##### 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 March 31, 2008
 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)
 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  Common Stock, par value $.10 per share
    
    11,210,615(Class of Common Stock)
    
    Number of Shares




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##### 



DRI CORPORATION AND SUBSIDIARIES
 INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations  Three Months Ended March 31, 2008 and 2007
(Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Three Months Ended March 31, 2008 and 2007
(Unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Securityholders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    27Executive Employment AgreementSection 302 Certification - David L. TurneySection 302 Certification - Stephen P. SlaySection 906 Certification - David L. TurneySection 906 Certification - Stephen P. Turney
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
  
    December 31, 2007March 31, 2008
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    1,372
    
    
    $
    729Trade accounts receivable, net
    
    
    14,107
    
    
    
    11,919Current portion of note receivable
    
    
    86
    
    
    
    86Other receivables
    
    
    652
    
    
    
    465Inventories
    
    
    11,026
    
    
    
    9,603Prepaids and other current assets
    
    
    661
    
    
    
    495Total current assets
    
    
    27,904
    
    
    
    23,297Property and equipment, net
    
    
    3,138
    
    
    
    2,890Long-term portion of note receivable
    
    
    258
    
    
    
    258Goodwill
    
    
    11,879
    
    
    
    11,033Intangible assets, net
    
    
    1,131
    
    
    
    1,097Deferred tax assets, net
    
    
    30
    
    
    
    56Other assets
    
    
    158
    
    
    
    283Total assets
    
    $
    44,498
    
    
    $
    38,914LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    7,624
    
    
    $
    6,043Notes payable, net
    
    
    500
    
    
    
    500Loans payable
    
    
    564
    
    
    
    391Current portion of long-term debt
    
    
    253
    
    
    
    254Current portion of foreign tax settlement
    
    
    511
    
    
    
    499Accounts payable
    
    
    7,219
    
    
    
    6,246Accrued expenses
    
    
    4,440
    
    
    
    3,681Preferred stock dividends payable
    
    
    20
    
    
    
    18Total current liabilities
    
    
    21,131
    
    
    
    17,632Long-term debt and capital leases, long-term
    
    
    8
    
    
    
    14Foreign tax settlement, long-term
    
    
    975
    
    
    
    1,043Liability for uncertain tax positions
    
    
    442
    
    
    
    311Minority interest in consolidated subsidiary
    
    
    718
    
    
    
    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 March 31, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company at any time
    
    
    337
    
    
    
    355Series G Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 418 and 410
shares issued and outstanding at March 31, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company after five years
from date of issuance
    
    
    1,808
    
    
    
    1,768Series H Redeemable, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 600 shares authorized; 60 and 59
shares issued and outstanding at March 31, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company after five years
from date of issuance
    
    
    252
    
    
    
    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 March 31, 2008, and December 31, 2007;
redeemable at the discretion of the Company at any time
    
    
    388
    
    
    
    388Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value,
liquidation preference of $5,000 per share; 20,000 shares authorized; 166 and 172
shares issued and outstanding at March 31, 2008, and December 31, 2007,
respectively; redeemable at the discretion of the Company at any time
    
    
    830
    
    
    
    860Common stock, $ .10 par value, 25,000,000 shares authorized; 11,208,635 and
11,187,993 shares issued and outstanding at March 31, 2008 and December
31, 2007, respectively
    
    
    1,121
    
    
    
    1,119Additional paid-in capital
    
    
    32,086
    
    
    
    32,079Accumulated other comprehensive income  foreign currency translation
    
    
    5,574
    
    
    
    4,570Accumulated deficit
    
    
    (21,172
    )
    
    
    (21,894
    )Total shareholders equity
    
    
    21,224
    
    
    
    19,492Total liabilities, minority interest and shareholders equity
    
    $
    44,498
    
    
    $
    38,914
  3




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Three Months Ended March 31,2008
    
    
    2007Net sales
    
    $
    17,025
    
    
    $
    12,000Cost of sales
    
    
    10,993
    
    
    
    8,323Gross profit
    
    
    6,032
    
    
    
    3,677Operating expensesSelling, general and administrative
    
    
    4,309
    
    
    
    3,601Research and development
    
    
    287
    
    
    
    332Total operating expenses
    
    
    4,596
    
    
    
    3,933Operating income (loss)
    
    
    1,436
    
    
    
    (256
    )Other income
    
    
    92
    
    
    
    11Foreign currency gain (loss)
    
    
    163
    
    
    
    (24
    )Interest expense
    
    
    (303
    )
    
    
    (315
    )Total other income and expense
    
    
    (48
    )
    
    
    (328
    )Income (loss) from continuing operations before income tax expense
    
    
    1,388
    
    
    
    (584
    )Income tax expense
    
    
    (370
    )
    
    
    (34
    )Income (loss) from continuing operations before minority interest in
(income) loss of consolidated subsidiary
    
    
    1,018
    
    
    
    (618
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (296
    )
    
    
    25Income (loss) from continuing operations
    
    
    722
    
    
    
    (593
    )Loss from discontinued operations (Note 2)
    
    
    
    
    
    
    (177
    )Net income (loss)
    
    
    722
    
    
    
    (770
    )Provision for preferred stock dividends
    
    
    (74
    )
    
    
    (76
    )Net income (loss) applicable to common shareholders
    
    $
    648
    
    
    $
    (846
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.06
    
    
    $
    (0.07
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.02
    )Income (loss) per share applicable to common shareholders
    
    $
    0.06
    
    
    $
    (0.08
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.06
    
    
    $
    (0.07
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.02
    )Income (loss) per share applicable to common shareholders
    
    $
    0.06
    
    
    $
    (0.08
    )Weighted average number of common shares and common
share equivalent outstandingBasic
    
    
    11,197,563
    
    
    
    10,173,578Diluted
    
    
    12,873,397
    
    
    
    10,173,578
  4




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Three Months Ended March 31,2008
    
    
    2007Cash flows from operating activitiesNet income (loss)
    
    $
    722
    
    
    $
    (770
    )Loss from discontinued operations
    
    
    
    
    
    
    (177
    )Income (loss) from continuing operations
    
    
    722
    
    
    
    (593
    )Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activitiesDeferred income taxes
    
    
    30
    
    
    
    (15
    )Liability for uncertain tax positions
    
    
    103
    
    
    
    Depreciation and amortization of property and equipment
    
    
    233
    
    
    
    280Amortization of intangible assets
    
    
    39
    
    
    
    30Amortization of deferred financing costs
    
    
    63
    
    
    
    83Amortization of the fair value of warrants
    
    
    57
    
    
    
    69Bad debt expense
    
    
    41
    
    
    
    Stock issued in lieu of cash compensation
    
    
    19
    
    
    
    21Stock-based compensation expense
    
    
    17
    
    
    
    9Write-down of inventory for obsolescence
    
    
    4
    
    
    
    Loss on sale of fixed assets
    
    
    2
    
    
    
    1Other, primarily effect of foreign currency gain
    
    
    (91
    )
    
    
    (8
    )Minority interest in income (loss) of consolidated subsidiary
    
    
    296
    
    
    
    (25
    )Changes in operating assets and liabilities(Increase) decrease in trade accounts receivable
    
    
    (1,780
    )
    
    
    952Increase in other receivables
    
    
    (159
    )
    
    
    (225
    )Increase in inventories
    
    
    (1,136
    )
    
    
    (100
    )(Increase) decrease in prepaids and other current assets
    
    
    (148
    )
    
    
    67Decrease in other assets
    
    
    5
    
    
    
    Increase (decrease) in accounts payable
    
    
    729
    
    
    
    (301
    )Increase in accrued expenses
    
    
    628
    
    
    
    209Increase (decrease) in foreign tax settlement
    
    
    (85
    )
    
    
    39Net cash (used in) provided by continuing operations
    
    
    (411
    )
    
    
    493Net cash provided by discontinued operations
    
    
    
    
    
    
    3Net cash (used in) provided by operating activities
    
    
    (411
    )
    
    
    496Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    
    
    
    
    39Purchases of property and equipment
    
    
    (107
    )
    
    
    (80
    )Investments in software development
    
    
    (255
    )
    
    
    (98
    )Net cash used in investing activities
    
    
    (362
    )
    
    
    (139
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    19,501
    
    
    
    16,633Principal payments on bank borrowings and lines of credit
    
    
    (18,069
    )
    
    
    (16,975
    )Payment of dividends on Preferred stock
    
    
    (27
    )
    
    
    (36
    )Net cash provided by (used in) financing activities
    
    
    1,405
    
    
    
    (378
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    11
    
    
    
    14Net increase (decrease) in cash and cash equivalents
    
    
    643
    
    
    
    (7
    )Cash and cash equivalents at beginning of period
    
    
    729
    
    
    
    611Cash and cash equivalents at end of period
    
    $
    1,372
    
    
    $
    604Supplemental disclosures of non-cash investing and financing activities:Conversion of preferred stock to common stock
    
    $
    55
    
    
    $
    520Preferred stock dividends
    
    $
    45
    
    
    $
    40
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DRI CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 ()
  (1) BASIS OF PRESENTATION AND DISCLOSURE
     Product Warranties
  6




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Three Months ended March 31,2008
    
    
    2007Balance at beginning of period
    
    $
    491
    
    
    $
    384Additions charged to costs and expenses
    
    
    41
    
    
    
    Deductions
    
    
    (68
    )
    
    
    (20
    )Foreign exchange translation loss (gain)
    
    
    15
    
    
    
    (2
    )Balance at end of period
    
    $
    479
    
    
    $
    362
 Recent Accounting Pronouncements
     (2) DISCONTINUED OPERATIONS
  7




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##### Table of Contents



Accounting for the Impairment or Disposal of Long-Lived
Assets
 Three months ended March 31,2007(In thousands)Net sales
    
    $
    168Loss before income tax expense
    
    
    (177
    )
 (3) GOODWILL AND OTHER INTANGIBLE ASSETS
  (4) INVENTORIES
 March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Raw materials and system components
    
    $
    7,544
    
    
    $
    6,496Work in process
    
    
    292
    
    
    
    176Finished goods
    
    
    3,190
    
    
    
    2,931Total inventories
    
    $
    11,026
    
    
    $
    9,603
 (5) PROPERTY AND EQUIPMENT
 EstimatedDepreciable
    
    March 31,
    
    
    December 31,Lives (years)
    
    2008
    
    
    2007(In thousands)Leasehold improvements
    
    5 - 9
    
    $
    278
    
    
    $
    278Automobiles
    
    5
    
    
    16
    
    
    
    16Computer and telecommunications equipment
    
    3
    
    
    885
    
    
    
    857Software
    
    3 - 5
    
    
    4,793
    
    
    
    4,434Test equipment
    
    3 - 5
    
    
    127
    
    
    
    123Furniture and fixtures
    
    3 - 7
    
    
    2,939
    
    
    
    2,730Software projects in progress
    
    
    
    
    836
    
    
    
    6689,874
    
    
    
    9,106Less accumulated depreciation and amortization
    
    
    
    
    6,736
    
    
    
    6,216Total property and equipment, net
    
    
    
    $
    3,138
    
    
    $
    2,890
 8




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##### Table of Contents



(6) ACCRUED EXPENSES
 March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Salaries, commissions, and benefits
    
    $
    1,664
    
    
    $
    1,429Taxes  payroll, sales, income, and other
    
    
    1,109
    
    
    
    1,020Warranties
    
    
    479
    
    
    
    491Current portion of capital leases
    
    
    24
    
    
    
    23Interest payable
    
    
    202
    
    
    
    172Deferred revenue
    
    
    204
    
    
    
    303Other
    
    
    758
    
    
    
    243Total accrued expenses
    
    $
    4,440
    
    
    $
    3,681
 (7) LINES OF CREDIT, NOTES PAYABLE AND LOANS PAYABLE
 (a) Domestic line of credit and note payable
   b) International lines of credit and loans payable
     9




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##### Table of Contents



March 31,
    
    
    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 8.25% and 9.80% in 2008 and 2007, respectively
    
    $
    4,500
    
    
    $
    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 6.10% and 4.92% in 2008 and 2007, respectively
    
    
    946
    
    
    
    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 6.40% and 5.36% in 2008 and 2007, respectively
    
    
    1,523
    
    
    
    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
    
    
    655
    
    
    
    103Total lines of credit
    
    $
    7,624
    
    
    $
    6,043
 (8) LONG-TERM DEBT
  March 31,
    
    
    December 31,2008
    
    
    2007(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
    
    
    3
    
    
    
    4Total long-term debt
    
    
    253
    
    
    
    254Less current portion
    
    
    253
    
    
    
    254
    
    
    
    Long-term portion of capital leases
    
    
    8
    
    
    
    14Total long-term debt and capital leases, less current portion
    
    $
    8
    
    
    $
    14
 (9) PREFERRED STOCK
   10




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(10) PER SHARE AMOUNTS
  Three months ended March 31,2008
    
    
    2007(Unaudited)(In thousands, except share amounts)Net income (loss) applicable to common shareholders
    
    $
    648
    
    
    $
    (846
    )Effect of dilutive securities on net income (loss):Convertible debt
    
    
    3
    
    
    
    Convertible preferred stock
    
    
    63
    
    
    
    Net income (loss) applicable to common shareholders, assuming conversions
    
    $
    714
    
    
    $
    (846
    )Weighted average shares outstanding  Basic
    
    
    11,197,563
    
    
    
    10,173,578Effect of dilutive securities on shares outstanding:Options
    
    
    23,238
    
    
    
    Warrants
    
    
    19,849
    
    
    
    Convertible debt
    
    
    206,612
    
    
    
    Convertible preferred stock
    
    
    1,426,135
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    12,873,397
    
    
    
    10,173,578
  (11) COMPREHENSIVE INCOME (LOSS)
  Three Months Ended March 31,2008
    
    
    2007(Unaudited)(In thousands)Net income (loss)
    
    $
    722
    
    
    $
    (770
    )Foreign currency translation adjustment
    
    
    1,004
    
    
    
    (203
    )Total comprehensive income (loss)
    
    $
    1,726
    
    
    $
    (973
    )
 11




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(12) SEGMENT AND GEOGRAPHIC INFORMATION
  Three Months Ended March 31,2008
    
    
    2007(Unaudited)(In thousands)Net sales  continuing operationsNorth America
    
    $
    6,758
    
    
    $
    5,994Europe
    
    
    5,151
    
    
    
    3,621Asia-Pacific
    
    
    2,374
    
    
    
    1,047Middle East
    
    
    225
    
    
    
    299South America
    
    
    2,517
    
    
    
    1,039$
    17,025
    
    
    $
    12,000
 March 31,2008
    
    
    December 31,(Unaudited)
    
    
    2007(In thousands)Long-lived assets  continuing operationsNorth America
    
    $
    1,334
    
    
    $
    1,345Europe
    
    
    1,660
    
    
    
    1,538Asia-Pacific
    
    
    49
    
    
    
    44South America
    
    
    253
    
    
    
    246$
    3,296
    
    
    $
    3,173
 (13) INCOME TAXES
   12




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(14) SUBSEQUENT EVENTS
  13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business  General
 ® ® ®
  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
  14




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Three Months Ended March 31,2008
    
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    64.6
    
    
    
    69.4Gross profit
    
    
    35.4
    
    
    
    30.6Operating expenses:Selling, general and administrative
    
    
    25.3
    
    
    
    30.0Research and development
    
    
    1.7
    
    
    
    2.8Total operating expenses
    
    
    27.0
    
    
    
    32.8Operating income (loss)
    
    
    8.4
    
    
    
    (2.1
    )Other income and expense
    
    
    (0.3
    )
    
    
    (2.7
    )Income (loss) from continuing operations before
income tax expense
    
    
    8.1
    
    
    
    (4.9
    )Income tax expense
    
    
    (2.2
    )
    
    
    (0.3
    )Income (loss) from continuing operations before minority
interest in (income) loss of consolidated subsidiary
    
    
    5.9
    
    
    
    (5.2
    )Minority interest in (income) loss of consolidated subsidiary
    
    
    (1.7
    )
    
    
    0.2Income (loss) from continuing operations
    
    
    4.2
    
    
    
    (4.9
    )Loss from discontinued operations
    
    
    
    
    
    
    (1.5
    )Net income (loss)
    
    
    4.2
    %
    
    
    (6.4
    )%
 COMPARISON OF OUR RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 Net Sales and Gross Profit.
     15




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Selling, General and Administrative.
 Research and Development Expenses .
  Operating Income (Loss).
 Other Income, Foreign Currency Gain (Loss), and Interest Expense.
 Income Tax Expense.
 16




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Discontinued Operations.
 Net Income (Loss) Applicable to Common Shareholders.
 Industry and Market Overview
   OUR LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows For the Three months Ended March 31, 2008 and 2007
   17




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Credit Agreements
  Wall Street Journal
        18




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Management Conclusion
  Impact of Inflation
  FORWARD-LOOKING STATEMENTS
   
    
    our ability to continue as a going concern because of our inability to repay amounts due
under our line of credit with Laurus, which matures on June 30, 2008;
 
    
    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;
 
    
    our ability to refinance our Laurus credit facility;
 
    
    our future cash flow position;
 
    
    our ability to obtain lender financing sufficient to meet our working capital requirements;
 
    
    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,
including our belief that the recent upturn in the U.S. market will be long-term; and
 
    
    our opinion that increased funding for transit security establishes a positive trend.
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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  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
  
    
    Changes 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 are occurring, including preparing a more detailed analysis of direct labor
and overhead costs
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##### Table of Contents



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.
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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
 There is substantial doubt concerning our ability to continue as a going concern
 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.
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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 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
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##### Table of Contents



Exhibit No.
    
    DocumentRedeemable 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)4.7
    
    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)10.1
    
    Secured Non-Convertible Revolving Note between the Company and
Laurus Master Fund, Ltd.,
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##### Table of Contents



Exhibit No.
    
    Documentdated 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)10.11
    
    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)
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##### Table of Contents



Exhibit No.
    
    Document10.16
    
    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 (filed
herewith)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)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 CORPORATION
 Signature:
    
    /s/ STEPHEN P. SLAYBy:
    
    Stephen P. SlayTitle:
    
    Chief Financial Officer (Principal Financial and Accounting Officer)Date:
    
    May 15, 2008
 27