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EXHIBIT 10.2




REGISTRATION RIGHTS AGREEMENT




         This Registration Rights Agreement (this “Agreement”) is made and entered
into as of October 5, 2004, by and among Digital Recorders, Inc., a North
Carolina corporation (the “Company”), and the investors signatory hereto (each
an “Investor” and collectively, the “Investors”).



         This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Investors (the “Purchase
Agreement”).



         The Company and the Investors hereby agree as follows:



     1. Definitions. Capitalized terms used and not otherwise defined herein
that are defined in the Purchase Agreement will have the meanings given such
terms in the Purchase Agreement. As used in this Agreement, the following
terms have the respective meanings set forth in this Section 1:



         “Effective Date” means the date that the Registration Statement is first
declared effective by the Commission.



         “Effectiveness Date” means the earlier of: (i) the 180th day following the
Closing Date and (ii) the fifth Trading Day following the date on which the
Company is notified by the Commission that the Registration Statement will not
be reviewed or is no longer subject to further review and comments.



         “Effectiveness Period” has the meaning set forth in Section 2(a).



         “Exchange Act” means the Securities Exchange Act of 1934, as amended.



         “Filing Date” means the 31st day following the Closing Date.



         “Holder” or “Holders” means the holder or holders, as the case may be,
from time to time of Registrable Securities.



         “Indemnified Party” has the meaning set forth in Section 5(c).



         “Indemnifying Party” has the meaning set forth in Section 5(c).



         “Losses” has the meaning set forth in Section 5(a).



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



         “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.



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         “Prospectus” means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by a
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.



         “Registrable Securities” means: (i) the Shares, (ii) the Warrant Shares,
(iii) any shares of Common Stock issuable upon the exercise of warrants issued
to any placement agent as compensation in connection with the financing subject
of the Purchase Agreement and (iv) any securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or similar event,
or any exercise price adjustment with respect to any of the securities
referenced in (i), (ii) and (iii) above, without regard to any limitations on
exercises of the Warrants.



         “Registration Statement” means the registration statement of the Company
filed under the Securities Act covering the Registrable Securities, including
the Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference therein.



         “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.



         “Rule 415” means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.



         “Rule 424” means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.



         “Securities Act” means the Securities Act of 1933, as amended.



         “Shares” means the shares of Common Stock issued or issuable by the
Company to the Investors pursuant to the Purchase Agreement.



         “Warrants” means the Common Stock purchase warrants issued or issuable to
the Investors pursuant to the Purchase Agreement.



         “Warrant Shares” means the shares of Common Stock issued or issuable upon
exercise of the Warrants.



     2. Registration.



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         (a) Filing and Effectiveness. On or prior to the Filing Date, the Company
shall prepare and file with the Commission a Registration Statement covering
the resale of all Registrable Securities. The Registration Statement shall be
on Form S-1 (subject to the provisions of Section 2(e)), and shall contain
(except if otherwise required pursuant to written comments received from the
Commission upon a review of such Registration Statement) the “Selling
Stockholders” and “Plan of Distribution” attached hereto as Annex A. The
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the number of Registrable
Securities as of the Trading Day immediately preceding the date the
Registration Statement is initially filed with the Commission, subject to
adjustment as provided in Section 2(f). The Company shall cause such
Registration Statement to be declared effective under the Securities Act as
soon as possible but, in any event, no later than its Effectiveness Date. The
Company shall use its reasonable best efforts to keep the Registration
Statement continuously effective under the Securities Act until the date which
is the earlier of (i) such time as all of the Registrable Securities covered by
such Registration Statement have been sold pursuant to the Registration
Statement or otherwise publicly sold by the Holders, or (ii) such time as all
of the Registrable Securities covered by such Registration Statement may be
sold by the Holders pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”).



         (b) Liquidated Damages. If: (i) the Registration Statement is not filed
on or prior to the Filing Date (if the Company files a Registration Statement
without affording the Holders the opportunity to review and comment on the same
as required by Section 3(a) hereof, the Company shall not be deemed to have
satisfied this clause (i)), or (ii) the Registration Statement covering all of
the Registrable Securities is not declared effective by the Commission on or
prior to the Effectiveness Date, or (iii) after the Effective Date, without
regard for the reason thereunder or efforts therefore, such Registration
Statement ceases for any reason to be effective and available to the Holders as
to all Registrable Securities to which it is required to cover at any time
prior to the expiration of the Effectiveness Period (other than during an
Allowable Grace Period, as defined in Section 3(r)) (any such failure or breach
being referred to as an “Event,” and for purposes of clauses (i) or (ii) the
date on which such Event occurs, or for purposes of clause (iii) the date which
such Allowable Grace Period is exceeded, being referred to as “Event Date”),
then in addition to any other rights the Holders may have hereunder or under
applicable law: (x) on each such Event Date the Company shall pay to each
Holder an amount in cash, as partial liquidated damages and not as a penalty,
equal to 1.0% of the product of the number of Shares then held by such Holder
and the Per Unit Purchase Price; and (y) on each monthly anniversary of each
such Event Date (if the applicable Event shall not have been cured by such
date) until the applicable Event is cured, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to
1.5% of the product of the number of Shares then held by such Holder and the
Per Unit Purchase Price. The parties agree that the Company will not be liable
for liquidated damages under this Section in respect of the Warrants or Warrant
Shares. If the Company fails to pay any partial liquidated damages pursuant to
this Section in full within seven days after the date payable, the Company will
pay interest thereon at a rate of 10% per annum (or such lesser maximum amount
that is permitted to be paid by applicable law) to the Holder, accruing daily
from the date such partial liquidated damages are due until such amounts, plus
all such interest thereon, are paid in full. The partial



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liquidated damages pursuant to the terms hereof shall apply on a daily
pro-rata basis for any portion of a month prior to the cure of an Event, except
in the case of the first Event Date.



         (c) Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Holders based on the number of Registrable Securities held by
each Holder at the time the Registration Statement covering such initial number
of Registrable Securities or increase thereof is declared effective by the
Commission. In the event that a Holder sells or otherwise transfers any of
such Holder’s Registrable Securities, each transferee shall be allocated a pro
rata portion of the then remaining number of Registrable Securities included in
such Registration Statement for such transferor. Any shares of Common Stock
included in a Registration Statement and which remain allocated to any Person
which ceases to hold any Registrable Securities covered by such Registration
Statement shall be allocated to the remaining Holders, pro rata based on the
number of Registrable Securities then held by such Holders which are covered by
such Registration Statement. In no event shall the Company include any
securities other than Registrable Securities on any Registration Statement
without the prior written consent of Investors holding at least a majority of
the Registrable Securities.



         (d) Selling Holder Questionnaire. Each Holder agrees to furnish to the
Company a completed Questionnaire in the form attached to this Agreement as
Annex B (a “Selling Holder Questionnaire”). The Company shall not be required
to include the Registrable Securities of a Holder in a Registration Statement
and shall not be required to pay any liquidated or other damages under Section
2(b) to any Holder who fails to furnish to the Company a fully completed
Selling Holder Questionnaire at least two Trading Days prior to the Filing Date
(subject to the requirements set forth in Section 3(a)).



         (e) Ineligibility for Form S-3. The Company shall undertake to register
the Registrable Securities on Form S-3 as soon as such form is available,
provided that the Company shall maintain the effectiveness of the Registration
Statement then in effect until such time as a Registration Statement on Form
S-3 covering the Registrable Securities has been declared effective by the
Commission.



         (f) Sufficient Number of Shares Registered. In the event the number of
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities required to be
covered by such Registration Statement or a Holder’s allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall amend the
applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least
100% of the number of such Registrable Securities as of the Trading Day
immediately preceding the date of the filing of such amendment or new
Registration Statement, in each case, as soon as practicable, but in any event
not later than 15 days after the Company becomes aware of the necessity
therefor. The Company shall use its reasonable best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed “insufficient to cover all of the Registrable Securities” if at any
time the number of shares of Common Stock available for resale under such
Registration Statement is less than the



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number of Registrable Securities. The calculation set forth in the
foregoing sentence shall be made without regard to any limitations on the
exercise of the Warrants and such calculation shall assume that the Warrants
are then exercisable into shares of Common Stock.



     3. Registration Procedures



         In connection with the Company’s registration obligations hereunder, the
Company shall:



         (a) (A) permit legal counsel designated by a majority in interest of the
Holders, which shall initially be Schulte Roth & Zabel LLP (“Legal Counsel”) to
review and comment upon (i) the Registration Statement at least five Business
Days prior to its filing with the Commission and (ii) all amendments and
supplements to all Registration Statements (except for amendments or
supplements filed solely for the purpose of adding information included in
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and any similar or successor reports) within a reasonable number of
days prior to their filing with the Commission, and (B) not file any
Registration Statement or amendment or supplement thereto in a form to which
Legal Counsel reasonably objects. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or of any
amendment thereto without the prior approval of Legal Counsel, which consent
shall not be unreasonably withheld. The Company shall furnish to Legal
Counsel, without charge, (i) copies of any correspondence from the Commission
or the staff of the Commission to the Company or its representatives relating
to any Registration Statement, (ii) promptly after the same is prepared and
filed with the Commission, one copy of any Registration Statement and any
amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, if requested by a Holder and not
otherwise available on the EDGAR system, and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus
included in such Registration Statement and all amendments and supplements
thereto.



         (b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement and the Prospectus
used in connection therewith as may be necessary to keep such Registration
Statement continuously effective as to the Registrable Securities for the
Effectiveness Period; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or
amended to be filed pursuant to Rule 424; (iii) respond as promptly as
reasonably possible, but in any event no later than five Business Days after
receipt thereof, to any comments received from the Commission with respect to
the Registration Statement or any amendment thereto and, as promptly as
reasonably possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to such Registration
Statement that would not result in the disclosure to the Holders of material
and non-public information concerning the Company; (iv) submit to the
Commission, within two Business Days after the Company learns that no review of
a particular Registration Statement will be made by the staff of the Commission
or that the staff of the Commission has no further comments on a particular
Registration Statement, as the case may be, a request for acceleration of
effectiveness of such Registration Statement to a time and date not later than
48 hours after the submission of such request; and (v) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with
respect to the Registration Statement and the disposition of all Registrable
Securities



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covered by any Registration Statement. In the case of amendments and
supplements to a Registration Statement which are required to be filed pursuant
to this Agreement (including pursuant to this Section 3(b)) by reason of the
Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any analogous
report under the Exchange Act, the Company shall have incorporated such report
by reference into such Registration Statement, if permissible, or shall file
such amendments or supplements with the Commission not later than one Business
Day after the day on which the Exchange Act report is filed which created the
requirement for the Company to amend or supplement such Registration Statement.



         (c) Notify the Holders as promptly as reasonably possible (and, in the
case of (i)(A) below, not less than three Trading Days prior to such filing)
and (if requested by any such Holder) confirm such notice in writing no later
than one Trading Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a “review” of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company
shall provide true and complete copies thereof and all written responses
thereto to each of the Holders that pertain to the Holders as a Selling
Stockholder or to the Plan of Distribution, but not information which the
Company reasonably believes would constitute material and non-public
information); and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or
for additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any
or all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (v) of the
occurrence of any event or passage of time that makes the financial statements
included in the Registration Statement ineligible for inclusion therein or any
statement made in such Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to such Registration Statement,
Prospectus or other documents so that, in the case of such Registration
Statement or the Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (provided that in no
event shall such notice contain any material and non-public information).



         (d) (i) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (A) any order suspending the effectiveness of
the Registration Statement, or (B) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment and (ii) notify Legal
Counsel and each Holder of Registrable Securities being sold of the issuance of
such order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.



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         (e) Furnish to each Holder, without charge, at least one conformed copy of
each Registration Statement and each amendment thereto and all exhibits to the
extent requested by such Person (including those previously furnished) promptly
after the filing of such documents with the Commission.



         (f) Promptly deliver to each Holder, without charge, upon the
effectiveness of any Registration Statement, as many copies of each Prospectus
or Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request. The Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the selling Holders in connection with the offering and sale of the
Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.



         (g) Prior to any public offering of Registrable Securities, to register or
qualify or cooperate with the selling Holders in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
Holders may reasonably request (provided that the Company shall not be required
to register as a foreign corporation or qualify to do business generally in any
jurisdiction in which it is not otherwise required to be so registered or
qualified), to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all
other acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement.



         (h) If any Holder is required under applicable securities law to be
described in the Registration Statement as an underwriter (which does not
include statements in the Registration Statement that a Holder may be deemed to
be an underwriter), at the reasonable request of such Holder, the Company
shall furnish to such Holder, on the date of the effectiveness of the
Registration Statement and thereafter from time to time on such dates as an
Holder may reasonably request (i) a letter, dated such date, from the Company’s
independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the Holders, and (ii) an
opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the Holders.



         (i) Upon the written request of any Holder in connection with any Holder’s
due diligence requirements, if any, the Company shall make available for
inspection by (i) any Holder, (ii) Legal Counsel and (iii) one firm of
accountants or other agents retained by the Holders (collectively, the
“Inspectors”), all pertinent financial and other records, and pertinent
corporate documents and properties of the Company (collectively, the
“Records”), as shall be reasonably deemed necessary by each Inspector, and
cause the Company’s officers, directors and employees to supply all information
which any Inspector may reasonably request; provided, however, that each
Inspector shall agree in writing to hold in strict confidence and shall not
make any disclosure (except to an Holder) or use of any Record or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (a) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in any Registration Statement or is otherwise required under the



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Securities Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. Each Holder agrees that it shall, upon learning that disclosure
of such Records is required or is sought in or by a court or governmental body
of competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential. Such Holder shall, at the Company’s sole expense,
cooperate with the Company in connection with any such action. Nothing herein
(or in any other confidentiality agreement between the Company and any Holder)
shall be deemed to limit the Holders’ ability to sell Registrable Securities in
a manner which is otherwise consistent with applicable laws and regulations.



         (j) The Company shall hold in confidence and not make any disclosure of
information concerning a Holder provided to the Company and determined in good
faith by such Holder to be confidential, and of which determination the Company
is so notified, unless (i) disclosure of such information is necessary to
comply with federal or state securities laws, (ii) the disclosure of such
information is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other final, non-appealable order from a court or
governmental body of competent jurisdiction, or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this Agreement or any other agreement of which the Company has knowledge. The
Company agrees that it shall, upon learning that disclosure of such information
concerning a Holder is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to
such Holder and allow such Holder, at the Holder’s expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.



         (k) The Company shall use its reasonable best efforts either to (i) cause
all the Registrable Securities covered by a Registration Statement to be listed
on each securities exchange on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation and quotation of all the Registrable Securities covered
by a Registration Statement on the Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to use its
reasonable best efforts to arrange for at least two market makers to register
with the National Association of Securities Dealers, Inc. (“NASD”) as such with
respect to such Registrable Securities. The Company shall pay all fees and
expenses in connection with satisfying its obligation under this Section 3(k).



         (l) Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.



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         (m) Upon the occurrence of any event contemplated by Section 3(c)(v), as
promptly as reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the affected Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, no Registration Statement nor any Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading and
deliver such number of copies of such supplement or amendment to Legal Counsel
and each Holder as they may reasonably request.



         (n) If requested by a Holder, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as a Holder reasonably requests to be included therein relating to
the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering
and (ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the matters to
be incorporated in such prospectus supplement or post-effective amendment.



         (o) The Company shall use its reasonable best efforts to cause the
Registrable Securities covered by a Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.



         (p) The Company shall make generally available to its security holders as
soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with, and in the
manner provided by, the provisions of Rule 158 under the Securities Act)
covering a twelve-month period beginning not later than the first day of the
Company’s fiscal quarter next following the effective date of a Registration
Statement.



         (q) Within two Business Days after a Registration Statement which covers
Registrable Securities is ordered effective by the Commission, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Holders
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by
the Commission in the form attached hereto as Exhibit A.



         (r) Notwithstanding anything to the contrary herein, at any time after the
Registration Statement has been declared effective by the Commission, the
Company may delay the disclosure of material, non-public information concerning
the Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company and its counsel, in the best
interest of the Company and, in the opinion of counsel to the Company,
otherwise required (a “Grace Period”); provided, that the Company shall
promptly (i) notify the Holders in writing of the existence of a Grace Period
in conformity with the provisions of this Section 3(r)(provided that in each
notice the Company will not disclose the
content of such



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material, non-public information to the Holders) and the
date on which the Grace Period will begin, and (ii) notify the Holders in
writing of the date on which the Grace Period ends; and, provided further, that
no Grace Period shall exceed ten consecutive days and during any 365 day period
such Grace Periods shall not exceed an aggregate of 30 days (each, an
“Allowable Grace Period”). For purposes of determining the length of a Grace
Period above, the Grace Period shall begin on and include the date the Holders
receive the notice referred to in clause (i) and shall end on and include the
later of the date the Holders receive the notice referred to in clause (ii) and
the date referred to in such notice. The provisions of Section 3(d) hereof
shall not be applicable during the period of any Allowable Grace Period. Upon
expiration of the Grace Period, the Company shall again be bound by the first
sentence of Section 3(c)(v) with respect to the information giving rise thereto
unless such material, non-public information is no longer applicable. The
Holder shall adhere to its obligation to trade in accordance with the rules and
regulations of the Commission during such Allowable Grace Period.
Notwithstanding anything to the contrary, the Company shall cause its transfer
agent to deliver unlegended shares of Common Stock to a purchaser of
Registrable Securities from a Holder in accordance with the terms of the
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which a Holder has entered into a binding contract for sale, and
delivered a copy of the prospectus included as part of the applicable
Registration Statement, prior to the Holder’s receipt of the notice of a Grace
Period and for which the Holder has not yet settled.



     4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing
fees (including, without limitation, fees and expenses (A) with respect to
filings required to be made with any Trading Market on which the Common Stock
is then listed for trading, and (B) in compliance with applicable state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is reasonably requested
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit and the fees and expenses incurred in connection with the
listing of the Registrable Securities on any Trading Market as required
hereunder.



     5. Indemnification.



         (a) Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, investment advisors, partners, members, employees
and representatives of each of them, each Person who controls any such Holder
(within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and



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employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses,
claims, damages, liabilities, judgments, fines, penalties, charges, costs
(including, without limitation, reasonable costs of preparation and reasonable
attorneys’ fees), amounts paid in settlement or expenses (collectively, “Losses”), as arising out of, relate to or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
“blue sky” laws of any jurisdiction in which Registrable Securities are
offered, or the omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, or contained in the Prospectus or
the omission or alleged omission to state therein any material fact necessary
to make the statements made therein, in the light of the circumstances under
which the statements therein were made, not misleading, (iii) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act, any
other law, including, without limitation, any state securities law, or any rule
or regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement or (iv) any material violation
of this Agreement, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by Legal Counsel or otherwise by or
on behalf of such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by Legal Counsel or otherwise by or on behalf of such Holder or
provided to the Company by Legal Counsel or otherwise by or on behalf of such
Holder expressly for use in the Registration Statement, such Prospectus or such
form of Prospectus or in any amendment or supplement thereto (it being
understood that the Holder has approved Annex A hereto for this purpose) or (2)
such Holder uses an outdated or defective Prospectus after the Company has
notified such Holder in writing that the Prospectus is outdated or defective
and prior to the receipt by such Holder of an Advice (as hereinafter defined)
or an amended or supplemented Prospectus, but only if and to the extent that
following the receipt of the Advice or the amended or supplemented Prospectus
the misstatement or omission giving rise to such Loss would have been
corrected. The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.



         (b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, each of its
officers who signs the Registration Statement and, each Person who controls the
Company (within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), to the fullest extent permitted by applicable law, from
and against all Losses, as incurred, arising solely out of or based solely
upon: (x) such Holder’s failure to comply with the prospectus delivery
requirements of the Securities Act or (y) any untrue statement of a material
fact contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto, or arising solely out of
or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading to the
extent, but only to the extent that, (1) such untrue statements or omissions
are based solely upon information regarding such Holder furnished in writing to
the Company by Legal Counsel or otherwise by or
on behalf of such Holder expressly for use therein, or to the extent that
such information relates



11









 






to such Holder or such Holder’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder or provided to the Company by Legal Counsel or
otherwise by or on behalf of such Holder expressly for use in the Registration
Statement (it being understood that the Holder has approved Annex A hereto for
this purpose), such Prospectus or such form of Prospectus or in any amendment
or supplement thereto or (2) such Holder uses an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder of
an Advice or an amended or supplemented Prospectus, but only if and to the
extent that following the receipt of the Advice or the amended or supplemented
Prospectus the misstatement or omission giving rise to such Loss would have
been corrected. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 5(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
(as hereinafter defined) if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented. In no event shall the liability
of any selling Holder hereunder be greater in amount than the dollar amount of
the net proceeds received by such Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation.



         (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
“Indemnified Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses incurred in connection with defense thereof; provided,
that the failure of any Indemnified Party to give such notice shall not relieve
the Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that such failure shall have
prejudiced the Indemnifying Party.



         An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). In the case of Indemnified Parties consisting of
Holders,, legal counsel referred to in the immediately preceding sentence shall
be selected by the Holders holding at least a majority in interest of the
Registrable Securities included in the Registration Statement to which the Loss
relates. The Indemnified Party shall cooperate fully with the Indemnifying
Party in connection with any negotiation or defense of any Proceeding or Loss
by the Indemnifying Party and shall furnish to the Indemnifying Party all
information reasonably available to the Indemnified Party which relates to
such Proceeding or



12









 






Loss. The Indemnifying Party shall keep the Indemnified
Party fully apprized at all times as to the status of the defense or any
settlement negotiations with respect thereto. The Indemnifying Party shall not
be liable for any settlement of any such Proceeding effected without its prior
written consent, which consent shall not be unreasonably withheld. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding. Following indemnification as provided for
hereunder, the Indemnifying Party shall be subrogated to all rights of the
Indemnified Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made.



         All fees and expenses of the Indemnified Party (including reasonable fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within thirty
days of written notice thereof to the Indemnifying Party (regardless of whether
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).



         (d) Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations;
provided, however, that no Person involved in the sale of Registrable
Securities which Person is guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) in connection with such sale
shall be entitled to contribution from any Person involved in such sale of
Registrable Securities who was not guilty of fraudulent misrepresentation The
relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates
to information supplied by, such Indemnifying Party or Indemnified Party, and
the parties’ relative intent, knowledge, access to information and opportunity
to correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 5(c), any reasonable attorneys’
or other reasonable fees or expenses incurred by such party in connection with
any Proceeding to the extent such party would have been indemnified for such
fees or expenses if the indemnification provided for in this Section was
available to such party in accordance with its terms.



         The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no



13









 






Holder shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received by such
Holder from the sale of the Registrable Securities subject to the Proceeding
exceeds the amount of any damages that such Holder has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission.



         The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties, but without duplication of recovery.



     6. Reports Under The Exchange Act.



         With a view to making available to the Holders the benefits of Rule 144,
the Company agrees to:



         (a) make and keep public information available, as those terms are
understood and defined in Rule 144;



         (b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Exchange Act so long as the Company
remains subject to such requirements and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and



         (c) furnish to each Holder so long as such Holder owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144 and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Holders to
sell such securities pursuant to Rule 144 without registration.



     7. Miscellaneous.



         (a) Remedies. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted
by law and under this Agreement, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of
any action for specific performance in respect of such breach, it shall waive
the defense that a remedy at law would be adequate.



         (b) No Piggyback on Registrations. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in a Registration Statement other than the
Registrable Securities, and the Company shall not during the Registration
Period enter into any agreement providing any such right to any of its security
holders.



14









 





         (c) Compliance. Each Holder covenants and agrees that it will comply with
the prospectus delivery requirements of the Securities Act as applicable to it
in connection with sales of Registrable Securities pursuant to the Registration
Statement.



         (d) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Section 3(c), such Holder
will forthwith discontinue disposition of such Registrable Securities under the
Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph. Neither the obligation of the Holders to discontinue disposition of
Registrable Securities pursuant to this Section 7(d) nor any event giving rise
thereto shall constitute an Event for purposes of Section 2(b) unless the
effectiveness of the Registration Statement is suspended or terminated as a
result thereof during the Effectiveness Period. Notwithstanding anything to
the contrary, the Company shall cause its transfer agent to deliver unlegended
Shares of Common Stock to a purchaser of Registrable Securities from a Holder
in accordance with the terms of the Purchase Agreement in connection with any
sale of Registrable Securities with respect to which a Holder has entered into
a binding contract for sale prior to the Holder’s receipt of a notice from the
Company of the happening of any event of the kind described in Section 3(c) and
for which the Holder has not yet settled.



         (e) Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of
such determination and, if within fifteen days after receipt of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered, subject to customary underwriter cutbacks
applicable to all holders of registration rights.



         (f) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this Section 6(f), may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of no less than a majority in interest of the then outstanding
Registrable Securities. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of certain Holders and that does not directly or
indirectly affect the rights of other Holders may be given by Holders of at
least a majority of the Registrable Securities to which such waiver or consent
relates. No consideration shall be offered or paid to any Person to amend or
consent to a



15









 






waiver or modification of any provision of any of this Agreement unless
the same consideration also is offered to all of the parties to this Agreement.



         (g) Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 6:30 p.m. (New York City
time) on a Trading Day, (b) 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, (c) the
Trading Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (d) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as follows:



	 	 	 
	If to the Company:

	 	Digital Recorders, Inc.
	

	 	5949 Sherry Lane, Suite 1050
	

	 	Dallas, Texas 75225
	

	 	Attn: Chief Financial Officer
	

	 	Facsimile: (214) 378-8437
	 
	 	 
	With a copy to:

	 	Carrington, Coleman, Sloman & Blumenthal, L.L.P.
	

	 	200 Crescent Court, Suite 1500
	

	 	Dallas, Texas 75201
	

	 	Attn: Kenn W. Webb, Esq.
	

	 	Facsimile: (214) 855-1333
	 
	 	 
	If to an Investor:

	 	To the address and facsimile number set forth
on the Schedule of Investors attached hereto, with copies to such
Investor’s representatives as set forth on the Schedule of
Investors.
	 
	 	 
	If to any other Person who is then the registered Holder:

	 
	 	 
	

	 	To the address of such Holder as it appears in the
stock transfer books of the Company
	 
	 	 
	If to Legal Counsel:

	 	Schulte Roth & Zabel LLP
	

	 	919 Third Avenue
	

	 	New York, New York 10022
	

	 	Attn: Eleazer Klein, Esq.
	

	 	Facsimile: (212) 593-5955






or such other address as may be designated in writing hereafter, in the same
manner, by such Person.



         (h) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the



16









 






benefit of each Holder. The Company may not assign its rights or
obligations hereunder without the prior written consent of a majority in
interest of the Holders. Each Holder may assign its respective rights
hereunder in the manner and to the Persons as permitted under the Purchase
Agreement.



         (i) Execution and Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.



         (j) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement (whether brought
against a party hereto or its respective Affiliates, employees or agents) will
be commenced 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 Agreement
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 Proceeding arising
out of or relating to this Agreement or the transactions contemplated hereby.
If either party shall commence a Proceeding to enforce any provisions of this
Agreement, 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.



         (k) Cumulative Remedies. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.



         (l) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties hereto shall
use their reasonable efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to be
the intention of the parties that



17









 






they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.



         (m) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.



         (n) Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under this Agreement are several and not joint
with the obligations of each other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under this Agreement. Nothing contained herein or in any Transaction
Document, and no action taken by any Investor pursuant thereto, shall be deemed
to constitute the Investors as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Investors are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by this Agreement or any other Transaction Document.
Each Investor acknowledges that no other Investor will be acting as agent of
such Investor in enforcing its rights under this Agreement. Each Investor
shall be entitled to independently protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not
be necessary for any other Investor to be joined as an additional party in any
Proceeding for such purpose. The Company acknowledges that each of the
Investors has been provided with the same Registration Rights Agreement for the
purpose of closing a transaction with multiple Investors and not because it was
required or requested to do so by any Investors.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES TO FOLLOW]





18









 







     IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

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




[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES OF HOLDERS TO FOLLOW]





 









 





     IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

	 	 	 	 	 
	 	NAME OF INVESTING ENTITY


RIVERVIEW GROUP, LLC
	 
	 	By:  	/s/ TERRY FEENEY	 
	 	 	Name:  	Terry Feeney	 
	 	 	Title:  	Chief Operating Officer	 
	 





 









 





SCHEDULE OF INVESTORS




	 	 	 	 	 
	 	 	Investor Address	 	Investor’s Representative’s Address
	Investor
	 	and Facsimile Number
	 	and Facsimile Number

	Riverview Group, LLC

	 	666 Fifth Avenue, 8th floor
	 	Schulte Roth & Zabel LLP
	

	 	New York, New York 10103
	 	919 Third Avenue
	

	 	Attention: Manager
	 	New York, NY 10022
	

	 	Facsimile: (212) 841-4141
	 	Attn: Eleazer Klein, Esq.
	

	 	Telephone: (212) 841-4100
	 	Facsimile: (212) 593-5955
	

	 	 	 	Telephone: (212) 756-2000







 









 





EXHIBIT A




FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT




[Transfer Agent]



Attn:


Re: Digital Recorders, Inc.



Ladies and Gentlemen:



     We are counsel to Digital Recorders, Inc., a North Carolina corporation
(the “Company”), and have represented the Company in connection with that
certain Securities Purchase Agreement, dated as of October 5, 2004 (the
“Securities Purchase Agreement”), entered into by and among the Company and the
buyers named therein (collectively, the “Holders”) pursuant to which the
Company issued to the Holders its shares of the Company’s Common Stock, par
value $.1 per share (the “Common Stock”) and warrants exercisable for shares of
Common Stock (the “Warrants”). Pursuant to the Securities Purchase Agreement,
the Company also has entered into a Registration Rights Agreement with the
Holders (the “Registration Rights Agreement”) pursuant to which the Company
agreed, among other things, to register the resale of the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issuable upon exercise of the Warrants under the
Securities Act of 1933, as amended (the “Securities Act”). In connection with
the Company’s obligations under the Registration Rights Agreement, on
                                                             , 2004, the Company filed a Registration Statement on Form S-1
(File No. 333-                                        ) (the “Registration Statement”) with the Securities
and Exchange Commission (the “Commission”) relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.



     In connection with the foregoing, we advise you that a member of the
Commission’s staff has advised us by telephone that the Commission has entered
an order declaring the Registration Statement effective under the Securities
Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we
have no knowledge, after telephonic inquiry of a member of the Commission’s
staff, that any stop order suspending its effectiveness has been issued or that
any proceedings for that purpose are pending before, or threatened by, the
Commission and the Registrable Securities are available for resale under the
Securities Act pursuant to the Registration Statement.



     This letter shall serve as our standing opinion to you that the shares of
Common Stock are freely transferable by the Holders pursuant to the
Registration Statement. You need not require further letters from us to effect
any future legend-free issuance or reissuance of shares of Common Stock in
connection with sales or transfers thereof by the Holders as contemplated by
the Company’s Irrevocable Transfer Agent Instructions dated October 6, 2004.
This letter shall serve as our standing opinion with regard to this matter.



Very truly yours,



 









 





[ISSUER’S COUNSEL]



By:                                                            



CC: [LIST NAMES OF HOLDERS]



 









 






ANNEX A




SELLING STOCKHOLDERS




     The shares of common stock being offered by the selling stockholders are
those previously issued to the selling stockholders and those issuable to the
selling stockholders upon exercise of the warrants. For additional information
regarding the issuance of common stock and the warrants, see “Private Placement
of Common Shares and Warrants” above. We are registering the shares of common
stock in order to permit the selling stockholders to offer the shares for
resale from time to time. Except for the ownership of the shares of common
stock and the warrants, the selling stockholders have not had any material
relationship with us within the past three years.



     The table below lists the selling stockholders and other information
regarding the beneficial ownership of the shares of common stock by each of the
selling stockholders. The second column lists the number of shares of common
stock beneficially owned by each selling shareholder, based on its ownership of
the shares of common stock and the warrants, as of                     , 200                  , assuming
exercise of the warrants held by the selling stockholders on that date, without
regard to any limitations on exercise.



     The third column lists the shares of common stock being offered by this
prospectus by the selling stockholders.



     In accordance with the terms of registration rights agreements with the
holders of the shares of common stock and the warrants, this prospectus
generally covers the resale of at least 100% of that number of shares of common
stock equal to the number of shares of common stock issued and the shares of
common stock issuable upon exercise of the related warrants, determined as if
the outstanding warrants were exercised in full as of the trading day
immediately preceding the date this registration statement was initially filed
with the Commission. Because the exercise price of the warrants may be
adjusted, the number of shares that will actually be issued may be more or less
than the number of shares being offered by this prospectus. The fourth column
assumes the sale of all of the shares offered by the selling stockholders
pursuant to this prospectus.



     Under the terms of the warrants, a selling shareholder may not exercise
the warrants, to the extent such exercise would cause such selling shareholder,
together with its affiliates, to beneficially own a number of shares of common
stock which would exceed 9.99% of our then outstanding shares of common stock
following such exercise, excluding for purposes of such determination shares of
common stock issuable upon exercise of the warrants which have not been
exercised. The number of shares in the second column does not reflect this
limitation. In addition, the warrants provide that a selling stockholder may
not exercise the warrants if the issuance of shares of common stock upon
exercise would exceed the number of shares that we can issue without exceeding
certain limitations contained in the rules of The Nasdaq Stock Market. That
maximum number of shares currently issuable under the warrants, or that are
likely to become issuable under the warrants, do not exceed such limitation.
The selling stockholders may sell all, some or none of their shares in this
offering. See “Plan of Distribution.”



 









 





	 	 	 	 	 	 	 	 	 	 	 	 	 
	Name of Selling Shareholder
	 	Number of Shares
Owned Prior to
Offering
	 	Maximum Number of
Shares to be Sold
Pursuant to this
Prospectus
	 	 	Number of Shares
Owned After
Offering
	 	 
	Riverview Group, LLC (1)
	 	(3)	 	 	 	 	 	0	 	 
	Roth Capital Partners (2)
	 	(4)	 	 	 	 	 	 	 	 	 







     (1) The sole member of Riverview is Millennium Holding Group, L.P., a
Delaware limited partnership (“Holding”). Millennium Management, LLC, a
Delaware limited liability company (“Millennium Management”), is the general
partner of Holding and consequently has voting control and investment
discretion over securities owned by Holding and by Riverview. Israel A.
Englander (“Mr. Englander”) is the sole managing member of Millennium
Management. As a result, Mr. Englander may be considered the beneficial owner
of any shares deemed to be beneficially owned by Millennium Management. The
foregoing should not be construed in and of itself as an admission by any of
Holding, Millennium Management or Mr. Englander as to beneficial ownership of
the shares owned by Riverview.



     (2) Describe Roth



     (3) Describe securities



     (4) Describe securities


On October 5, 2004, we engaged Roth Capital Partners, LLC, which is one of the
selling stockholders listed above, to serve as our exclusive placement agent in
connection with a private placement of our common stock. We issued the warrant
described in footnote 4 to the table above to Roth Capital Partners, LLC and
also paid that firm a cash fee in the amount of $400,000 as compensation for
its services as placement agent in connection with a private placement
completed pursuant to that agreement. That private placement related to the
shares of common stock covered by this prospectus, including the 1,207,730
shares that are presently outstanding and the 241,546 shares issuable upon the
exercise of the warrant described in footnote 3 to the table above.



 









 





PLAN OF DISTRIBUTION




     We are registering the shares of common stock previously issued and the
shares of common stock issuable upon exercise of the warrants to permit the
resale of these shares of common stock by the holders of the common stock and
warrants from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling stockholders of the
shares of common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.



     The selling stockholders may sell all or a portion of the shares of common
stock beneficially owned by them and offered hereby from time to time directly
or through one or more underwriters, broker-dealers or agents. If the shares
of common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated
prices. These sales may be effected in transactions, which may involve crosses
or block transactions,




	•	 	on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of
sale;
	 
	•	 	in the over-the-counter market;
	 
	•	 	in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
	 
	•	 	through the writing of options, whether such options are listed on an options exchange or otherwise;
	 
	•	 	in ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
	 
	•	 	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
	 
	•	 	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
	 
	•	 	an exchange distribution in accordance with the rules of the applicable exchange;
	 
	•	 	privately negotiated transactions;
	 
	•	 	to cover short sales made after the date that this Registration Statement is declared effective by the Commission;
	 
	•	 	broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price
per share;
	 
	•	 	a combination of any such methods of sale; and




 









 






	•	 	any other method permitted pursuant to applicable law.




     The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.



     If the selling stockholders effect such transactions by selling shares of
common stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In
connection with sales of the shares of common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the shares of common stock in the course of
hedging in positions they assume. The selling stockholders may also sell
shares of common stock short and deliver shares of common stock covered by this
prospectus to close out short positions. The selling stockholders may also
loan or pledge shares of common stock to broker-dealers that in turn may sell
such shares.



     The selling stockholders may pledge or grant a security interest in some
or all of the warrants or shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell the shares of common stock from time to time
pursuant to this prospectus or any amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933, as
amended, amending, if necessary, the list of selling stockholders to include
the pledgee, transferee or other successors in interest as selling stockholders
under this prospectus. The selling stockholders also may transfer and donate
the shares of common stock in other circumstances in which case the
transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus.



     The selling stockholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be “underwriters”
within the meaning of the Securities Act, and any commission paid, or any
discounts or concessions allowed to, any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.



     Under the securities laws of some states, the shares of common stock may
be sold in such states only through registered or licensed brokers or dealers.
In addition, in some states the shares of common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.



 









 





     We have advised each selling stockholder that under current
interpretations it may not use shares registered on this registration statement
to cover short sales of our common stock made prior to the date on which this
registration statement shall have been declared effective by the Securities and
Exchange Commission. If a selling stockholder uses this prospectus for any
sale of our common stock, it will be subject to the prospectus delivery
requirements of the Securities Act of 1933, as amended.



     There can be no assurance that any selling stockholder will sell any or
all of the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.



     The selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder,
including, without limitation, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of common stock by
the selling stockholders and any other participating person. Regulation M may
also restrict the ability of any person engaged in the distribution of the
shares of common stock to engage in market-making activities with respect to
the shares of common stock. All of the foregoing may affect the marketability
of the shares of common stock and the ability of any person or entity to engage
in market-making activities with respect to the shares of common stock.



     We will not receive any proceeds from the sale of our common stock
pursuant to this prospectus. We will pay all expenses of the registration of
the shares of common stock pursuant to the registration rights agreement,
estimated to be $[                    ] in total, including, without limitation, Securities
and Exchange Commission filing fees and expenses of compliance with state
securities or “blue sky” laws; provided, however, that a selling shareholder
will pay all underwriting discounts and selling commissions, if any. We will
indemnify the selling stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with the registration
rights agreements, or the selling stockholders will be entitled to
contribution. We may be indemnified by the selling stockholders against civil
liabilities, including liabilities under the Securities Act, that may arise
from any written information furnished to us by the selling stockholder
specifically for use in this prospectus, in accordance with the related
registration rights agreements, or we may be entitled to contribution.



     Once sold under the shelf registration statement, of which this prospectus
forms a part, the shares of common stock will be freely tradable in the hands
of persons other than our affiliates.



     One of the selling stockholders, Roth Capital Partners, LLC, is a
broker-dealer registered with the National Association of Securities Dealers,
Inc. The shares being offered by it pursuant to this prospectus are being
offered for sale for its own account, and such firm is not serving as an
underwriter, broker or dealer, and is not receiving any compensation, in
connection with the offer or sale of any of the securities being offered
pursuant to this prospectus. We issued the warrant to Roth Capital Partners,
LLC and also paid that firm a cash fee in the amount of $400,000 as
compensation for its services as placement agent in connection with a private
placement of our common stock.



 









 





Annex B




DIGITAL RECORDERS, INC.




Selling Securityholder Notice and Questionnaire



The undersigned beneficial owner of common stock (the “Common Stock”), of
Digital Recorders, Inc. (the “Company”) understands that the Company has filed
or intends to file with the Securities and Exchange Commission (the
“Commission”) a Registration Statement for the registration and resale of the
Registrable Securities, in accordance with the terms of the Registration Rights
Agreement, dated as of October 5, 2004 (the “Registration Rights Agreement”),
among the Company and the Investor[s] named therein. A copy of the
Registration Rights Agreement is available from the Company upon request at the
address set forth below. All capitalized terms used and not otherwise defined
herein shall have the meanings ascribed thereto in the Registration Rights
Agreement.


The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:



QUESTIONNAIRE




	 	 	 	 	 
	1.

	 	Name.	 	 
	 
	 	 	 	 
	

	 	(a)
	 	Full Legal Name of Selling Securityholder
	 
	 	 	 	 
	

	 	 	 	

	 
	 	 	 	 
	

	 	(b)
	 	Full Legal Name of Registered Holder (if not the same as (a)
above) through which Registrable Securities Listed in Item 3 below
are held:
	 
	 	 	 	 
	

	 	 	 	

	 
	 	 	 	 
	

	 	(c)
	 	Full Legal Name of Natural Control Person (which means a
natural person who directly you indirectly alone or with others has
power to vote or dispose of the securities covered by the
questionnaire):
	 
	 	 	 	 
	

	 	 	 	








 









 





     2. Address for Notices to Selling Securityholder:





















Telephone:

Fax:

Contact Person:



3. Beneficial Ownership of Registrable Securities:




	 	(a)	 	Type and Principal Amount of Registrable Securities
beneficially owned:




	 
	


	 

	


	 

	









4. Broker-Dealer Status:





	 	(a)	 	Are you a broker-dealer?




Yes o No o





		
	Note: 	If yes, the Commission’s staff has indicated that you should be
identified as an underwriter in the Registration Statement.






	 	(b)	 	Are you an affiliate of a broker-dealer?




Yes o No o





	 	(c)	 	If you are an affiliate of a broker-dealer, do you certify
that you bought the Registrable Securities in the ordinary course of
business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or understandings,
directly or indirectly, with any person to distribute the
Registrable Securities?




Yes o No o





		
	Note: 	If no, the Commission’s staff has indicated that you should be
identified as an underwriter in the Registration Statement.





 









 





5. Beneficial Ownership of Other Securities of the Company Owned by the
Selling Securityholder.



Except as set forth below in this Item 5, the undersigned is not the beneficial
or registered owner of any securities of the Company other than the Registrable
Securities listed above in Item 3.




	 	(a)	 	Type and Amount of Other Securities beneficially owned by the
Selling Securityholder:







6. Relationships with the Company:




Except as set forth below, neither the undersigned nor any of its affiliates,
officers, directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has
had any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.



     State any exceptions here:














The undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the
date hereof and prior to the Effective Date for the Registration Statement.


By signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus. The
undersigned understands that such information will be relied upon by the
Company in connection with the preparation or amendment of the Registration
Statement and the related prospectus.


IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by
its duly authorized agent.



	 	 	 
	Dated:

	 	Beneficial Owner:
	 
	 	 
	

	 	By:







 









 





Name:



Title:


PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:



Tracy Reynolds, Esq.

Carrington, Coleman, Sloman & Blumenthal, L.L.P.

200 Crescent Court, Suite 1500

Dallas, Texas 75201

Telephone: (214) 855-3050

Facsimile: (214) 855-1333