##### 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 September 30, 2007
 Commission
File Number 0-28539
 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
 þ o
  o o þ
 o þ
  Common Stock, par value $.10 per share
    
    11,178,599(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  September 30, 2007 (Unaudited) and December 31, 2006
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended September 30,
2007 and 2006 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2007 and 2006
(Unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4T. Controls and Procedures
    
    
    26PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Securityholders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    33Section 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
  
   September 30, 2007
    
    
    December 31, 2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    238
    
    
    $
    611Trade accounts receivable, net
    
    
    11,056
    
    
    
    10,100Current portion of note receivable
    
    
    86
    
    
    
    Other receivables
    
    
    489
    
    
    
    147Inventories
    
    
    9,078
    
    
    
    9,057Prepaids and other current assets
    
    
    473
    
    
    
    422Assets of discontinued operations
    
    
    
    
    
    
    1,728Total current assets
    
    
    21,420
    
    
    
    22,065Property and equipment, net
    
    
    2,833
    
    
    
    2,906Long-term portion of note receivable
    
    
    258
    
    
    
    Goodwill
    
    
    10,967
    
    
    
    10,289Intangible assets, net
    
    
    1,130
    
    
    
    1,110Deferred tax assets, net
    
    
    203
    
    
    
    191Other assets
    
    
    404
    
    
    
    797Total assets
    
    $
    37,215
    
    
    $
    37,358LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    5,440
    
    
    $
    7,608Notes payable, net
    
    
    500
    
    
    
    1,584Loan payable
    
    
    466
    
    
    
    Current portion of long-term debt
    
    
    250
    
    
    
    254Current portion of foreign tax settlement
    
    
    477
    
    
    
    393Accounts payable
    
    
    5,014
    
    
    
    5,560Accrued expenses
    
    
    3,990
    
    
    
    2,921Preferred stock dividends payable
    
    
    17
    
    
    
    23Liabilities of discontinued operations
    
    
    
    
    
    
    74Total current liabilities
    
    
    16,154
    
    
    
    18,417Long-term debt and capital leases, long-term
    
    
    26
    
    
    
    42Foreign tax settlement, long-term
    
    
    1,089
    
    
    
    1,087Deferred tax liabilities
    
    
    335
    
    
    
    383Minority interest in consolidated subsidiary
    
    
    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
    
    
    
    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
    
    
    
    1,613Series 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
    
    
    
    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
    
    
    
    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
    
    
    
    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
    
    
    
    1,004Additional paid-in capital
    
    
    32,077
    
    
    
    31,517Accumulated other comprehensive income  foreign currency translation
    
    
    4,404
    
    
    
    3,397Accumulated deficit
    
    
    (21,982
    )
    
    
    (22,414
    )Total shareholders equity
    
    
    19,219
    
    
    
    17,195Total liabilities and shareholders equity
    
    $
    37,215
    
    
    $
    37,358
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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    13,929
    
    
    $
    12,371
    
    
    $
    40,814
    
    
    $
    36,085Cost of sales
    
    
    9,520
    
    
    
    9,011
    
    
    
    27,738
    
    
    
    25,246Gross profit
    
    
    4,409
    
    
    
    3,360
    
    
    
    13,076
    
    
    
    10,839Operating expensesSelling, general and administrative
    
    
    3,174
    
    
    
    3,756
    
    
    
    10,351
    
    
    
    11,047Research and development
    
    
    329
    
    
    
    314
    
    
    
    1,024
    
    
    
    913Total operating expenses
    
    
    3,503
    
    
    
    4,070
    
    
    
    11,375
    
    
    
    11,960Operating income (loss)
    
    
    906
    
    
    
    (710
    )
    
    
    1,701
    
    
    
    (1,121
    )Other income (loss)
    
    
    4
    
    
    
    24
    
    
    
    43
    
    
    
    (17
    )Foreign currency gain
    
    
    130
    
    
    
    11
    
    
    
    151
    
    
    
    100Interest expense
    
    
    (276
    )
    
    
    (330
    )
    
    
    (924
    )
    
    
    (818
    )Total other income and expense
    
    
    (142
    )
    
    
    (295
    )
    
    
    (730
    )
    
    
    (735
    )Income (loss) from continuing operations before income tax expense
    
    
    764
    
    
    
    (1,005
    )
    
    
    971
    
    
    
    (1,856
    )Income tax expense
    
    
    (138
    )
    
    
    (59
    )
    
    
    (162
    )
    
    
    (175
    )Income (loss) from continuing operations before minority interest in
income of consolidated subsidiary
    
    
    626
    
    
    
    (1,064
    )
    
    
    809
    
    
    
    (2,031
    )Minority interest in income of consolidated subsidiary
    
    
    (127
    )
    
    
    (159
    )
    
    
    (158
    )
    
    
    (229
    )Income (loss) from continuing operations
    
    
    499
    
    
    
    (1,223
    )
    
    
    651
    
    
    
    (2,260
    )Income (loss) from discontinued operations (Note 2)
    
    
    
    
    
    
    212
    
    
    
    (219
    )
    
    
    333Net income (loss)
    
    
    499
    
    
    
    (1,011
    )
    
    
    432
    
    
    
    (1,927
    )Provision for preferred stock dividends
    
    
    (76
    )
    
    
    (77
    )
    
    
    (220
    )
    
    
    (221
    )Amortization for discount on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )Net income (loss) applicable to common shareholders
    
    $
    423
    
    
    $
    (1,088
    )
    
    $
    212
    
    
    $
    (2,197
    )Net income (loss) per share  basicContinuing operations
    
    $
    0.04
    
    
    $
    (0.13
    )
    
    $
    0.04
    
    
    $
    (0.26
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.03Income (loss) per share applicable to common shareholders
    
    $
    0.04
    
    
    $
    (0.11
    )
    
    $
    0.02
    
    
    $
    (0.22
    )Net income (loss) per share  dilutedContinuing operations
    
    $
    0.04
    
    
    $
    (0.13
    )
    
    $
    0.04
    
    
    $
    (0.26
    )Discontinued operations
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.03Income (loss) per share applicable to common shareholders
    
    $
    0.04
    
    
    $
    (0.11
    )
    
    $
    0.02
    
    
    $
    (0.22
    )Weighted average number of common shares and common
share equivalent outstandingBasic
    
    
    11,131,248
    
    
    
    9,801,789
    
    
    
    10,606,347
    
    
    
    9,777,044Diluted
    
    
    11,711,753
    
    
    
    9,801,789
    
    
    
    11,020,059
    
    
    
    9,777,044
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Nine Months Ended September 30,2007
    
    
    2006Cash flows from operating activitiesNet income (loss)
    
    $
    432
    
    
    $
    (1,927
    )(Loss) income from discontinued operations
    
    
    (219
    )
    
    
    333Income (loss) from continuing operations
    
    
    651
    
    
    
    (2,260
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activitiesDeferred income taxes
    
    
    (53
    )
    
    
    3Depreciation and amortization of property and equipment
    
    
    810
    
    
    
    873Amortization of intangible assets
    
    
    100
    
    
    
    83Amortization of deferred financing costs
    
    
    216
    
    
    
    210Amortization of beneficial conversion feature
    
    
    
    
    
    
    81Amortization of the fair value of warrants
    
    
    188
    
    
    
    192Bad debt expense
    
    
    22
    
    
    
    300Stock issued in lieu of cash compensation
    
    
    57
    
    
    
    63Stock-based compensation expense
    
    
    28
    
    
    
    5Write-down of inventory for obsolescence
    
    
    119
    
    
    
    114(Gain) loss on sale of fixed assets
    
    
    (3
    )
    
    
    9Other, primarily effect of foreign currency gain/loss
    
    
    (272
    )
    
    
    (124
    )Minority interest in income of consolidated subsidiary
    
    
    158
    
    
    
    229Changes in operating assets and liabilitiesIncrease in trade accounts receivable
    
    
    (344
    )
    
    
    (2,636
    )Increase in other receivables
    
    
    (301
    )
    
    
    (238
    )(Increase) decrease in inventories
    
    
    302
    
    
    
    (650
    )Increase in prepaids and other current assets
    
    
    (34
    )
    
    
    (55
    )Increase in other assets
    
    
    
    
    
    
    (6
    )Increase (decrease) in accounts payable
    
    
    (729
    )
    
    
    135Increase (decrease) in accrued expenses
    
    
    877
    
    
    
    (11
    )Decrease in foreign tax settlement
    
    
    (128
    )
    
    
    Net cash provided by (used in) continuing operations
    
    
    1,664
    
    
    
    (3,683
    )Net cash (used in) provided by discontinued operations
    
    
    (68
    )
    
    
    754Net cash provided by (used in) operating activities
    
    
    1,596
    
    
    
    (2,929
    )Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    65
    
    
    
    3Purchases of property and equipment
    
    
    (195
    )
    
    
    (142
    )Investments in software development
    
    
    (472
    )
    
    
    (153
    )Proceeds from sale of DAC
    
    
    1,100
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    498
    
    
    
    (292
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (21
    )Net cash provided by (used in) investing activities
    
    
    498
    
    
    
    (313
    )Cash flows from financing activitiesProceeds from bank borrowings and lines of credit
    
    
    48,267
    
    
    
    49,849Principal payments on bank borrowings and lines of credit
    
    
    (51,264
    )
    
    
    (47,056
    )Issuance of common stock
    
    
    173
    
    
    
    Proceeds from issuance of Preferred stock, net of costs
    
    
    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
    )
    
    
    (101
    )Net cash (used in) provided by financing activities
    
    
    (2,505
    )
    
    
    2,767Effect of exchange rate changes on cash and cash equivalents
    
    
    38
    
    
    
    52Net decrease in cash and cash equivalents
    
    
    (373
    )
    
    
    (423
    )Cash and cash equivalents at beginning of period
    
    
    611
    
    
    
    807Cash and cash equivalents at end of period
    
    $
    238
    
    
    $
    384
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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
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DRI CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 ()
  (1) BASIS OF PRESENTATION AND DISCLOSURE
      7




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Product Warranties
  Nine Months ended September 30,2007
    
    
    2006Balance at beginning of period
    
    $
    384
    
    
    $
    214Additions charged to costs and expenses
    
    
    54
    
    
    
    145Deductions
    
    
    (118
    )
    
    
    (113
    )Foreign exchange translation loss
    
    
    15
    
    
    
    11Balance at end of period
    
    $
    335
    
    
    $
    257
 Recent Accounting Pronouncements
   (2) DISCONTINUED OPERATIONS
  8




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Accounting for the Impairment or Disposal of Long-Lived
Assets
 Three Months Ended September 30,
    
    Nine Months Ended 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
  9




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(4) INVENTORIES
 September 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands)Raw materials and system components
    
    $
    6,564
    
    
    $
    5,966Work in process
    
    
    129
    
    
    
    119Finished goods
    
    
    2,385
    
    
    
    2,972Total inventories
    
    $
    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 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006(In thousands)Salaries, commissions, and benefits
    
    $
    1,328
    
    
    $
    1,176Taxes  payroll, sales, income, and other
    
    
    822
    
    
    
    620Warranties
    
    
    335
    
    
    
    384Current portion of capital leases
    
    
    23
    
    
    
    22Interest payable
    
    
    130
    
    
    
    51Deferred revenue
    
    
    921
    
    
    
    196Other
    
    
    431
    
    
    
    472Total accrued expenses
    
    $
    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.
 10




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11




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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
 12




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##### Table of Contents



(8) LONG-TERM DEBT
  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
     13




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(10) PER SHARE AMOUNTS
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)(In thousands, except share amounts)Net income (loss) applicable to common shareholders
    
    $
    423
    
    
    $
    (1,088
    )
    
    $
    212
    
    
    $
    (2,197
    )Effect of dilutive securities on net income (loss):Convertible debt
    
    
    5
    
    
    
    
    
    
    
    6
    
    
    
    Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) applicable to common shareholders, assuming conversions
    
    $
    428
    
    
    $
    (1,088
    )
    
    $
    218
    
    
    $
    (2,197
    )Weighted average shares oustanding  Basic
    
    
    11,131,248
    
    
    
    9,801,789
    
    
    
    10,606,347
    
    
    
    9,777,044Effect of dilutive securities on shares outstanding:Options
    
    
    188,268
    
    
    
    
    
    
    
    41,623
    
    
    
    Warrants
    
    
    176,333
    
    
    
    
    
    
    
    372,089
    
    
    
    Convertible debt
    
    
    206,612
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    9,292
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  Diluted
    
    
    11,711,753
    
    
    
    9,801,789
    
    
    
    11,020,059
    
    
    
    9,777,044
  14




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##### Table of Contents



(11) COMPREHENSIVE INCOME (LOSS)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    499
    
    
    $
    (1,011
    )
    
    $
    432
    
    
    $
    (1,927
    )Foreign currency translation adjustment
    
    
    843
    
    
    
    120
    
    
    
    1,007
    
    
    
    1,076Total comprehensive income (loss)
    
    $
    1,342
    
    
    $
    (891
    )
    
    $
    1,439
    
    
    $
    (851
    )
 (12) SEGMENT AND GEOGRAPHIC INFORMATION
   15




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##### Table of Contents



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
    
    $
    2,554
    
    
    $
    2,947Europe
    
    
    11,389
    
    
    
    10,830Asia-Pacific
    
    
    31
    
    
    
    31South America
    
    
    230
    
    
    
    184$
    14,204
    
    
    $
    13,992
 (13) INCOME TAXES
     16




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(14) SUBSEQUENT EVENT
  17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Business  General
  ® ® TM ®
  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; and§
    
    Stock-based compensation.
   18




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Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    68.3
    
    
    
    72.8
    
    
    
    68.0
    
    
    
    70.0Gross profit
    
    
    31.7
    
    
    
    27.2
    
    
    
    32.0
    
    
    
    30.0Operating expenses:Selling, general and administrative
    
    
    22.8
    
    
    
    30.4
    
    
    
    25.4
    
    
    
    30.6Research and development
    
    
    2.4
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.5Total operating expenses
    
    
    25.2
    
    
    
    32.9
    
    
    
    27.9
    
    
    
    33.1Operating income (loss)
    
    
    6.5
    
    
    
    (5.7
    )
    
    
    4.1
    
    
    
    (3.1
    )Other income and expense
    
    
    (1.0
    )
    
    
    (2.4
    )
    
    
    (1.8
    )
    
    
    (2.0
    )Income (loss) from continuing operations before
income tax expense
    
    
    5.5
    
    
    
    (8.1
    )
    
    
    2.3
    
    
    
    (5.1
    )Income tax expense
    
    
    (1.0
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.5
    )Income (loss) from continuing operations before minority
interest in income of consolidated subsidiary
    
    
    4.5
    
    
    
    (8.6
    )
    
    
    1.9
    
    
    
    (5.6
    )Minority interest in income of consolidated subsidiary
    
    
    (0.9
    )
    
    
    (1.3
    )
    
    
    (0.4
    )
    
    
    (0.6
    )Income (loss) from continuing operations
    
    
    3.6
    
    
    
    (9.9
    )
    
    
    1.5
    
    
    
    (6.2
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    1.7
    
    
    
    (0.5
    )
    
    
    0.9Net income (loss)
    
    
    3.6
    %
    
    
    (8.2
    )%
    
    
    1.0
    %
    
    
    (5.3
    )%
 COMPARISON OF OUR RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Net Sales and Gross Profit.
    19




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Selling, General and Administrative.
 Research and Development Expenses .
  Operating Income (Loss).
 Other Income, Foreign Currency Gain, and Interest Expense.
 20




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Income Tax Expense.
 Discontinued Operations.
 Net Income (Loss) Applicable to Common Shareholders.
 COMPARISON OF OUR RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Net Sales and Gross Profit.
   .
  Selling, General and Administrative.
 21




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Research and Development Expenses .
  Operating Income (Loss).
 Other Income, Foreign Currency Gain, and Interest Expense.
 Income Tax Expense.
 Discontinued Operations.
 22




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Net Income (Loss) Applicable to Common Shareholders.
 Future Outlook
 Domestic Market.
   International Market.
 Long-Term Outlook.
 OUR LIQUIDITY AND CAPITAL RESOURCES
 For the Nine months Ended September 30, 2007 and 2006
  23




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Credit Agreements
       Note Payable.
 24




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Long-term Debt.
 Divestiture of Digital Audio Corporation and Use of Proceeds
   Management Conclusion
   Impact of Inflation
  Subsequent Event
  25




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®
 FORWARD-LOOKING STATEMENTS
   
    
    our ability to continue as a going concern;
    
    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 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.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4T. CONTROLS AND PROCEDURES
 Introduction
  26




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Evaluation of Disclosure Controls and Procedures
   Required Reporting on Internal Control Over Financial Reporting
   27




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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;
 28




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##### Table of Contents




    
    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
    
 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)
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##### Table of Contents



Exhibit No.
    
    Document3.3
    
    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)
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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)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)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)
 31




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##### Table of Contents



Exhibit No.
    
    Document10.12
    
    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)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)
 32




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##### Table of Contents



SIGNATURES
  DRI CORPORATION
 Signature:
By:
    
    /s/ Stephen P. Slay                  

Stephen P. SlayTitle:
    
    Chief Financial Officer (Principal Financial and Accounting Officer)Date:
    
    November 13, 2007
 33