exv10w1



 





Exhibit 10.1




SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (this “Agreement”) is dated as of
October 5, 2004, among Digital Recorders, Inc., a North Carolina corporation
(the “Company”), and the investors identified on the signature pages hereto
(each, an “Investor” and collectively, the “Investors”).



     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule
506 promulgated thereunder, the Company desires to issue and sell to each
Investor, and each Investor, severally and not jointly, desires to purchase
from the Company certain securities of the Company, as more fully described in
this Agreement.



     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Investors agree
as follows:



ARTICLE I.

DEFINITIONS



     1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:



          “Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation
pending or threatened in writing against or affecting the Company, any
Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.



          “Affiliate” means any Person that, directly or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with a Person, as such terms are used in and construed under Rule 144.



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



          “Closing” means the closing of the purchase and sale of the Securities
pursuant to Article II.



          “Closing Date” means the Business Day immediately following the date on
which all of the conditions set forth in Sections 5.1 and 5.2 hereof are
satisfied, or such other date as the parties may agree.



 









 





          “Commission” means the Securities and Exchange Commission.



          “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.



          “Common Stock Equivalents” means any securities of the Company or any
Subsidiary which entitle the holder thereof to acquire Common Stock at any
time, including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.



          “Company Counsel” means Carrington, Coleman, Sloman & Blumenthal, L.L.P.
and Gray, Layton, Kersh, Soloman, Sigmon, Furr & Smith, P.A.



          “Company Deliverables” has the meaning set forth in Section 2.2(a).



          “Disclosure Materials” has the meaning set forth in Section 3.1(h).



          “Effective Date” means the date that the Registration Statement required
by Section 2(a) of the Registration Rights Agreement is first declared
effective by the Commission.



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



          “GAAP” means U.S. generally accepted accounting principals.



          “Intellectual Property Rights” has the meaning set forth in Section
3.1(n).



          “Investment Amount” means, with respect to each Investor, the Investment
Amount indicated on such Investor’s signature page to this Agreement.



          “Investor Deliverables” has the meaning set forth in Section 2.2(b).



          “Investor Party” has the meaning set forth in Section 4.7.



          “Lien” means any lien, charge, encumbrance, security interest, right of
first refusal or other restrictions of any kind, other than restrictions on
transfer of securities arising under federal or state securities laws and
regulations.



          “Material Adverse Effect” means any of (i) a material and adverse effect
on the legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) an adverse impairment to the Company’s
ability to perform on a timely basis its obligations under any Transaction
Document.



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



          “Per Unit Purchase Price” equals $4.14.



          “Person” means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.



          “Principal Market” means the NASDAQ Small Cap Market.



          “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.



          “Registration Statement” means the registration statement of the Company
meeting the requirements set forth in the Registration Rights Agreement and
covering the resale by the Investors of the Shares and the Warrant Shares.



          “Registration Rights Agreement” means the Registration Rights Agreement,
dated as of the date of this Agreement, among the Company and the Investors, in
the form of Exhibit B hereto.



          “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.



          “SEC Reports” has the meaning set forth in Section 3.1(h).



          “Securities” means the Shares, the Warrants and the Warrant Shares.



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



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



          “Short Sales” has the meaning set forth in Section 3.2(f).



          “Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w)
of the Regulation S-X promulgated by the Commission under the Exchange Act.



          “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



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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.



          “Trading Market” means whichever of the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.



          “Transaction Documents” means this Agreement, the Warrants, the
Registration Rights Agreement, and any other documents or agreements executed
in connection with the transactions contemplated hereunder.



          “Warrants” means the Common Stock purchase warrants in the form of Exhibit
A, which are issuable to the Investors at the Closing.



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



ARTICLE II.

PURCHASE AND SALE



     2.1 Closing. Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to each Investor,
and each Investor shall, severally and not jointly, purchase from the Company,
the Shares and the Warrants representing such Investor’s Investment Amount.
The Closing shall take place at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, NY 10022 on the Closing Date or at such other location
or time as the parties may agree.



     2.2
Closing Deliveries. At the Closing, the Company shall deliver or
cause to be delivered to each Investor the following (the “Company
Deliverables”):



                  (i) a certificate evidencing a number of Shares equal to such Investor’s
Investment Amount divided by the Per Unit Purchase Price, registered in the
name of such Investor;



                  (ii) a Warrant, registered in the name of such Investor, pursuant to which
such Investor shall have the right to acquire a number of shares of Common
Stock equal to 20% of the number of Shares issuable to such Investor pursuant
to Section 2.2(a)(i);



                  (iii) the legal opinion of Company Counsel addressed to the Investors in
the form attached as Exhibit A-1 and Exhibit A-2 hereto;



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                  (iv) the Registration Rights Agreement, duly executed by the Company; and



                  (v) the Irrevocable Transfer Agent Instructions in the form attached as
Exhibit B hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company’s transfer agent.



          (b) At the Closing, each Investor shall deliver or cause to be delivered
to the Company the following (the “Investor Deliverables”):



                  (i) its Investment Amount, in United States dollars and in immediately
available funds, by wire transfer to an account designated in writing by the
Company for such purpose; and



                  (ii) the Registration Rights Agreement, duly executed by such Investor.



ARTICLE III.

REPRESENTATIONS AND WARRANTIES



     3.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to each Investor:



          (a) Subsidiaries. The Company has no direct or indirect Subsidiaries
other than as specified in the SEC Reports. Except as disclosed in Schedule
3.1(a), the Company owns, directly or indirectly, all of the capital stock of
each Subsidiary free and clear of any and all Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights.



          (b) Organization and Qualification. The Company and each Subsidiary are
duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. The Company and each Subsidiary are duly
qualified to conduct its respective businesses and are in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect.



          (c) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of



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the Transaction Documents and otherwise to carry out its obligations
thereunder. The execution and delivery of each of the Transaction Documents by
the Company and the consummation by it of the transactions contemplated thereby
have been duly authorized by all necessary action on the part of the Company
and no further action is required by the Company in connection therewith. Each
Transaction Document has been (or upon delivery will have been) duly executed
by the Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors’ rights and remedies or by other equitable principles of general
application.



          (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
or (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or
other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal
and state securities laws and regulations and the rules and regulations of the
Principal Market), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of clauses (ii) and
(iii), such as would not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.



          (e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filing with the Commission of one or more
Registration Statements in accordance with the requirements of the Registration
Rights Agreement, (ii) filings required by state securities laws, (iii) the
filing of a Notice of Sale of Securities on Form D with the Commission under
Regulation D of the Securities Act (iv) the filing required to be made pursuant
to Rule 4310(c)(17)(D) of the Nasdaq Stock Market, which will be made prior to
Closing, (v) the filings required in accordance with Section 4.5, and (vi)
those that have been made or obtained prior to the date of this Agreement.
Except as disclosed on Schedule 3.1(e), the Company and its Subsidiaries are
unaware of any facts or circumstances that might prevent the Company from
obtaining or effecting any of the registration, application



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or filings pursuant to the preceding sentence. The Company is not in
violation of the listing requirements of the Principal Market and has no
knowledge of any facts that would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.



          (f) Issuance of the Securities. The Securities have been duly authorized
and, when issued and paid for in accordance with the Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens. The Company has reserved from its duly authorized capital stock
the shares of Common Stock issuable pursuant to this Agreement and the Warrants
in order to issue the Shares and the Warrant Shares. The Securities are not
subject to any preemptive or similar rights to subscribe for or purchase
securities, except as have been waived prior to the Closing. The Company
shall, so long as any of the Warrants are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
Capital Stock, solely for the purpose of effecting the exercise of the
Warrants, 100% of the number of shares of Common Stock issuable upon exercise
of the Warrants. Upon exercise in accordance with the Warrants, the Warrant
Shares will be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. Assuming
the accuracy of the representations and warranties of the Investor made herein,
the issuance by the Company of the Securities is exempt from registration under
the 1933 Act.



          (g) Capitalization. As of the date hereof, the authorized , issued and
outstanding capital stock of the Company and all shares of capital stock
reserved for issuance under the Company’s various option and incentive plans
convertible securities or other instruments, is as set forth on Schedule
3.1(g). Except as specified in the SEC Reports or on Schedule 3.1(g), no
security holders of the Company are entitled to preemptive or similar rights,
and no Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as specified in the SEC
Reports or on Schedule 3.1(g), there are no outstanding options, warrants,
scrip rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. Except as specified in the SEC
Reports or on Schedule 3.1(g), the issue and sale of the Securities will not,
immediately or with the passage of time, obligate the Company to issue shares
of Common Stock or other securities to any Person (other than the Investors)
and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under such securities.



          (h) SEC Reports; Financial Statements. Except as disclosed on Schedule
3.1(h), the Company has filed all reports required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the twelve months preceding the date hereof (the foregoing
materials, as amended, being collectively referred to



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herein as the “SEC Reports” and, together with the Schedules to this
Agreement (if any), the “Disclosure Materials”) on a timely basis or has timely
filed a request for and obtained a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such extension.
Except as disclosed on Schedule 3.1(h), as of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved,
except as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position of
the Company and its consolidated Subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial, year-end
audit adjustments.



          (i) Press Releases. The press releases disseminated by the Company during
the twelve months preceding the date of this Agreement taken as a whole do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made and when
made, not misleading.



          (j) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there has been no event, occurrence or development that
has had or that would reasonably be expected to result in a Material Adverse
Effect, (ii) the Company has not incurred any liabilities (contingent or
otherwise) other than (A) trade payables, accrued expenses and other
liabilities incurred in the ordinary course of business consistent with past
practice and (B) liabilities reflected in the Company’s quarterly financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
or not required to be so reflected or disclosed, (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its common stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company
stock option plans or previously issued warrants or convertible securities.
The Company does not have pending before the Commission any request for
confidential treatment of information.



          (k) Litigation. Except as disclosed on Schedule 3.1(k), there is no
Action which (i) adversely affects or challenges the legality, validity or
enforceability of any of the



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Transaction Documents or the Securities or (ii) except as specifically
disclosed in the SEC Reports, would, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
director or officer thereof (in his or her capacity as such), is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty, except
as specifically disclosed in the SEC Reports. There has not been, and to the
knowledge of the Company, there is not pending any investigation by the
Commission involving the Company or any current or former director or officer
of the Company (in his or her capacity as such). The Commission has not issued
any stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.



          (l) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.



          (m) Compliance. Neither the Company nor any Subsidiary (i) is in default
under or in violation of (and no event has occurred that has not been waived
that, with notice or lapse of time or both, would result in a default by the
Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (except to the extent such default or violation has been waived), (ii) is
in violation of any order of any court, arbitrator or governmental body, or
(iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws relating to taxes, environmental protection, occupational
health and safety, product quality and safety and employment and labor matters,
except in each case as would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect. The Company is
in compliance with all effective requirements of the Sarbanes-Oxley Act of
2002, as amended, and the rules and regulations thereunder, that are applicable
to it, except where such noncompliance would not have or reasonably be expected
to result in a Material Adverse Effect.



          (n) Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other
similar rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have would, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the “Intellectual
Property Rights”). Except as set forth in the SEC Reports or on Schedule
3.1(n), neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. Except as set forth in
the SEC Reports, to the knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement by
another Person of any of the Intellectual Property Rights.



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          (o) Insurance. The Company and the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged. The Company has no reason to believe
that it will not be able to renew its and the Subsidiaries’ existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business on terms
substantially as currently in effect.



          (p) Transactions With Affiliates and Employees. None of the officers or
directors of the Company and, to the knowledge of the Company, none of the
employees of the Company is presently a party to any material transaction with
the Company or any Subsidiary (other than for services as employees, officers
and directors), that is required to be disclosed in the SEC Reports and is not
so disclosed.



          (q) Tax Status. The Company and each of its Subsidiaries (i) has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.



          (r) Internal Accounting Controls. Except as disclosed on Schedule 3.1(r),
the Company and the Subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures
(as defined in Exchange Act rules 13a-14 and 15d-14) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s Form 10-K or 10-Q, as the case may be, is
being prepared. The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures as of the last day of
the period covered by the Form 10-K/A for the Company’s most recently ended
fiscal year (such date, the “Evaluation Date”). The Company presented in its
most recently filed Form 10-K or Form 10-Q the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date. Except as disclosed on
Schedule 3.1(r), since the



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Evaluation Date, there have been no significant changes in the Company’s
internal controls (as such term is defined in Item 307(b) of Regulation S-K
under the Exchange Act) or, to the Company’s knowledge, in other factors that
would significantly affect the Company’s internal controls.



          (s) Solvency. Based on the financial condition of the Company as of the
Closing Date (and assuming that the Closing shall have occurred), the current
cash flow of the Company, together with the proceeds the Company would receive,
were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt).



          (t) Certain Fees. Except as described in Schedule 3.1(t), no brokerage or
finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
this Agreement. The Investors shall have no obligation with respect to any
fees or with respect to any claims (other than such fees or commissions owed by
an Investor pursuant to written agreements executed by such Investor which fees
or commissions shall be the sole responsibility of such Investor) made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by this Agreement.
The Company shall pay, and hold each Investor harmless against, any liability,
loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim.



          (u) Certain Registration Matters. Assuming the accuracy of the Investors’
representations and warranties set forth in Section 3.2(b)-(e), no registration
under the Securities Act is required for the offer and sale of the Shares and
Warrant Shares by the Company to the Investors under the Transaction Documents.
The Company is not currently eligible to register the resale of its Common
Stock for resale by the Investors under Form S-3 promulgated under the
Securities Act. The Company has not granted or agreed to grant to any Person
any rights (including “piggy-back” registration rights) to have any securities
of the Company registered with the Commission or any other governmental
authority that have not been satisfied.



          (v) No General Solicitation; Placement Agent’s Fees. Neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the
Securities.



          (w) No Integrated Offering. None of the Company, its Subsidiaries, any of
their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of



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the Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of any Trading
Market on which any of the securities of the Company are listed or designated.
None of the Company, its Subsidiaries, their affiliates and any Person acting
on their behalf will take any action or steps referred to in the preceding
sentence that would require registration of any of the Securities under the
1933 Act or cause the offering of the Securities to be integrated with other
offerings.



          (x) Listing and Maintenance Requirements. Except as specified in the SEC
Reports or on Schedule 3.1(x), the Company has not, in the two years preceding
the date hereof, received notice from any Trading Market to the effect that the
Company is not in compliance with the listing or maintenance requirements
thereof. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with the listing and
maintenance requirements for continued listing of the Common Stock on the
Trading Market on which the Common Stock is currently listed or quoted. The
issuance and sale of the Securities under the Transaction Documents does not
contravene the rules and regulations of the Trading Market on which the Common
Stock is currently listed or quoted, and no approval of the shareholders of the
Company thereunder is required for the Company to issue and deliver to the
Investors the Securities contemplated by Transaction Documents.



          (y) Investment Company. The Company is not, and is not an Affiliate of,
and immediately following the Closing will not have become, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.



          (z) Application of Takeover Protections. The Company has taken all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the
Company’s Certificate of Incorporation (or similar charter documents) or the
laws of its state of incorporation that is or would become applicable to the
Investors as a result of the Investors acquiring Securities at Closing
including the Warrant Shares issuable upon exercise of the Warrants, assuming
that no Investor or group of Investors (as defined in Rule 13d-1 of the
Exchange Act) acquires more than 15% of the Company’s Common Stock other than
solely by purchasing Shares and Warrant Shares from the Company.



          (aa) No Additional Agreements. The Company does not have any agreement or
understanding with any Investor with respect to the transactions contemplated
by the Transaction Documents other than as specified in the Transaction
Documents.



          (bb) Disclosure. The Company confirms that neither it nor any Person
acting on its behalf has provided any Investor or its respective agents or
counsel with any information that the Company believes constitutes material,
non-public information except insofar as the existence and terms of the
proposed transactions hereunder may constitute such information. The Company
understands and confirms that the Investors will rely on the foregoing
representations



-12-









 




and covenants in effecting transactions in securities of the Company. The
Company’s representations and warranties set forth in this Agreement are true
and correct and do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.



     3.2 Representations and Warranties of the Investors. Each Investor
hereby, for itself and for no other Investor, represents and warrants to the
Company as follows:



          (a) Organization; Authority. Such Investor is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder.
The execution, delivery and performance by such Investor of the transactions
contemplated by this Agreement has been duly authorized by all necessary
corporate or, if such Investor is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such
Investor. Each of this Agreement and the Registration Rights Agreement has
been duly executed by such Investor, and when delivered by such Investor in
accordance with terms hereof, will constitute the valid and legally binding
obligation of such Investor, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally the enforcement of, creditors’ rights and remedies
or by other equitable principles of general application.



          (b) Investment Intent. Such Investor is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof,
without prejudice, however, to such Investor’s right at all times to sell or
otherwise dispose of all or any part of such Securities in compliance with
applicable federal and state securities laws. Subject to the immediately
preceding sentence, nothing contained herein shall be deemed a representation
or warranty by such Investor to hold the Securities for any period of time.
Such Investor is acquiring the Securities hereunder in the ordinary course of
its business. Such Investor does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.



          (c) Investor Status. At the time such Investor was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises Warrants it will be, an “accredited investor” as defined in Rule
501(a) under the Securities Act. Such Investor is not a registered
broker-dealer under Section 15 of the Exchange Act.



          (d) General Solicitation. Such Investor is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar.



-13-









 





          (e) Access to Information. Such Investor acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of investing in the Securities;
(ii) access to information about the Company and the Subsidiaries and their
respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment;
and (iii) the opportunity to obtain such additional information that the
Company possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Investor or its representatives or counsel shall modify,
amend or affect such Investor’s right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company’s representations and
warranties contained in the Transaction Documents.



          (f) Certain Trading Activities. Such Investor has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Investor, engaged in any transactions in the securities
of the Company (including, without limitation, any Short Sales involving the
Company’s securities) since the time that such Investor was first contacted by
the Company or Roth Capital Partners, LLC regarding an investment in the
Company. For purposes of this Section, “Short Sales” include, without
limitation, all “short sales” as defined in Rule 200 of Regulation SHO adopted
under the Exchange Act and include all types of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, short sales, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker-dealers or foreign regulated brokers having
the effect of hedging the securities or investment made under this Agreement.
Such Investor covenants that neither it, nor any person acting on its behalf or
pursuant to any understanding with it, will engage in any transactions in the
securities of the Company (including Short Sales) (a) prior to the time that
the transactions contemplated by this Agreement are publicly disclosed, or (b)
in violation of any laws or any rules or regulations of the Commission. Such
Investor is aware of the Commission’s position set forth in Item 65, Section 5,
under Section A, of the Manual of Publicly Available Telephone Interpretations,
dated July 1997, compiled by the Office of Chief Counsel, Division of
Corporation Finance.



          (g) Independent Investment Decision. Such Investor has independently
evaluated the merits of its decision to purchase Securities pursuant to the
Transaction Documents, and such Investor confirms that it has not relied on the
advice of any other Investor’s business and/or legal counsel in making such
decision. Such Investor has not relied on the business or legal advice of Roth
Capital Partners, LLC or any of its agents, counsel or Affiliates in making its
investment decision hereunder, and confirms that none of such Persons has made
any representations or warranties to such Investor in connection with the
transactions contemplated by the Transaction Documents.



-14-









 




The Company acknowledges and agrees that no Investor has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.



ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES



     4.1 (a) Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of the Securities
other than pursuant to an effective registration statement, to the Company, to
an Affiliate of an Investor or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor, the form and
substance of which opinion shall be reasonably satisfactory to the Company, to
the effect that such transfer does not require registration of such transferred
Securities under the Securities Act.



          (b) Certificates evidencing the Securities will contain the following
legend, until such time as they are not required under Section 4.1(c):




[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE
OF THESE SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE
NOT 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] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.



          The Company acknowledges and agrees that an Investor may from time to time
pledge, and/or grant a security interest in some or all of the Securities
pursuant to a bona fide margin agreement in connection with a bona fide margin
account of Investor and, if required under the terms of such agreement or
account, such Investor may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to



-15-









 




approval or consent of the Company and no legal opinion of legal counsel to the
pledgee, secured party or pledgor shall be required in connection with the
pledge, but such legal opinion may be required in connection with a subsequent
transfer by the pledgee or secured party, following default by the Investor or
otherwise. No notice shall be required of such pledge. At the appropriate
Investor’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably
request in connection with a pledge or transfer of the Securities including the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) of the Securities Act or other applicable provision of the Securities
Act to appropriately amend the list of Selling Stockholders thereunder.



          (c) Certificates evidencing the Shares and Warrant Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)): (i)
following a sale of such Securities pursuant to an effective registration
statement (including the Registration Statement) covering the resale of such
Securities, or (ii) following a sale of such Shares or Warrant Shares pursuant
to Rule 144 (assuming the transferor is not an Affiliate of the Company), or
(iii) while such Shares or Warrant Shares are eligible for sale under Rule
144(k). The Company shall use its best efforts to cause its counsel to issue
any legal opinion or instruction required by the Company’s transfer agent to
comply with the requirements set forth in this Section. Following such time as
restrictive legends are not required to be placed on certificates representing
Shares or Warrant Shares pursuant to the preceding sentence, the Company will,
no later than four Trading Days following the delivery by an Investor to the
Company or the Company’s transfer agent of a certificate representing Shares or
Warrant Shares containing a restrictive legend, deliver or cause to be
delivered to such Investor a certificate representing such Shares or Warrant
Shares that is free from all restrictive and other legends. The Company may
not make any notation on its records or give instructions to any transfer agent
of the Company that enlarge the restrictions on transfer set forth in this
Section.



     4.2 Furnishing of Information. As long as any Investor owns the
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Investor owns Securities, if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to
the Investors and make publicly available in accordance with Rule 144(c) such
information as is required for the Investors to sell the Shares and Warrant
Shares in compliance with Rule 144. The Company further covenants that it will
take such further action as any holder of Shares may reasonably request, all to
the extent required from time to time to facilitate transfers without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.



     4.3 Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or
sale of the Securities in a manner that would require the registration under
the Securities Act of the sale of the Securities to the Investors, or that
would be integrated with the



-16-









 




offer or sale of the Securities for purposes of the rules and regulations
of any Trading Market in a manner that would require stockholder approval of
the sale of the securities to the Investors.



     4.4 Subsequent Registrations. Other than pursuant to the Registration
Statement, prior to the Effective Date, the Company may not file any
registration statement with the Commission with respect to any securities of
the Company (other than on Form S-8).



     4.5 Securities Laws Disclosure; Publicity. By 9:45 a.m. (New York time)
on October 6, 2004, and by 9:30 a.m. (New York time) on the Closing Date, the
Company shall issue press releases disclosing the transactions contemplated
hereby and the Closing. On the Trading Day after the execution of this
Agreement the Company will file a Current Report on Form 8-K disclosing the
material terms of the Transaction Documents (and attach as exhibits thereto the
Transaction Documents), and on the Closing Date the Company will file an
additional Current Report on Form 8-K to disclose the Closing. In addition,
the Company will make such other filings and notices in the manner and time
required by the Commission and the Trading Market on which the Common Stock is
listed. Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Investor, or include the name of any Investor in any filing
with the Commission (other than the Registration Statement and any exhibits to
filings made in respect of this transaction in accordance with periodic filing
requirements under the Exchange Act) or any regulatory agency or Trading
Market, without the prior written consent of such Investor, except to the
extent such disclosure is required by law or Trading Market regulations.



     4.6 Limitation on Issuance of Future Priced Securities. During the six
months following the Closing Date, the Company shall not issue any “Future
Priced Securities” as such term is described by NASD IM-4350-1.



     4.7 Indemnification of Investors. In addition to the indemnity provided
in the Registration Rights Agreement, the Company will indemnify and hold the
Investors and their directors, officers, shareholders, partners, employees and
agents (each, an “Investor Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation (collectively, “Losses”)
that any such Investor Party may suffer or incur as a result of or relating to
any misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document.



     4.8 Non-Public Information. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Investor or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Investor shall have
expressly consented to such disclosure and have executed a written agreement
regarding the confidentiality and use of such information.



     4.9 Listing of Securities. The Company agrees, (i) if the Company applies
to have the Common Stock traded on any other Trading Market, it will include in
such application the



-17-









 




Shares and Warrant Shares, and will take such other action as is necessary
or desirable to cause the Shares and Warrant Shares to be listed on such other
Trading Market as promptly as possible, and (ii) it will take all action
reasonably necessary to continue the listing and trading of its Common Stock on
the Principal Market and will comply in all material respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
the Trading Market.



     4.10 Use of Proceeds. The Company will use the net proceeds from the sale
of the Securities hereunder for working capital purposes, the retirement of any
indebtedness of the Company, the possible redemption of outstanding convertible
securities and potential business acquisitions.



     4.11 Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Investor promptly after such filing. The Company, on or before
the Closing Date, shall take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Investors at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Investors on or prior to the
Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or “Blue
Sky” laws of the states of the United States following the Closing Date.



     4.12 Reporting Status. Until the date on which the Investors shall have
sold all the Common Shares and Warrant Shares and none of the Warrants is
outstanding (the “Reporting Period”), the Company shall timely file all reports
required to be filed with the SEC pursuant to the Exchange Act, and the Company
shall not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations thereunder
would otherwise permit such termination.



     4.13 Reasonable Best Efforts. Each party shall use its reasonable best
efforts timely to satisfy each of the covenants and the conditions to be
satisfied by it as provided in Sections 5.1 and 5.2 of this Agreement.



ARTICLE V.

CONDITIONS PRECEDENT TO CLOSING



     5.1 Conditions Precedent to the Obligations of the Investors to Purchase
Securities. The obligation of each Investor to acquire Securities at the
Closing is subject to the satisfaction or waiver by such Investor, at or before
the Closing, of each of the following conditions:



          (a) Representations and Warranties. The representations and warranties of
the Company contained herein shall be true and correct in all material respects
as of the date when made and as of the Closing as though made on and as of such
date;



-18-









 





          (b) Performance. The Company shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
by the Transaction Documents to be performed, satisfied or complied with by it
at or prior to the Closing;



          (c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents;



          (d) Adverse Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably would have or
result in a Material Adverse Effect;



          (e) No Suspensions of Trading in Common Stock; Listing. Trading in the
Common Stock shall not have been suspended by the Commission or any Trading
Market (except for any suspensions of trading of not more than one Trading Day
solely to permit dissemination of material information regarding the Company)
at any time since the date of execution of this Agreement, and the Common Stock
shall have been at all times since such date listed for trading on a Trading
Market;



          (f) Nasdaq Listing. The Nasdaq Stock Market shall have waived application
of the 15 day prior notice contained in NASD Marketplace Rule 4310(c)(17)(D) or
such timeframe shall have expired without objection;



          (g) Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a); and



          (h) Timing. The Closing shall have occurred no later than October 6,
2004.



     5.2 Conditions Precedent to the Obligations of the Company to sell
Securities. The obligation of the Company to sell Securities at the Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:



          (a) Representations and Warranties. The representations and warranties of
each Investor contained herein shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made on
and as of such date;



          (b) Performance. Each Investor shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Investor at or prior to the Closing;



-19-









 





          (c) Nasdaq Listing. The Nasdaq Stock Market shall have waived application
of the 15 day prior notice contained in NASD Marketplace Rule 4310(c)(17)(D) or
such timeframe shall have expired without objection;



          (d) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents;



          (e) Investors Deliverables. Each Investor shall have delivered its
Investors Deliverables in accordance with Section 2.2(b); and



          (f) Timing. The Closing shall have occurred no later than October 6,
2004.



ARTICLE VI.

MISCELLANEOUS




     6.1 Fees and Expenses. At the Closing, the Company shall reimburse
Riverview Group, LLC, an Investor, for its legal and due diligence fees and
expenses in connection with the negotiation of the Transaction Documents by
paying up to $10,000 to Schulte Roth & Zabel LLP, which amount shall be
withheld by the Investor from its Purchase Price to be paid at Closing. Except
as specified in the immediately preceding sentence, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of the Transaction Documents.
The Company shall pay all stamp and other taxes and duties levied in connection
with the sale of the Shares.



     6.2 Entire Agreement. The Transaction Documents, together with the
Exhibits and Schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements,
understandings, discussions and representations, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such
documents, exhibits and schedules.



     6.3 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:



-20-









 





	 	 	 
	If to the Company:

	 	Digital Recorders, Inc.

5949 Sherry Lane, Suite 1050

Dallas, Texas 75225

Facsimile: (214) 378-8437

Attn.: David L. Turney
	 
	 	 
	With a copy to:

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

200 Crescent Court, Suite 1500

Dallas, Texas 75201

Facsimile: (214) 855-1333

Attn.: Kenn W. Webb, Esq.
	 
	 	 
	If to an Investor:

	 	To the address set forth under such Investor’s name on the signature pages hereof;
	 
	 	 
	With a copy (for informational

purposes only) to:

	 	Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer Klein, Esq.






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



     6.4 Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived or amended except in a written instrument signed
by the Company and the Investors holding a majority of the Shares. No waiver
of any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right. No
consideration shall be offered or paid to any Investor to amend or consent to a
waiver or modification of any provision of any Transaction Document unless the
same consideration is also offered to all Investors who then hold Shares.



     6.5 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party. This
Agreement shall be construed as if drafted jointly by the parties, and no
presumption or



-21-









 




burden of proof shall arise favoring or disfavoring any party by virtue of
the authorship of any provisions of this Agreement or any of the Transaction
Documents.



     6.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Investors. Any Investor may
assign any or all of its rights under this Agreement to any Person to whom such
Investor assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the “Investors.”



     6.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.7 (as to each
Investor Party).



     6.8 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 and any other
Transaction Documents (whether brought against 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 (including with respect to the enforcement of the any of
the Transaction Documents), 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 such 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 legal 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 a Transaction
Document, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such
Proceeding.



-22-









 





     6.9 Survival. The representations and warranties contained herein shall
survive until the second anniversary of the Closing. The agreements and
covenants contained herein shall survive the Closing and the delivery of the
Securities in accordance with their respective terms.



     6.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.



     6.11 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.



     6.12 Rescission and Withdrawal of Elections, Etc. Notwithstanding
anything to the contrary contained in (and without limiting any similar
provisions of) the Transaction Documents, whenever any Investor exercises a
right, election, demand or option under a Transaction Document and the Company
does not timely perform its related obligations within the periods therein
provided, then such Investor may rescind or withdraw, in its sole discretion
from time to time upon written notice to the Company, any relevant notice,
demand or election in whole or in part without prejudice to its future actions
and rights.



     6.13 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new
certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary
and reasonable indemnity, if requested. The applicants for a new certificate
or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Securities.
If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such
mutilated certificate or instrument as a condition precedent to any issuance of
a replacement.



     6.14 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Investors and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any



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action for specific performance of any such obligation the defense that a
remedy at law would be adequate.



     6.15 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Investor pursuant to any Transaction Document or an Investor
enforces or exercises its rights thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.



     6.16 Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by such
Investor independently of any other Investor. 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 the Transaction Documents.
Each Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no
Investor will be acting as agent of such Investor in connection with monitoring
its investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and
enforce its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, 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 Transaction Documents for the purpose
of closing a transaction with multiple Investors and not because it was
required or requested to do so by any Investor.



     6.17 Limitation of Liability. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that the liability of an Investor
arising directly or indirectly, under any Transaction Document of any and every
nature whatsoever shall be satisfied solely out of the assets of such Investor,
and that no trustee, officer, other investment vehicle or any other Affiliate
of such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of
such Investor.



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SIGNATURE PAGES FOLLOW]




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     IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

	 	 	 	 	 
	 	DIGITAL RECORDERS, INC.

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




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SIGNATURE PAGES FOR INVESTORS FOLLOW]





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



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



	 	 	 	 	 
	 	Investment Amount: $5,000,000
	 	 	  	 	 
	 	Tax ID No.:  	 	 
	 
	 	Date:  	 	 
	 



	 	 	 	 	 
	 	ADDRESS FOR NOTICE
	 
	 	c/o:  	 	 
	 
	 	Street: 	666 Fifth Avenue, 8th Floor   	 
	 
	 	City/State/Zip:	New York, NY 10103	 
	 
	 	Attention:	 Daniel Cardella	 
	 
	 	Tel:	 (212) 841-4100	 
	 
	 	Fax:	(212) 977-1667 	 
	 



	 	 	 	 	 
	 	DELIVERY INSTRUCTIONS

(if different from above)
	 
	 	c/o:  	 	 
	 
	 	Street:  	 	 
	 
	 	City/State/Zip:  	 	 
	 
	 	Attention:  	 	 
	 
	 	Tel:  	 	 
	 





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