In thousands)Leasehold improvements
    
    
    5  9
    
    
    $
    278
    
    
    $
    278Automobiles
    
    
    5
    
    
    
    13
    
    
    
    16Computer and telecommunications equipment
    
    
    3
    
    
    
    948
    
    
    
    857Software
    
    
    3  5
    
    
    
    4,786
    
    
    
    4,434Test equipment
    
    
    3  5
    
    
    
    126
    
    
    
    123Furniture and fixtures
    
    
    3  7
    
    
    
    3,032
    
    
    
    2,730Software projects in progress
    
    
    
    
    
    
    1,236
    
    
    
    66810,419
    
    
    
    9,106Less accumulated depreciation and amortization
    
    
    
    
    
    
    6,961
    
    
    
    6,216Total property and equipment, net
    
    
    
    
    
    $
    3,458
    
    
    $
    2,890
 (6) ACCRUED EXPENSES
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Salaries, commissions, and benefits
    
    $
    1,870
    
    
    $
    1,429Taxes  payroll, sales, income, and other
    
    
    1,359
    
    
    
    1,020Warranties
    
    
    466
    
    
    
    491Current portion of capital leases
    
    
    29
    
    
    
    23Interest payable
    
    
    247
    
    
    
    172Deferred revenue
    
    
    842
    
    
    
    303Other
    
    
    389
    
    
    
    243Total accrued expenses
    
    $
    5,202
    
    
    $
    3,681
 (7) LINES OF CREDIT, NOTES PAYABLE AND LOANS PAYABLE
 (a) Domestic line of credit and loan payable
  10




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b) International lines of credit and loans payable
  11




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June 30,
    
    
    December 31,2008
    
    
    2007(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 8.13% and 9.80% in 2008 and
2007, respectively.
    
    $
    5,184
    
    
    $
    3,796Line of credit with Swedish bank dated
December 31, 2007, expires on December 31,
2008; secured by certain assets of the
Swedish subsidiary, Mobitec AB; bears
average interest rate of 6.20% and 4.92% in
2008 and 2007, respectively.
    
    
    993
    
    
    
    1,057Line of credit with Swedish bank dated
December 31, 2007; expires on December 31,
2008; secured by accounts receivable of the
Swedish subsidiary, Mobitec AB; bears
average interest rate of 6.58% and 5.36% in
2008 and 2007, respectively.
    
    
    1,278
    
    
    
    1,087Line 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 5.50% and 5.30% in
2008 and 2007, respectively.
    
    
    793
    
    
    
    103Total lines of credit
    
    $
    8,248
    
    
    $
    6,043
 12




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(8) LONG-TERM DEBT
   June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Convertible debenture to a director dated August 26, 2002,
converted on June 30, 2008
    
    $
    
    
    
    $
    250Other long-term debt
    
    
    2
    
    
    
    4Total long-term debt
    
    
    2
    
    
    
    254Less current portion
    
    
    2
    
    
    
    254
    
    
    
    Long-term portion of capital leases
    
    
    18
    
    
    
    14Total long-term debt and capital leases, less current portion
    
    $
    18
    
    
    $
    14
 (9) PREFERRED STOCK
   (10) PER SHARE AMOUNTS
  13




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Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)(In thousands, except share amounts)Net income (loss) applicable to common shareholders
    
    $
    593
    
    
    $
    244
    
    
    $
    1,241
    
    
    $
    (602
    )Effect of dilutive securities on net income (loss):Convertible debt
    
    
    5
    
    
    
    5
    
    
    
    10
    
    
    
    Convertible preferred stock
    
    
    64
    
    
    
    2
    
    
    
    128
    
    
    
    Net income (loss) applicable to common shareholders, assuming conversions
    
    $
    662
    
    
    $
    251
    
    
    $
    1,379
    
    
    $
    (602
    )Weighted average shares oustanding  Basic
    
    
    11,227,274
    
    
    
    10,503,691
    
    
    
    11,207,633
    
    
    
    10,339,546Effect of dilutive securities on shares outstanding:Options
    
    
    64,492
    
    
    
    15,366
    
    
    
    48,256
    
    
    
    Warrants
    
    
    94,151
    
    
    
    481,148
    
    
    
    50,931
    
    
    
    Convertible debt
    
    
    224,775
    
    
    
    206,612
    
    
    
    226,024
    
    
    
    Convertible preferred stock
    
    
    1,442,884
    
    
    
    227,503
    
    
    
    1,446,499
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    13,053,576
    
    
    
    11,434,320
    
    
    
    12,979,343
    
    
    
    10,339,546
  (11) COMPREHENSIVE INCOME (LOSS)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    668
    
    
    $
    312
    
    
    $
    1,390
    
    
    $
    (458
    )Foreign currency translation adjustment
    
    
    124
    
    
    
    367
    
    
    
    1,128
    
    
    
    164Total comprehensive income (loss)
    
    $
    792
    
    
    $
    679
    
    
    $
    2,518
    
    
    $
    (294
    )
 (12) SEGMENT AND GEOGRAPHIC INFORMATION
  14




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net sales  continuing operationsNorth America
    
    $
    7,997
    
    
    $
    8,377
    
    
    $
    14,755
    
    
    $
    14,371Europe
    
    
    5,908
    
    
    
    3,320
    
    
    
    11,059
    
    
    
    6,941Asia-Pacific
    
    
    2,313
    
    
    
    1,068
    
    
    
    4,687
    
    
    
    2,116Middle East
    
    
    377
    
    
    
    669
    
    
    
    602
    
    
    
    967South America
    
    
    2,808
    
    
    
    1,451
    
    
    
    5,325
    
    
    
    2,490$
    19,403
    
    
    $
    14,885
    
    
    $
    36,428
    
    
    $
    26,885
 June 30,2008(Unaudited)
    
    

December
31,2007(In thousands)Long-lived assets  continuing operationsNorth America
    
    $
    1,759
    
    
    $
    1,345Europe
    
    
    1,704
    
    
    
    1,538Asia-Pacific
    
    
    46
    
    
    
    44South America
    
    
    281
    
    
    
    246$
    3,790
    
    
    $
    3,173
 (13) INCOME TAXES
    15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business  General
   16




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##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Allowance for doubtful accounts
    
    Inventory valuation
    
    Warranty reserve
    
    Intangible assets and goodwill
    
    Income taxes, including deferred tax assets
    
    Revenue recognition
    
    Stock-based compensation
   Results of Operations
  Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    65.2
    
    
    
    69.5
    
    
    
    64.9
    
    
    
    69.5Gross profit
    
    
    34.8
    
    
    
    30.5
    
    
    
    35.1
    
    
    
    30.5Operating expenses:Selling, general and administrative
    
    
    24.8
    
    
    
    24.4
    
    
    
    25.0
    
    
    
    26.8Research and development
    
    
    1.2
    
    
    
    2.4
    
    
    
    1.4
    
    
    
    2.6Total operating expenses
    
    
    26.0
    
    
    
    26.8
    
    
    
    26.4
    
    
    
    29.4Operating income
    
    
    8.8
    
    
    
    3.7
    
    
    
    8.7
    
    
    
    1.1Other income and expense
    
    
    (2.4
    )
    
    
    (1.7
    )
    
    
    (1.4
    )
    
    
    (2.2
    )Income (loss) from continuing operations before
income tax (expense) benefit
    
    
    6.4
    
    
    
    2.0
    
    
    
    7.3
    
    
    
    (1.1
    )Income tax (expense) benefit
    
    
    (2.7
    )
    
    
    0.4
    
    
    
    (2.4
    )
    
    
    0.1Income (loss) from continuing operations before minority
interest in (income) loss of consolidated subsidiary
    
    
    3.7
    
    
    
    2.4
    
    
    
    4.9
    
    
    
    (1.0
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (0.2
    )
    
    
    (0.03
    )
    
    
    (0.9
    )
    
    
    0.1Income (loss) from continuing operations
    
    
    3.5
    
    
    
    2.4
    
    
    
    4.0
    
    
    
    (0.9
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.8
    )Net income (loss)
    
    
    3.5
    %
    
    
    2.1
    %
    
    
    4.0
    %
    
    
    (1.7)
    %
 17




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##### Table of Contents



COMPARISON OF OUR RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
 Net Sales and Gross Profit.
       Selling, General and Administrative.
 18




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##### Table of Contents



Research and Development Expenses.
 Operating Income.
 Other Income (Loss), Foreign Currency Gain, and Interest Expense.
 Income Tax Expense.
 Discontinued Operations.
 Net Income Applicable to Common Shareholders.
 19




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##### Table of Contents



COMPARISON OF OUR RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 Net Sales and Gross Profit.
     Selling, General and Administrative.
 20




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##### Table of Contents



Research and Development Expenses .
 Operating Income.
 Other Income, Foreign Currency Gain, and Interest Expense.
 Income Tax Benefit (Expense).
 Discontinued Operations.
 Net Income (Loss) Applicable to Common Shareholders.
 Industry and Market Overview
  21




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##### Table of Contents



OUR LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows for the Six Months Ended June 30, 2008 and 2007
    Significant Financing Arrangements
  (1)
    
    The existing line of credit with Laurus, which matured June 30, 2008, was replaced with
a new line of credit under the PNC Agreement which increased borrowing capacity from $6.0
million to $8.0 million. The line of credit under the PNC Agreement matures June 30, 2011.(2)
    
    An additional $5.0 million in working capital was provided by the Term Loan under the
BHC Agreement. The Term Loan matures June 30, 2011.(3)
    
    Borrowing capacity on Mobitec ABs lines of credit under agreements with Handelsbanken
was increased from approximately $2.7 million to approximately $4.0 million and the basis
on which borrowings are made under these credit agreements was increased to a maximum of
90% of total invoiced sales of Mobitec AB.(4)
    
    An additional $753,000 in working capital was provided by the Mobitec Loan. The
Mobitec Loan matures June 30, 2011.
 Management Conclusion
  22




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##### Table of Contents



Impact of Inflation
  FORWARD-LOOKING STATEMENTS
   
    
    our ability to meet our capital requirements;
    
    our ability to meet and maintain our existing debt obligations, including obligations to
make payments under such debt instruments;
    
    the sufficiency of our liquidity and capital resources to support current operations for
the remainder of 2008;
    
    our future cash flow position;
    
    recent legislative action affecting the transportation and/or security industry;
    
    changes in federal or state funding for transportation and/or security-related funding;
    
    our future outlook with respect to the domestic and international markets for our products; and
    
    our opinion that increased funding for transit security establishes a positive trend.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  23




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##### Table of Contents



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; and(3)
    
    ensure intercompany profits in ending inventories are properly eliminated.
   Changes in Internal Control over Financial Reporting
  
    
    Management has determined that the control deficiencies in our internal control over
financial reporting with respect to capitalizing direct production labor and overhead in
inventory and eliminating intercompany profits in ending inventories have been remediated.
Managements remediation efforts include preparing a more detailed analysis of direct labor
and overhead costs incurred in production and the amount of such costs to be capitalized in
our inventories as well as a thorough analysis of our subsidiaries inventories that consist
of product received through intercompany transactions. Additionally, we have updated our
procedures to include a review and approval of these analyses by management with the proper
skill and experience levels necessary to ensure inventory is properly recorded in accordance
with generally accepted accounting principles.
    
    The Company expects to conduct its next annual physical inventory on or about January 2,
2009. A greater level of management oversight will be instituted to ensure established
procedures for conducting inventory counts and recording the results of those counts are
performed.
  24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risks Related to Indebtedness, Financial Condition and Results of Operations
 Our substantial debt could adversely affect our financial position, operations and ability to
grow.
 
    
    we could be required to dedicate a substantial portion of our cash flow from operations
to payments on our debt, which would reduce amounts available for working capital, capital
expenditures, research and development and other general corporate purposes;
    
    our flexibility in planning for, or reacting to, changes in our business and the
industries in which we operate could be limited;
    
    we may be more vulnerable to general adverse economic and industry conditions;
    
    we may be at a disadvantage compared to our competitors that may have less debt than we
do;
    
    it may be more difficult for us to obtain additional financing that may be necessary in
connection with our business;
    
    it may be more difficult for us to implement our business and growth strategies; and
    
    we may have to pay higher interest rates on future borrowings.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   25




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
  (1)
    
    To elect seven directors to serve until the annual meeting of shareholders in 2009:
 Against orVotes for
    
    
    WitheldHuelon Andrew Harrison
    
    
    9,320,835
    
    
    
    2,265,074John D. Higgins
    
    
    9,235,864
    
    
    
    2,350,045C. James Meese Jr.
    
    
    9,233,364
    
    
    
    2,352,545Stephanie L. Pinson
    
    
    9,324,535
    
    
    
    2,261,374John K. Pirotte
    
    
    9,236,864
    
    
    
    2,349,045Juliann Tenney, J.D.
    
    
    9,321,535
    
    
    
    2,264,374David L. Turney
    
    
    9,111,794
    
    
    
    2,474,115
 (2)
    
    To amend the DRI Corporation 2003 Stock Option Plan to increase by 900,000 the number
of shares that may be issued pursuant to awards granted under the Plan:
 For
    
    
    4,942,964Against
    
    
    2,703,216Abstain
    
    
    87,933Broker nonvotes
    
    
    3,851,796
 
 ITEM 5. OTHER INFORMATION
  26




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##### Table of Contents



ITEM 6. EXHIBITS
  Exhibit No.
    
    Document3.1
    
    Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference from the Companys
Registration Statement on Form S-3, filed with the SEC on
December 23, 2003)3.2
    
    Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series E
Redeemable Nonvoting Convertible Stock (incorporated herein by
reference from the Companys Report on Form 8-K, filed with
the SEC on November 12, 2003)3.3
    
    Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series F Convertible Preferred Stock
(incorporated herein by reference from the Companys Report on
Form 8-K, filed with the SEC on April 14, 2004)3.4
    
    Articles of Amendment to the Articles of Incorporation of the
Company containing Series AAA Preferred Stock Change in
Quarterly Dividend Accrual and Conversion Price (incorporated
herein by reference to the Companys Report on Form 10-K for
the year ended December 31, 2004)3.5
    
    Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series G Redeemable Convertible Preferred Stock
(incorporated herein by reference to the Companys Report on
Form 8-K filed on June 28, 2005)3.6
    
    Articles of Correction of Articles of Amendment to the
Articles of Incorporation of the Company containing a
correction to an error in the Amended Certificate of
Designation of Series G Redeemable Convertible Preferred Stock
(incorporated herein by reference to the Companys Report on
Form 10-Q for the quarter ended June 30, 2005)3.7
    
    Articles of Amendment to the Articles of Incorporation of the
Company containing an amendment to eliminate a staggered
election of Board members (incorporated herein by reference to
the Companys Report on Form 10-Q for the quarter ended June
30, 2005)3.8
    
    Articles of Amendment to Articles of Incorporation of the
Company containing Amended and Restated Certificate of
Designation of Series H Convertible Preferred Stock
(incorporated herein by reference to the Companys Report on
Form 8-K filed on November 4, 2005)3.9
    
    Articles of Amendment to Articles of Incorporation of the
Company containing Certificate of Designation of Series I
Convertible Preferred Stock (incorporated herein by reference
to the Companys Report on Form 8-K filed on March 23, 2006)3.10
    
    Amended and Restated Bylaws of the Company (incorporated
herein by reference from the Companys Registration Statement
on Form SB-2)3.11
    
    Amendment to Amended and Restated Bylaws of the Company
(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)3.12
    
    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)3.13
    
    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)3.14
    
    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)4.5
    
    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)4.6
    
    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)
 27




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##### Table of Contents



Exhibit No.
    
    Document4.7
    
    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)4.8
    
    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)4.9
    
    Certificate of Designation of Series J Convertible Preferred
Stock of Digital Recorders, Inc. (incorporated herein by
reference to the Companys Report on Form 10-Q for the quarter
ended June 30, 2007)4.10
    
    Warrant, dated as of June 30, 2008, issued by DRI Corporation
to BHC Interim Funding III, L.P. (incorporated herein by
reference to the Companys report on Form 8-K/A filed with the
SEC on August 13, 2008)10.1
    
    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)10.2
    
    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)10.3
    
    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)10.4
    
    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)10.5
    
    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)10.6
    
    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)10.7
    
    Share Purchase Agreement between the Company and Transit
Vehicle Technology Investments, Inc., dated March 21, 2006
(incorporated herein by reference to the Companys Report on
Form 8-K filed on March 23, 2006)10.8
    
    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)10.9
    
    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)10.10
    
    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)
 28




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##### Table of Contents



Exhibit No.
    
    Document10.11
    
    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)10.12
    
    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)10.13
    
    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)10.14
    
    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)10.15
    
    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)10.16
    
    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)10.17
    
    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)10.18
    
    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)10.19
    
    Executive Employment Agreement, effective July 1, 2007, by and
between Mobitec GmbH and Mobitec AB and Oliver Wels (incorporated herein by reference to the Companys Report on Form 10-Q for the
quarter ended March 31, 2008)10.20
    
    Extension Agreement, dated as of April 30, 2008 by and between
DRI Corporation and Digital Audio Corporation. (incorporated
herein by reference to the Companys Report on Form 8-K filed
on May 6, 2008)10.21
    
    Agreement, dated as of June 30, 2008, by and between DRI
Corporation and John D. Higgins (incorporated herein by
reference to the Companys current report on Form 8-K/A filed
with the SEC on August 14, 2008)10.22
    
    Revolving Credit and Security Agreement, dated as of June 30,
2008, by and among, PNC Bank, National Association, and
Digital Recorders, Inc., TwinVision of North America, Inc. and
DRI Corporation (incorporated herein by reference to the
Companys current report on Form 8-K/A filed with the SEC on
August 14, 2008)10.23
    
    Revolving Credit Note, dated as of June 30, 2008, issued by
Digital Recorders, Inc., TwinVision of North America, Inc. and
DRI Corporation to PNC Bank, National Association
(incorporated herein by reference to the Companys current
report on Form 8-K/A filed with the SEC on August 14, 2008)10.24
    
    Loan and Security Agreement, dated as of June 30, 2008, by and
among Digital Recorders, Inc., TwinVision of North America,
Inc. and DRI Corporation, and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys current
report on Form 8-K/A filed with the SEC on August 14, 2008)
 29




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##### Table of Contents



Exhibit No.
    
    Document10.24.1
    
    First Amendment to the Loan and Security Agreement, dated as
of July 30, 2008, by and among Digital Recorders, Inc.,
TwinVision of North America, Inc. and DRI Corporation, and BHC
Interim Funding III, L.P. (incorporated herein by reference to
the Companys current report on Form 8-K/A filed with the SEC
on August 14, 2008)10.25
    
    Senior Secured Term Note, dated as of June 30, 2008, issued by
Digital Recorders, Inc. and TwinVision of North America, Inc.
to BHC Interim Funding III, L.P. (incorporated herein by
reference to the Companys current report on Form 8-K/A filed
with the SEC on August 14, 2008)10.26
    
    Continuing Unconditional Guaranty, dated as of June 30, 2008,
granted by DRI Corporation in favor of BHC Interim Funding
III, L.P. (incorporated herein by reference to the Companys
current report on Form 8-K/A filed with the SEC on August 14,
2008)10.27
    
    Stock Pledge Agreement, dated as of June 30, 2008, by and
between DRI Corporation and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys current
report on Form 8-K/A filed with the SEC on August 14, 2008)10.28
    
    Trademark Security Agreement, dated as of June 30, 2008, by
and between DRI Corporation and BHC Interim Funding III, L.P.
(incorporated herein by reference to the Companys current
report on Form 8-K/A filed with the SEC on August 14, 2008)10.29
    
    Trademark Security Agreement, dated as of June 30, 2008, by
and between Digital Recorders, Inc. and BHC Interim Funding
III, L.P. (incorporated herein by reference to the Companys
current report on Form 8-K/A filed with the SEC on August 14,
2008)10.30
    
    Trademark Security Agreement, dated as of June 30, 2008, by
and between TwinVision of North America, Inc. and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys current report on Form 8-K/A filed with the SEC on
August 14, 2008)10.31
    
    Copyright Security Agreement, dated as of June 30, 2008, by
and between Digital Recorders, Inc. and BHC Interim Funding
III, L.P. (incorporated herein by reference to the Companys
current report on Form 8-K/A filed with the SEC on August 14,
2008)10.32
    
    Copyright Security Agreement, dated as of June 30, 2008, by
and between TwinVision of North America, Inc. and BHC Interim
Funding III, L.P. (incorporated herein by reference to the
Companys current report on Form 8-K/A filed with the SEC on
August 14, 2008)10.33
    
    Patent Security Agreement, dated as of June 30, 2008, by and
between Digital Recorders, Inc. and BHC Interim Funding III,
L.P. (incorporated herein by reference to the Companys
current report on Form 8-K/A filed with the SEC on August 14,
2008)10.34
    
    Undertaking Concerning Loan Payment  for purposes other than
personal consumption, by and between Handelsbanken and Mobitec
AB (English translation). (incorporated herein by reference to
the Companys current report on Form 8-K/A filed with the SEC
on August 14, 2008)10.35
    
    Instrument for Debt A  Loan for purposes other than personal
consumption, by and between Handelsbanken, Mobitec AB (English
translation). (incorporated herein by reference to the
Companys current report on Form 8-K/A filed with the SEC on
August 14, 2008)10.36
    
    Factoring Agreement by and between Handelsbanken and Mobitec
AB (English translation). (incorporated herein by reference to
the Companys current report on Form 8-K/A filed with the SEC
on August 14, 2008)10.37
    
    EURO Short Term loan Facility by and between Handelsbanken and
Mobitec GmbH (incorporated herein by reference to the
Companys current report on Form 8-K/A filed with the SEC on
August 14, 2008)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)
 30




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##### Table of Contents



SIGNATURES
  DRI CORPORATIONSignature:
    /s/ Stephen P. SlayBy:
    Stephen P. SlayTitle:
    Chief Financial Officer (Principal Financial and Accounting Officer)Date:
    August 14, 2008 31