exv10w3



 





Exhibit 10.3



NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED
BY SUCH SECURITIES.



DIGITAL RECORDERS, INC.




WARRANT




			
	Warrant No.
2004-13
	 	Original Issue Date: October 6, 2004







     Digital Recorders, Inc., a North Carolina corporation (the “Company”),
hereby certifies that, for value received, RIVERVIEW GROUP, LLC or its
registered assigns (the “Holder”), is entitled to purchase from the Company up
to a total of 241,546 shares of Common Stock (each such share, a “Warrant
Share” and all such shares, the “Warrant Shares”), at any time and from time to
time from and after the sixth-month anniversary of the Original Issue Date and
through and including October 5, 2009 (the “Expiration Date”), and subject to
the following terms and conditions:



     1. Definitions. As used in this Warrant, the following terms shall have
the respective definitions set forth in this Section 1. Capitalized terms that
are used and not defined in this Warrant that are defined in the Purchase
Agreement (as defined below) shall have the respective definitions set forth in
the Purchase Agreement.



     “Business Day” means any day except Saturday, Sunday and any day that is a
federal legal holiday in the United States or a day on which banking
institutions in the State of New York are authorized or required by law or
other government action to close.



     “Common Stock” means the common stock of the Company, par value $0.10 per
share, and any securities into which such common stock may hereafter be
reclassified.



1









 





     “Exercise Price” means $6.00, subject to adjustment in accordance with
Section 9.



     “New York Courts” means the state and federal courts sitting in the City
of New York, Borough of Manhattan.



     “Original Issue Date” means the Original Issue Date first set forth on the
first page of this Warrant.



     “Purchase Agreement” means the Securities Purchase Agreement, dated
October 5, 2004, to which the Company and the original Holder are parties.



     “Trading Day” means (i) a day on which the Common Stock is traded on a
Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock
is not listed on a Trading Market (other than the OTC Bulletin Board), a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any
Trading Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not
listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
shall mean a Business Day.



     2. Registration of Warrant. The Company shall register this Warrant upon
records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, absent actual notice to
the contrary.



     3. Registration of Transfers. The Company shall register the transfer of
any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and signed,
to the Company at its address specified herein. Upon any such registration or
transfer, a new Warrant to purchase Common Stock, in substantially the form of
this Warrant (any such new Warrant, a “New Warrant”), evidencing the portion of
this Warrant so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if any,
shall be issued to the transferring Holder. The acceptance of the New Warrant
by the transferee thereof shall be deemed the acceptance by such transferee of
all of the rights and obligations of a holder of a Warrant.



     4. Exercise and Duration of Warrants. This Warrant shall be exercisable
by the registered Holder at any time and from time to time on or after the six
month anniversary of the Original Issue Date through and including the
Expiration Date. At 6:30 p.m., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void
and of no value. The Company may not call or redeem any portion of this
Warrant without the prior written consent of the affected Holder.



     5. Delivery of Warrant Shares.



2









 





          (a) To effect exercises hereunder, the Holder shall not be required to
physically surrender this Warrant unless the aggregate Warrant Shares
represented by this Warrant is being exercised. Upon delivery of the Exercise
Notice (in the form attached hereto) to the Company (with the attached Warrant
Shares Exercise Log) at its address for notice set forth herein and upon
payment of the Exercise Price multiplied by the number of Warrant Shares that
the Holder intends to purchase hereunder, the Company shall promptly (but in no
event later than three Trading Days after the Date of Exercise (as defined
herein)) issue and deliver to the Holder, a certificate for the Warrant Shares
issuable upon such exercise, which, unless otherwise required by the Purchase
Agreement, shall be free of restrictive legends. The Company shall, upon
request of the Holder and subsequent to the date on which a registration
statement covering the resale of the Warrant Shares has been declared effective
by the Securities and Exchange Commission, use its reasonable best efforts to
deliver Warrant Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions, if available, provided, that, the Company may, but will not be
required to change its transfer agent if its current transfer agent cannot
deliver Warrant Shares electronically through the Depository Trust Corporation.
A “Date of Exercise” means the date on which the Holder shall have delivered
to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached
to it), appropriately completed and duly signed and (ii) if such Holder is not
utilizing the cashless exercise provisions set forth in this Warrant, payment
of the Exercise Price for the number of Warrant Shares so indicated by the
Holder to be purchased.



          (b) If by the third Trading Day after a Date of Exercise the Company fails
to deliver the required number of Warrant Shares in the manner required
pursuant to Section 5(a), then the Holder will have the right to rescind such
exercise.



          (c) If by the third Trading Day after a Date of Exercise the Company fails
to deliver the required number of Warrant Shares in the manner required
pursuant to Section 5(a), and if after such third Trading Day and prior to the
receipt of such Warrant Shares, the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the number of
Warrant Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue by (B) the closing bid price of the
Common Stock on the date of the sale giving rise to such purchase obligation
and (2) at the option of the Holder, either reinstate the portion of the
Warrant and equivalent number of Warrant Shares for which such exercise was not
honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In.



          (d) The Company’s obligations to issue and deliver Warrant Shares in
accordance with the terms hereof are absolute and unconditional, irrespective
of any action or inaction by the Holder to enforce the same, any waiver or
consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach



3









 




by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any
other remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief
with respect to the Company’s failure to timely deliver certificates
representing Warrant Shares upon exercise of the Warrant as required pursuant
to the terms hereof.



     6. Charges, Taxes and Expenses. Issuance and delivery of Warrant Shares
upon exercise of this Warrant shall be made without charge to the Holder for
any issue or transfer tax, withholding tax, transfer agent fee or other
incidental tax or expense in respect of the issuance of such certificates, all
of which taxes and expenses shall be paid by the Company; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrants in a name other than that of the Holder. The Holder
shall be responsible for all other tax liability that may arise as a result of
holding or transferring this Warrant or receiving Warrant Shares upon exercise
hereof.



     7. Reissuance of Warrant.



          (a) Transfer of Warrant. If this Warrant is to be transferred, the Holder
shall surrender this Warrant to the Company, whereupon the Company will
forthwith issue and deliver upon the order of the Holder a new Warrant (in
accordance with Section 7(d)), registered as the Holder may request,
representing the right to purchase the number of Warrant Shares being
transferred by the Holder and, if less then the total number of Warrant Shares
then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number
of Warrant Shares not being transferred.



          (b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant, and, in the case of loss, theft or destruction,
of any indemnification undertaking by the Holder to the Company in customary
form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the Warrant
Shares then underlying this Warrant.



          (c) Exchangeable for Multiple Warrants. This Warrant is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Warrant or Warrants (in accordance with Section 7(d)) representing in
the aggregate the right to purchase the number of Warrant Shares then
underlying this Warrant, and each such new Warrant will represent the right to
purchase such portion of such Warrant Shares as is designated by the Holder at
the time of such surrender; provided, however, that no Warrants for fractional
shares of Common Stock shall be given.



          (d) Issuance of New Warrants. Whenever the Company is required to issue a
new Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall
be of like tenor



4









 




with this Warrant, (ii) shall represent, as indicated on the face of such
new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added
to the number of shares of Common Stock underlying the other new Warrants
issued in connection with such issuance, does not exceed the number of Warrant
Shares then underlying this Warrant), (iii) shall have an issuance date, as
indicated on the face of such new Warrant which is the same as the Issuance
Date, and (iv) shall have the same rights and conditions as this Warrant.



     8. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued and otherwise unreserved Common Stock, solely for the purpose of
enabling it to issue Warrant Shares upon exercise of this Warrant as herein
provided, the number of Warrant Shares which are then issuable and deliverable
upon the exercise of this entire Warrant, free from preemptive rights or any
other contingent purchase rights of Persons other than the Holder (taking into
account the adjustments and restrictions of Section 9). The Company covenants
that all Warrant Shares so issuable and deliverable shall, upon issuance and
the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and
nonassessable.



     9. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 9.



          (a) Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding, (i) pays a stock dividend on its Common Stock or
otherwise makes a distribution on any class of capital stock that is payable in
shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock
into a smaller number of shares, then in each such case the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding immediately before such event and of which
the denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to clause (i) of
this paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this
paragraph shall become effective immediately after the effective date of such
subdivision or combination.



          (b) Fundamental Transactions. If, at any time while this Warrant is
outstanding, (1) the Company effects any merger or consolidation of the Company
with or into another Person, (2) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (3)
any tender offer or exchange offer (whether by the Company or another Person)
is completed pursuant to which holders of Common Stock are permitted to tender
or exchange their shares for other securities, cash or property, or (4) the
Company effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then the Holder shall have the right thereafter to
receive, upon exercise of this Warrant, the same amount and kind of securities,
cash



5









 




or property as it would have been entitled to receive upon the occurrence
of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of the number of Warrant Shares then
issuable upon exercise in full of this Warrant (the “Alternate Consideration”).
For purposes of any such exercise, the determination of the Exercise Price
shall be appropriately adjusted to apply to such Alternate Consideration based
on the amount of Alternate Consideration issuable in respect of one share of
Common Stock in such Fundamental Transaction, and the Company shall apportion
the Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any exercise of this Warrant following such Fundamental
Transaction. If any successor to the Company or surviving entity in such
Fundamental Transaction shall fail to issue, not later than the earlier of 15
days after consummation of such Fundamental Transaction or three days after
written request therefor by the Holder, to the Holder a new warrant
substantially in the form of this Warrant and consistent with the foregoing
provisions and evidencing the Holder’s right to purchase the Alternate
Consideration for the aggregate Exercise Price upon exercise thereof, then the
Holder shall have the right to require such successor or surviving entity to
purchase the Warrant from the Holder for a purchase price, payable in cash
within five Trading Days after such request, equal to the Black Scholes value
of the remaining unexercised portion of this Warrant on the date of such
request. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (b) and
insuring that the Warrant (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.



          (c) Number of Warrant Shares. Simultaneously with any adjustment to the
Exercise Price pursuant to this Section 9, the number of Warrant Shares that
may be purchased upon exercise of this Warrant shall be increased or decreased
proportionately, so that after such adjustment the aggregate Exercise Price
payable hereunder for the adjusted number of Warrant Shares shall be the same
as the aggregate Exercise Price in effect immediately prior to such adjustment.



          (d) Calculations. All calculations under this Section 9 shall be made to
the nearest cent or the nearest 1/100th of a share, as applicable. The number
of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.



          (e) Notice of Adjustments. Upon the occurrence of each adjustment
pursuant to this Section 9, the Company at its expense will promptly compute
such adjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment, including a statement of the
adjusted Exercise Price and adjusted number or type of Warrant Shares or other
securities issuable upon exercise of this Warrant (as applicable), describing
the transactions giving rise to such adjustments and showing in detail the
facts upon which such adjustment is based. Upon written request, the Company
will promptly deliver a copy of each such certificate to the Holder and to the
Company’s Transfer Agent.



6









 





          (f) Notice of Corporate Events. If the Company (i) declares a dividend or
any other distribution of cash, securities or other property in respect of its
Common Stock, including without limitation any granting of rights or warrants
to subscribe for or purchase any capital stock of the Company or any
Subsidiary, (ii) authorizes or approves, enters into any agreement
contemplating or solicits stockholder approval for any Fundamental Transaction
or (iii) authorizes the voluntary dissolution, liquidation or winding up of the
affairs of the Company, then the Company shall deliver to the Holder a notice
describing the material terms and conditions of such transaction (but only to
the extent such disclosure would not result in the dissemination of material,
non-public information to the Holder) at least 10 calendar days prior to the
applicable record or effective date on which a Person would need to hold Common
Stock in order to participate in or vote with respect to such transaction, and
the Company will take all steps reasonably necessary in order to insure that
the Holder is given the practical opportunity to exercise this Warrant prior to
such time so as to participate in or vote with respect to such transaction;
provided, however, that the failure to deliver such notice or any defect
therein shall not affect the validity of the corporate action required to be
described in such notice.



     10. Payment of Exercise Price. The Holder may pay the Exercise Price in
one of the following manners:



          (a) Cash Exercise. The Holder may deliver immediately available funds; or



          (b) Cashless Exercise. If an Exercise Notice is delivered at a time when
a registration statement permitting the Holder to resell the Warrant Shares is
not then effective or the prospectus forming a part thereof is not then
available to the Holder for the resale of the Warrant Shares, then the Holder
may notify the Company in an Exercise Notice of its election to utilize
cashless exercise, in which event the Company shall issue to the Holder the
number of Warrant Shares determined as follows:



	 	 	 	 	 
	

	 	 	 	X = Y [(A-B)/A]
	 
	 	 	 	 
	

	 	where:	 	 
	 
	 	 	 	 
	

	 	 	 	X = the number of Warrant Shares to be issued to the Holder.
	 
	 	 	 	 
	

	 	 	 	Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
	 
	 	 	 	 
	

	 	 	 	A = the average of the closing prices for the five Trading Days immediately prior to (but not including)
the Exercise Date.
	 
	 	 	 	 
	

	 	 	 	B = the Exercise Price.






For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced, on
the date this Warrant was originally issued.



7









 





          (c) Disputes. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company
shall promptly issue to the Holder the number of Warrant Shares that are not
disputed and resolve such dispute in accordance with Section 13.



     11. Limitations on Exercise.



          (a) Beneficial Ownership. The Company shall not effect the exercise of
this Warrant, and the Holder shall not have the right to exercise this Warrant,
to the extent that after giving effect to such exercise, such Person (together
with such Person’s affiliates) would beneficially own in excess of 9.99% of the
shares of Common Stock outstanding immediately after giving effect to such
exercise. For purposes of the foregoing sentence, the aggregate number of
shares of Common Stock beneficially owned by such Person and its affiliates
shall include the number of shares of Common Stock issuable upon exercise of
this Warrant with respect to which the determination of such sentence is being
made, but shall exclude shares of Common Stock which would be issuable upon (i)
exercise of the remaining, unexercised portion of this Warrant beneficially
owned by such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes
of this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Warrant, in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current
Report on Form 8-K or other public filing with the Securities and Exchange
Commission, as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at any
time, upon the written or oral request of the Holder, the Company shall within
one Business Day confirm orally and in writing to the Holder the number of
shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Warrant, by the Holder and its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.



          (b) Principal Market Regulation. The Company shall not be obligated to
issue any shares of Common Stock upon exercise of this Warrant if the issuance
of such shares of Common Stock would exceed that number of shares of Common
Stock which the Company may issue upon exercise of this Warrant (including, as
applicable, any shares of Common Stock issued upon exercise of this Warrant)
without breaching the Company’s obligations under the rules or regulations of
the Principal Market (the “Exchange Cap”), except that such limitation shall
not apply in the event that the Company (A) obtains the approval of its
shareholders as required by the applicable rules of the Principal Market for
issuances of shares of Common Stock in excess of such amount or (B) obtains a
written opinion from outside counsel to the Company that such approval is not
required, which opinion shall be reasonably satisfactory to the Required
Holders. Until such approval or written opinion is obtained, no Investor shall
be



8









 




issued, upon exercise or conversion, as applicable, of any Warrant or any
Securities, shares of Common Stock in an amount greater than the product of the
Exchange Cap multiplied by a fraction, the numerator of which is the total
number of shares of Common Stock issued to such Investor pursuant to the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate number of shares of Common Stock issued to the Investors
pursuant to the Securities Purchase Agreement on the Issuance Date (with
respect to each Investor, the “Exchange Cap Allocation”). In the event that
any Investor shall sell or otherwise transfer any of such Investor’s Warrants,
the transferee shall be allocated a pro rata portion of such Investor’s
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee. In the event that any holder of Warrants shall
exercise all of such holder’s Warrants into a number of shares of Common Stock
which, in the aggregate, is less than such holder’s Exchange Cap Allocation,
then the difference between such holder’s Exchange Cap Allocation and the
number of shares of Common Stock actually issued to such holder shall be
allocated to the respective Exchange Cap Allocations of the remaining holders
of Warrants on a pro rata basis in proportion to the shares of Common Stock
underlying the Warrants then held by each such holder.



     12. No Fractional Shares. No fractional Warrant Shares will be issued in
connection with any exercise of this Warrant. In lieu of any fractional shares
which would otherwise be issuable, the Company shall pay cash equal to the
product of such fraction multiplied by the closing price of one share of Common
Stock as reported by the applicable Trading Market on the date of exercise.



     13. Dispute Resolution. In the case of a dispute as to the determination
of the Exercise Price or the arithmetic calculation of the Warrant Shares, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within two Business Days of receipt of the Exercise Notice giving
rise to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such
disputed determination or arithmetic calculation being submitted to the Holder,
then the Company shall, within two Business Days submit via facsimile (a) the
disputed determination of the Exercise Price to an independent, reputable
investment bank selected by the Company and approved by the Holder or (b) the
disputed arithmetic calculation of the Warrant Shares to the Company’s
independent, outside accountant. The Company shall cause at its expense the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the
results no later than ten Business Days from the time it receives the disputed
determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.



     14. Remedies, Other Obligations, Breaches and Injunctive Relief. The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant and the other Transaction
Documents, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit the right of
the Holder to pursue actual damages for any failure by the Company to comply
with the terms of this Warrant. The Company acknowledges that a breach by it
of its obligations hereunder will cause



9









 




irreparable harm to the Holder and that the remedy at law for any such
breach may be inadequate. The Company therefore agrees that, in the event of
any such breach or threatened breach, the holder of this Warrant shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.



     15. Notices. Any and all notices or other communications or deliveries
hereunder (including, without limitation, any Exercise Notice) shall be in
writing and shall be deemed given and effective on the earliest of (i) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number specified in this Section prior to 6:30 p.m. (New York
City time) on a Trading Day, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day
or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the
Trading Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications
shall be: (i) if to the Company, to Digital Recorders, Inc., Attn: President,
or to Facsimile No.: (214) 378-8437 (or such other address as the Company
shall indicate in writing in accordance with this Section), or (ii) if to the
Holder, to the address or facsimile number appearing on the Warrant Register or
such other address or facsimile number as the Holder may provide to the Company
in accordance with this Section.



     16. Warrant Agent. The Company shall serve as warrant agent under this
Warrant. Upon 10 days’ notice to the Holder, the Company may appoint a new
warrant agent. Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder’s
last address as shown on the Warrant Register.



     17. Miscellaneous.



          (a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns. Subject to the
preceding sentence, nothing in this Warrant shall be construed to give to any
Person other than the Company and the Holder any legal or equitable right,
remedy or cause of action under this Warrant. This Warrant may be amended only
in writing signed by the Company and the Holder and their successors and
assigns.



          (b) All questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York (except for
matters governed by corporate law in the State of North Carolina), without
regard to the principles of conflicts of law thereof. Each party agrees that
all legal proceedings concerning the interpretations, enforcement and defense
of this Warrant and the transactions herein contemplated (“Proceedings”)
(whether brought against



10









 




a party hereto or its respective Affiliates, employees or agents) shall be
commenced exclusively in the New York Courts. Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the New York Courts for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any Proceeding, any claim that it is not
personally subject to the jurisdiction of any New York Court, or that such
Proceeding has been commenced in an improper or inconvenient forum. Each party
hereto hereby irrevocably waives personal service of process and consents to
process being served in any such Proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Warrant and
agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law. Each
party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Warrant or the transactions contemplated
hereby. If either party shall commence a Proceeding to enforce any provisions
of this Warrant, then the prevailing party in such Proceeding shall be
reimbursed by the other party for its attorney’s fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
Proceeding.



          (c) The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.



          (d) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.



          (e) Prior to exercise of this Warrant, the Holder hereof shall not, by
reason of by being a Holder, be entitled to any rights of a stockholder with
respect to the Warrant Shares



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOLLOWS]



11









 





     IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

 	 
	 	By:  	/s/ DAVID L. TURNEY	 
	 	 	Name:  	David L. Turney	 
	 	 	Title:  	Chairman, CEO and President	 
	 





12









 





EXERCISE NOTICE

DIGITAL RECORDERS, INC.

WARRANT DATED OCTOBER 6, 2004


The undersigned Holder hereby irrevocably elects to purchase                     shares of Common Stock pursuant to the above referenced Warrant. Capitalized
terms used herein and not otherwise defined have the respective meanings set
forth in the Warrant.


(1) The undersigned Holder hereby exercises its right to purchase                      Warrant Shares pursuant to the Warrant.


(2) The Holder intends that payment of the Exercise Price shall be made as
(check one):



	 	 	 
	                    

	 	“Cash Exercise” under Section 10
	                    

	 	“Cashless Exercise” under Section 10






(3) If the holder has elected a Cash Exercise, the holder shall pay the sum of
$                     to the Company in accordance with the terms of the Warrant.


(4) Pursuant to this Exercise Notice, the Company shall deliver to the holder
                     Warrant Shares in accordance with the terms of the Warrant.


(5) By its delivery of this Exercise Notice, the undersigned represents and
warrants to the Company that in giving effect to the exercise evidenced hereby
the Holder will not beneficially own in excess of the number of shares of
Common Stock (determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934) permitted to be owned under Section 11 of this Warrant to
which this notice relates.

	 	 	 	 	 
	Dated:                    ,              	Name of Holder:

	 	 	 	 
	 	(Print):  	 	 
	 	 	 	 
	 	By:  	 	 
	 	Name:  	 	 
	 	Title:  	 	 
	 
	 	(Signature must conform in all respects to name of holder as specified on the face of the Warrant) 	 
	 





13









 





Warrant Shares Exercise Log




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Number of Warrant	 	 	 	 	 	Number of Warrant
	 	 	Shares Available to	 	Number of Warrant	 	Shares Remaining to
	Date
	 	be Exercised
	 	Shares Exercised
	 	be Exercised

	
	 		 		 	







14









 






DIGITAL RECORDERS, INC.

WARRANT ORIGINALLY ISSUED OCTOBER 6, 2004

WARRANT NO. 2004-13




FORM OF ASSIGNMENT




     [To be completed and signed only upon transfer of Warrant]



     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________   the right represented by the
above-captioned Warrant to purchase __________________    shares of Common Stock to
which such Warrant relates and appoints __________________    attorney to transfer
said right on the books of the Company with full power of substitution in the
premises.

	 	 	 	 	 
	Dated: _______________, ____


	 	
	 
	 	(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
	 		 
	 		 
	 		 
	 	
	 
	 	Address of Transferee	 
	 	 	 
	 	 	 
	 	 	 
	 	
	 
	 	 	 
	 	 	 
	 	
	 
	 	 	 
	 




	 	 	 	 	 
	In the presence of:	 
	 	 	 
	 	 	 
	 
	
	 





15