UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-28539

DRI CORPORATION

(Exact name of Registrant as specified in its Charter)

North Carolina		56-1362926
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

13760 Noel Road, Suite 830
Dallas, Texas 75240
(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (214) 378-8992

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No þ

     Indicate the number of shares outstanding of the registrant’s Common Stock as of October 31, 2009:

Common Stock, par value $.10 per share		11,734,073
(Class of Common Stock)		Number of Shares

 

 

DRI CORPORATION AND SUBSIDIARIES

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets — September 30, 2009 (Unaudited) and December 31, 2008			3
Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2009 and 2008 (Unaudited)			5
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 4T. Controls and Procedures			32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 4. Submission of Matters to a Vote of Securityholders			34
Item 5. Other Information			34
Item 6. Exhibits			34
SIGNATURES			41
EX-4.5.2
EX-10.22.4
EX-10.24.7
EX-10.43.1
EX-10.44.1
EX-10.45.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

DRI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)

		September 30, 2009				December 31, 2008
		(Unaudited)				(Note 1)
ASSETS
Current Assets
Cash and cash equivalents		$	1,552			$	598
Trade accounts receivable, net			17,394				12,403
Current portion of note receivable			86				86
Other receivables			1,560				431
Inventories			13,477				10,662
Prepaids and other current assets			877				427
Total current assets			34,946				24,607
Property and equipment, net			4,705				3,607
Long-term portion of note receivable			172				172
Goodwill			10,041				9,034
Intangible assets, net			773				790
Deferred tax assets, net			—				94
Other assets			984				1,157
Total assets		$	51,621			$	39,461
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Lines of credit		$	4,336			$	3,743
Loans payable			1,642				719
Current portion of long-term debt			751				193
Current portion of foreign tax settlement			467				386
Accounts payable			12,179				5,347
Accrued expenses and other current liabilities			5,584				4,359
Preferred stock dividends payable			16				16
Total current liabilities			24,975				14,763
Long-term debt and capital leases, net			6,860				5,149
Foreign tax settlement, long-term			213				528
Deferred tax liabilities, net			56				137
Liability for uncertain tax positions			333				300
Commitments and contingencies (Notes 6 and 7)
Shareholders’ Equity and Noncontrolling Interests
Series E Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value, liquidation preference of $5,000 per share; 500 shares authorized; 80 shares issued and outstanding at September 30, 2009, and December 31, 2008; redeemable at the discretion of the Company at any time.			337				337
Series G Redeemable, Convertible Preferred Stock, $.10 par value, liquidation preference of $5,000 per share; 600 shares authorized; 471 and 444 shares issued and outstanding at September 30, 2009, and December 31, 2008, respectively; redeemable at the discretion of the Company after five years from date of issuance.			2,073				1,938
Series H Redeemable, Convertible Preferred Stock, $.10 par value, liquidation preference of $5,000 per share; 600 shares authorized; 68 and 64 shares issued and outstanding at September 30, 2009, and December 31, 2008, respectively; redeemable at the discretion of the Company after five years from date of issuance.			292				272
Series J Redeemable, Convertible Preferred Stock, $.10 par value, liquidation preference of $5,000 per share; 250 shares authorized; 90 shares issued and outstanding at September 30, 2009, and December 31, 2008; redeemable at the discretion of the Company at any time.			388				388
Series AAA Redeemable, Nonvoting, Convertible Preferred Stock, $.10 par value, liquidation preference of $5,000 per share; 20,000 shares authorized; 166 shares issued and outstanding at September 30, 2009, and December 31, 2008; redeemable at the discretion of the Company at any time.			830				830
Common stock, $.10 par value, 25,000,000 shares authorized; 11,534,993 and 11,466,606 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively.			1,154				1,147
Additional paid-in capital			29,985				32,706
Accumulated other comprehensive income — foreign currency translation			2,726				512
Accumulated deficit			(19,003	)			(20,398	)
Total DRI shareholders’ equity			18,782				17,732
Noncontrolling interests
Noncontrolling interest — Mobitec Brazil Ltda.			—				596
Noncontrolling interest — Castmaster Mobitec India Private Limited			402				256
Total noncontrolling interests			402				852
Total shareholders’ equity			19,184				18,584
Total liabilities and shareholders’ equity		$	51,621			$	39,461

See accompanying notes to unaudited consolidated financial statements.

DRI CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(In thousands, except shares and per share amounts)
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net sales		$	21,606			$	18,794			$	56,385			$	54,922
Cost of sales			14,401				12,294				38,761				35,847
Gross profit			7,205				6,500				17,624				19,075
Operating expenses
Selling, general and administrative			5,000				4,798				14,628				13,921
Research and development			160				199				428				723
Total operating expenses			5,160				4,997				15,056				14,644
Operating income			2,045				1,503				2,568				4,431
Other income (loss)			(8	)			61				(120	)			130
Foreign currency gain (loss)			(343	)			125				(319	)			289
Interest expense			(358	)			(390	)			(1,059	)			(1,051	)
Total other income and expense			(709	)			(204	)			(1,498	)			(632	)
Income before income tax expense			1,336				1,299				1,070				3,799
Income tax expense			(212	)			(291	)			(174	)			(1,179	)
Net income			1,124				1,008				896				2,620
Net (income) loss attributable to noncontrolling interests			(164	)			(269	)			207				(700	)
Net income attributable to DRI			960				739				1,103				1,920
Provision for preferred stock dividends			(80	)			(77	)			(234	)			(226	)
Net income applicable to common shareholders		$	880			$	662			$	869			$	1,694
Net income per share applicable to common shareholders
Basic		$	0.08			$	0.06			$	0.08			$	0.15
Diluted		$	0.07			$	0.06			$	0.08			$	0.15
Weighted average number of common shares and common share equivalents outstanding
Basic			11,522,979				11,453,588				11,498,333				11,290,217
Diluted			13,395,830				13,052,316				11,566,882				12,885,628

See accompanying notes to unaudited consolidated financial statements.

DRI CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

(In thousands)

		Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities
Net income		$	896			$	2,620
Adjustments to reconcile net income to net cash provided by operating activities
Deferred income taxes			7				—
Change in liability for uncertain tax positions			(29	)			297
Depreciation and amortization of property and equipment			750				721
Amortization of intangible assets			87				118
Amortization of deferred financing costs			346				231
Amortization of debt discount			83				143
Amortization of beneficial conversion feature			—				54
Change in fair value of warrant liability			110				—
Loan termination fee accrual			184				—
Bad debt expense			107				100
Stock issued in lieu of cash compensation			74				64
Stock-based compensation expense			269				111
Write-down of inventory for obsolescence			133				81
Loss on sale of fixed assets			14				4
Other, primarily effect of foreign currency (gain) loss			291				(347	)
Changes in operating assets and liabilities
Increase in trade accounts receivable			(3,782	)			(2,944	)
Increase in other receivables			(960	)			(52	)
Increase in inventories			(1,962	)			(2,686	)
Increase in prepaids and other current assets			(410	)			(478	)
(Increase) decrease in other assets			(35	)			4
Increase in accounts payable			5,991				1,567
Increase in accrued expenses			869				1,925
Decrease in foreign tax settlement			(449	)			(263	)
Net cash provided by operating activities			2,584				1,270
Cash flows from investing activities
Proceeds from sale of fixed assets			3				5
Purchases of property and equipment			(111	)			(390	)
Investments in software development			(1,495	)			(1,075	)
Net cash used in investing activities			(1,603	)			(1,460	)
Cash flows from financing activities
Proceeds from bank borrowings and lines of credit			59,676				68,641
Principal payments on bank borrowings and lines of credit			(59,799	)			(65,702	)
Issuance of common stock			—				3
Payments related to new debt financing			—				(1,193	)
Payment of dividends on Preferred stock			(79	)			(83	)
Payment of dividends to noncontrolling interests			—				(184	)
Net cash provided by (used in) financing activities			(202	)			1,482
Effect of exchange rate changes on cash and cash equivalents			175				(84	)
Net increase in cash and cash equivalents			954				1,208
Cash and cash equivalents at beginning of period			598				729
Cash and cash equivalents at end of period		$	1,552			$	1,937

		Nine Months Ended September 30,
		2009				2008
		(In thousands)
Supplemental disclosures of non-cash investing and financing activities:
Fair value of warrants issued in connection with new term loan		$	—			$	333
Preferred stock dividends		$	155			$	145
Purchase of equipment under capital lease obligation		$	27			$	21
Conversion of convertible subordinated debenture		$	—			$	250
Amortization of convertible subordinated debenture beneficial conversion feature		$	—			$	54
Conversion of preferred stock to common stock		$	—			$	55
Increase in fair value of warrants due to modification		$	67			$	—
Acquisition of noncontrolling interest under short and long-term debt obligations		$	2,950			$	—

See accompanying notes to unaudited consolidated financial statements.

DRI CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     In this Quarterly Report on Form 10-Q, we will refer to DRI Corporation as “DRI,” “Company,” “we,” “us” and “our.” DRI was incorporated in 1983. DRI’s Common Stock, $.10 par value per share (the “Common Stock”), trades on the NASDAQ Capital Market^(™) under the symbol “TBUS.”

     Through its business units and wholly-owned subsidiaries, DRI manufactures, sells, and services information technology and security products either directly or through manufacturers’ representatives or distributors. Customers include municipalities, regional transportation districts, federal, state and local departments of transportation, and bus manufacturers. The Company markets primarily to customers located in North and South America, the Far East, the Middle East, Asia, Australia, and Europe.

(1) BASIS OF PRESENTATION AND DISCLOSURE

     The unaudited interim consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. Dividends paid by our subsidiaries to noncontrolling interests previously presented as other income (loss) for the nine months ended September, 2008 have been reclassified to net (income) loss attributable to noncontrolling interest in the accompanying consolidated statement of operations for those periods to conform to the presentation used in the consolidated statement of operations for the nine months ended September 30, 2009. These reclassifications have no effect on net income or shareholders’ equity as previously presented. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments and information (consisting only of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented.

     The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full fiscal year.

Product Warranties

     The Company provides a limited warranty for its products, generally for a period of one to five years. The Company’s standard warranties require the Company to repair or replace defective products during such warranty periods at no cost to the customer. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product sales are recognized. Factors that affect the Company’s warranty liability include such things as the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The following table summarizes product warranty activity during the nine months ended September 30, 2009 and 2008.

		Nine Months ended September 30,
		2009				2008
		(In thousands)
Balance at beginning of period		$	495			$	491
Additions charged to costs and expenses			173				119
Deductions			(155	)			(137	)
Foreign exchange translation (gain) loss			67				(21	)
Balance at end of period		$	580			$	452

Recent Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles”, (formerly referred to as SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC Topic 105 establishes the ASC as the source of authoritative principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC Topic 105 is effective for financial

statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC Topic 105 did not have a material impact on our consolidated financial statements for the three and nine months ended September 30, 2009.

     On February 12, 2008, the FASB issued ASC Topic 820-10-15, “Fair Value Measurements and Disclosures”, (formerly referred to as FASB Staff Position (“FSP”) No. FAS 157-2, “Effective date of FASB Statement No. 157”), which delayed the effective date of ASC Topic 820-10, (formerly referred to as SFAS No. 157), for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until 2009. The Company adopted the provisions of ASC Topic 820-10 for nonfinancial assets and nonfinancial liabilities effective January 1, 2009. The adoption of ASC Topic 820-10 with respect to nonfinancial assets and nonfinancial liabilities did not have a significant impact on our results of operations or financial condition.

     In December 2007, the FASB issued ASC Topic 805-10, “Business Combinations”, (formerly referred to as SFAS No. 141(R)). ASC Topic 805-10 retains the underlying concepts of prior guidance in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting; but ASC Topic 805-10 changed the method of applying the acquisition method in a number of significant aspects. ASC Topic 805-10 requires companies to recognize, with certain exception, 100% of the fair value of the assets acquired, liabilities assumed and non-controlling interest in acquisitions of less than 100% controlling interest when the acquisition constitutes a change in control; measure acquirer shares issued as consideration for a business combination at fair value on the date of the acquisition; recognize contingent consideration arrangements at their acquisition date fair value, with subsequent change in fair value generally reflected in earnings; recognition of reacquisition loss and gain contingencies at their acquisition date fair value; and expense, as incurred, acquisition related transaction costs. We adopted the provisions of ASC Topic 805-10 effective January 1, 2009 and accounted for the acquisition of the remaining 50% interest in Mobitec Brazil Ltda under the provisions of ASC Topic 805-10 (see Note 2 to the accompanying consolidated financial statements for further discussion of this acquisition).

     In December 2007, the FASB issued ASC Topic 810-10-65, “Consolidation”, (formerly referred to as SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51”). ASC Topic 810-10-65 establishes new standards that govern the accounting for and reporting of (1) noncontrolling interest in partially-owned consolidated subsidiaries and (2) loss of control of subsidiaries. ASC Topic 810-10-65 requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interest of the noncontrolling owners separately within the consolidated statement of position within equity, but separate from the parent’s equity and separately on the face of the consolidated income statement. Further, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be initially measured at fair value. We adopted the provisions of ASC Topic 810-10-65 effective January 1, 2009 and accounted for the acquisition of the remaining 50% interest in Mobitec Brazil Ltda under the provisions of ASC Topic 810-10-65 (see Note 2 to the accompanying consolidated financial statements for further discussion of this acquisition). The adoption of ASC Topic 810-10-65 impacted the accompanying consolidated financial statements for all periods presented as follows:

•

The noncontrolling interests in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited have been reclassified to shareholders’ equity.

•

Consolidated net income (loss) has been adjusted to include the net income (loss) attributed to the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

•

Consolidated comprehensive income (loss) has been adjusted to include the comprehensive income (loss) attributed to the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

•

We have disclosed for each reporting period the amounts of consolidated income (loss) attributed to the Company and the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited. In addition, for each reporting period we have presented a reconciliation at the beginning and end of the period of the carrying amount of equity attributable to the Company and noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

     In March 2008, the FASB issued ASC Topic 815-10, “Derivatives and Hedging”, (formerly referred to as SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133”), which is effective on a prospective basis for fiscal years and interim periods beginning after November 15, 2008. ASC Topic 815-10 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand such effects on financial position, financial performance and cash flow. We adopted the provisions of ASC Topic 815-10 effective January 1, 2009. The adoption of ASC Topic 815-10 did not have a material impact on our results of operations or financial condition.

     In April 2008, the FASB issued ASC Topic 350-30-65, “Intangibles-Goodwill and Other”, (formerly referred to as FSP FAS 142-3,“Determination of the Useful Life of Intangible Assets”) ASC Topic 350-30-65 amends the factors that should be considered in

developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC Topic 350-30-65 is effective for fiscal years beginning after December 15, 2008. We adopted the provisions of ASC Topic 350-30-65 effective January 1, 2009. The adoption of ASC Topic 350-30-65 did not have a material impact on our results of operations or financial condition.

     In June 2008, the FASB issued ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity”, (formerly referred to as Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”). ASC Topic 815-40 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10-15 (formerly referred to as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). ASC Topic 815-40 is effective for financial statements issued for fiscal years beginning after December 15, 2008. In conjunction with a loan agreement pursuant to which a $5.0 million term loan was obtained in June 2008, the Company issued the lender warrants to purchase up to 350,000 shares of our Common Stock. These warrants were determined to be a derivative instrument based on the clarification within ASC Topic 815-40. As of January 1, 2009, the fair value of these warrants was reclassified from equity to a current liability and a cumulative effect adjustment to retained earnings was recorded for the change in the fair value of the warrants. During the period in which the warrants are classified as a liability, the fair value of the warrants will be periodically remeasured with any changes in value recognized in other income (loss) in the consolidated financial statements. See the “Fair Value of Assets and Liabilities” section below for further discussion of accounting treatment of these warrants.

     In May 2009, the FASB issued ASC Topic 855-10, “Subsequent Events”, (formerly referred to as SFAS No. 165, “Subsequent Events”). ASC Topic 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855-10 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of ASC Topic 855-10 did not have an impact on our consolidated financial statements for the three and nine months ended September 30, 2009, as it is our continuing policy to evaluate subsequent events through the date our financial statements are issued. For the quarterly period ended September 30, 2009, we have evaluated subsequent events through November 16, 2009, which is the date our financial statements were issued and filed with the SEC.

     In April 2009, the FASB issued ASC Topic 825-10-65, “Financial Instruments”, (formerly referred to as FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”) ASC Topic 825-10-65 enhances consistency in financial reporting by increasing the frequency of fair value disclosures. ASC Topic 825-10-65 relates to fair value disclosures for any financial instruments that are not currently reflected on a company’s balance sheet at fair value. ASC Topic 825-10-65 requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under ASC Topic 825-10-65 was effective for the Company beginning with the interim reporting period ended June 30, 2009.

     In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-06, “Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”. ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes and eliminates the disclosures required by paragraph ASC Topic 740-10-50-15(a) through (b) for nonpublic entities. The Company believes the adoption of ASU 2009-09 will not have a material impact on its consolidated financial statements.

     In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, “Revenue Recognition”, to require companies to allocate the overall consideration in multiple-element arrangements to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company is in the process of determining the effect, if any, the adoption of ASU 2009-13 will have on its consolidated financial statements.

     In October 2009, the FASB issued ASU 2009-14, which amends ASC Topic 985-605, “Software-Revenue Recognition”, to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company is in the process of determining the effect, if any, the adoption of ASU 2009-14 will have on its consolidated financial statements.

Fair Value of Assets and Liabilities

     In September 2006, the FASB issued ASC Topic 820-10 which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Company adopted ASC Topic 820-10 beginning January 1, 2008 with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities. Under the provisions of ASC Topic 820-10-15, the Company adopted ASC Topic 820-10 as it relates to non-financial assets and liabilities on January 1, 2009. ASC Topic 820-10 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels which distinguish

between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The level in the fair value hierarchy within which the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities, Level 2 inputs are other than quotable market prices included in Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable market data. Level 3 inputs are unobservable inputs for the assets or liabilities that reflect management’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

     The Company does not engage in hedging activities and historically has not used derivative instruments. In conjunction with a loan agreement pursuant to which a $5.0 million term loan was obtained in June 2008, the Company issued the lender warrants to purchase up to 350,000 shares of the Company’s Common Stock. These warrants were determined to be a derivative instrument based on the clarification within ASC Topic 815-40. As of January 1, 2009, the fair value of these warrants was reclassified from equity to a current liability and a cumulative effect adjustment to retained earnings of $292,000 was recorded for the change in the fair value of the warrants. Through June 30, 2009, the fair value of the warrants were periodically remeasured using a Black-Scholes valuation model with Level 2 inputs and changes in fair value of the warrants were recognized in other income (loss) in the consolidated financial statements. Effective July 1, 2009, at which time the warrants had a fair value of $207,000, an amendment was executed to the warrant agreement (see Note 10 for further discussion of this amendment) which resulted in the classification of these warrants changing from a derivative instrument to an equity instrument. Accordingly, at July 1, 2009, the fair value of these warrants was reclassified from accrued expenses and other current liabilities to additional paid-in capital in the accompanying consolidated balance sheet and, as of July 1, 2009, periodic remeasurement of the fair value of the warrants is no longer required. For the nine months ended September 30, 2009, other income (loss) of approximately ($110,000) was recorded to recognize the change in fair value of these warrants.

     The Company’s only non-financial asset measured on a recurring basis is goodwill. This non-financial asset is measured for impairment annually on the Company’s measurement date at the reporting unit level using Level 3 inputs. For most assets, including goodwill, ASC Topic 820-10 requires that the impact of changes resulting from its application be applied prospectively in the year in which the statement is initially applied. The Company’s measurement date for its goodwill is December 31, 2009 and as such, no fair value measurements have been made during the fiscal period ended September 30, 2009. No events have occurred that would indicate an impairment of goodwill.

Fair Value of Financial Instruments

     ASC Topic 825-10-65 requires disclosure about the fair value of financial instruments. We believe the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their estimated fair values at September 30, 2009 due to their short maturities. We believe the carrying value of our lines of credit and loans payable approximate the estimated fair value for debt with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings at September 30, 2009. As of September 30, 2009, the carrying value and estimated fair value of our long-term debt were $7.5 million and $6.4 million, respectively. The estimate of fair value of our long-term debt is based on debt with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings at September 30, 2009.

(2) MOBITEC BRAZIL LTDA

     On July 22, 2009 (the “Closing Date”), Mobitec AB, Mobitec Empreendimientos e Participações Ltda., Mobitec AB’s wholly-owned Brazilian subsidiary (“Mobitec EP”), and Mobitec Brazil Ltda, the Company’s fifty percent (50%) owned Brazilian subsidiary (“Mobitec Brazil”), entered into a Quota Purchase Agreement (the “Purchase Agreement”) with Roberto Demore and Lorena Demore (collectively, the “Sellers”) and JADI Itinerários Eletrônicos Ltda, a Brazilian limited liability company, in its capacity as guarantor of the Sellers’ obligations (“JADI”), pursuant to which Mobitec EP acquired from the Sellers the remaining fifty percent (50%) of the issued and outstanding interests (the “Interests”) of Mobitec Brazil for an aggregate consideration of US$2.95 million (the “Consideration”). Per terms of the Purchase Agreement, the acquisition by Mobitec EP of the remaining fifty percent (50%) of the Interests of Mobitec Brazil from the Sellers is effective July 1, 2009, the date upon which the Company assumed full control of the business. The payment of the Consideration is separated into (a) US$1.0 million payable concurrently with the “Effective Date” (as defined below) of the transaction, and which is made an obligation of Mobitec EP by execution of the Purchase Agreement coupled with a Promissory Note (the “First Note”), which will only become effective if all conditions of the Purchase Agreement are met on the Effective Date and neither party exercises its right to rescission, as described below, and (b) a Promissory Note executed by Mobitec EP in favor of the Sellers on July 22, 2009, for US$1.95 million (the “Second Note”) to become effective only upon the official registration of the transfer of the Interests with the governmental Board of Trade on the Effective Date. The registration of the transfer of Interests with the Board of Trade is an administrative process required under Brazilian law to effect such transfer and is expected to occur in November, 2009 (the “Effective Date”).

     In order to enter into the Purchase Agreement and the related transactions, the Company obtained an acknowledgement and waiver (the “Waiver”) from BHC under the BHC Agreement (as defined in Note 7). Under the Waiver, BHC consented to the transactions contemplated under the Purchase Agreement and related documents, waived any defaults that the consummation of those

transactions may cause under the BHC Agreement, and BHC and the Borrowers also agreed to enter into such amendments to the BHC Agreement and that certain Quota Pledge Agreement, dated as of August 18, 2008, pursuant to which Mobitec AB pledged its shares in Mobitec Brazil to BHC. On August 7, 2009, the Borrowers and DRI (collectively, the “Loan Parties”), entered into the Third Amendment to the Loan and Security Agreement (the “Loan Amendment”) with BHC. The Loan Amendment modifies certain terms of the existing BHC Agreement and was accounted for in accordance with ASC Topic 470-50-40, “Modifications and Extinguishments”. Generally speaking, the Loan Amendment consents to and permits (a) the acquisition of the Interests currently held by the Sellers in Mobitec Brazil by Mobitec EP, (b) the conveyance by Mobitec AB to Mobitec EP of the interests of Mobitec Brazil representing fifty percent (50%) of the issued and outstanding interests of Mobitec Brazil owned by Mobitec AB prior to Mobitec EP’s acquisition of the Interests (the “Mobitec AB Shares”), and (c) the subsequent merger of Mobitec EP with and into Mobitec Brazil. The material terms of the Loan Amendment:

	§		Permit Mobitec AB to create, become and remain liable with respect to the indebtedness represented by that certain promissory note, issued by Mobitec AB to the Sellers in connection with the acquisition of the Interests by Mobitec EP, in the principal amount of US$1,950,000;
	§		Allow the Loan Parties and their Subsidiaries (as defined in the BHC Agreement) to become liable upon the obligations or liabilities of guarantees in an aggregate amount not to exceed 2,000,000 Brazilian Reals (approximately US$1.1 million, based on exchange rates as of September 30, 2009) made by Mobitec Brazil or Mobitec EP for purposes of asset-based working capital and capital lease financing of Mobitec Brazil;
	§		Permit Mobitec EP to purchase the Interests from the Sellers as set forth in the Purchase Agreement;
	§		Permit Mobitec AB to acquire Mobitec EP for the purpose of acquiring the Interests and to contribute the Mobitec AB Shares to Mobitec EP;
	§		Consent to the merger of Mobitec EP with and into Mobitec Brazil, so long as Mobitec Brazil is the successor company to such merger;
	§		Allow Mobitec Brazil to change its Organizational Documents (as defined in the BHC Agreement) in connection with the contribution of the Mobitec AB Shares to Mobitec EP and related changes to the Mobitec AB Pledge (as defined in the Loan Amendment); and
	§		Allow each of Mobitec Brazil and Mobitec EP to change its Organizational Documents solely in connection with the merger of Mobitec EP with and into Mobitec Brazil, so long as Mobitec Brazil is the successor company to such merger.

     Between the Closing Date and the Effective Date, there are several conditions that must be met which, if not met could, alone or in the aggregate, alter the material terms and conditions of the Purchase Agreement and related documents.

     The First Note entered into on July 22, 2009, represents Mobitec EP’s obligation to make the initial payment of US $1.0 million, but such obligation is contingent on all of the terms and conditions being met under the Purchase Agreement, with neither Mobitec EP or the Sellers exercising their rights to rescission prior to the Effective Date. The First Note is included in loans payable on the accompanying consolidated balance sheet.

     The Second Note entered into on July 22, 2009, once effective, will be unsecured and will obligate Mobitec AB to make twelve (12) successive fixed quarterly principal payments of $162,500 to the Sellers within thirty (30) days after the close of each calendar quarter (each such payment, an “Installment Payment”). The first Installment Payment will be due within thirty (30) days after the close of the calendar quarter ending December 31, 2009, and the last Installment Payment will be due within thirty (30) days after the close of the calendar quarter ending September 30, 2012. The unpaid principal balance of the Second Note will bear simple interest at a rate of five percent (5%) per annum, which will be payable quarterly on each date on which an Installment Payment is due. Mobitec AB will have the right, at its discretion, with certain interest rate provisions applied, to not make up to two such installments, provided such two installments are not consecutive (with such amounts to bear interest therefrom at a rate of nine percent (9%) per annum) and to defer such installment payments to the end date of the Second Note. The Second Note is included in long-term debt on the accompanying consolidated balance sheet.

     If Mobitec AB is in default with its payment obligation with respect to any Installment Payment, and such failure is not cured within five (5) business days from the date on which Mobitec AB and/or Mobitec EP receive a notice of payment default from the Sellers, the Sellers would be entitled to exercise any and all rights arising out of their capacity as beneficiaries of the Second Note.

     Due to certain legal limitations imposed by Brazilian governmental authorities on Roberto Demore and Lorena Demore, Roberto Demore became the sole holder of the Interests following the execution of the Purchase Agreement. This change in the beneficial ownership of the Interests is retroactive to a date prior to that of the Purchase Agreement. In light of such change in beneficial ownership, on September 17, 2009, the parties entered into the First Amendment to the Quota Purchase Agreement to be effective as of August 31, 2009 (the “Purchase Amendment”) to effect the following:

	•		Modify the capacity in which Lorena Demore is a party to the Purchase Agreement from that of “Seller” to that of “Intervening Party and Guarantor” of the Seller’s obligations, jointly and severally with JADI;
	•		Amend the definition of, and all references to, “Sellers” contained in the Purchase Agreement so that only Roberto Demore shall be considered a “Seller”;
	•		Delete all instances in the Purchase Agreement that refer to Lorena Demore, in her capacity as Seller, and replace them with Roberto Demore, in his capacity as Seller; and
	•		Establish that any other instances in the Purchase Agreement which refer to Lorena Demore, in any capacity other than as Seller, shall refer to Lorena Demore in her capacity as Intervening Party and Guarantor of the Seller’s obligation, jointly and severally with JADI.

     On September 17, 2009, as a result of the Purchase Amendment, Mobitec EP executed a promissory note to be effective as of August 31, 2009 (the “Replacement First Note”), with the co-signature of Mobitec AB, in favor of Roberto Demore which replaces in its entirety the First Note, dated July 22, 2009, executed by Mobitec EP in favor of Roberto Demore and Lorena Demore.

     On September 17, 2009, as a result of the Purchase Amendment, Mobitec AB executed a promissory note to be effective as of August 31, 2009 (the “Replacement Second Note”) in favor of Roberto Demore which replaces in its entirety the Second Note, dated July 22, 2009, executed by Mobitec AB in favor of Roberto Demore and Lorena Demore.

     In accordance with ASC Topic 810-10-65, effective July 1, 2009, we recorded the acquisition of the Interests, as described herein, as an equity transaction, whereby the difference between the Consideration of $2.95 million and the carrying value of non-controlling interests in Mobitec Brazil as of July 1, 2009 of $243,000 was recorded as additional paid-in capital.

(3) GOODWILL AND OTHER INTANGIBLE ASSETS

     The increase in goodwill from December 31, 2008 to September 30, 2009 of approximately $1.0 million is due solely to foreign exchange rate fluctuation.

(4) INVENTORIES

		September 30,				December 31,
		2009				2008
		(In thousands)
Raw materials and system components		$	9,236			$	6,803
Work in process			27				243
Finished goods			4,214				3,616
Total inventories		$	13,477			$	10,662

(5) PROPERTY AND EQUIPMENT

		Estimated
		Depreciable		September 30,				December 31,
		Lives (years)		2009				2008
				(In thousands)
Leasehold improvements		5 - 9		$	305			$	286
Automobiles		5			185				13
Computer and telecommunications equipment		3			1,196				976
Software		3 - 5			6,038				4,592
Test equipment		3 - 5			132				124
Furniture and fixtures		3 - 7			2,416				2,490
Software projects in progress					1,847				1,392
					12,119				9,873
Less accumulated depreciation and amortization					7,414				6,266
Total property and equipment, net				$	4,705			$	3,607

(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

		September 30,				December 31,
		2009				2008
		(In thousands)
Salaries, commissions, and benefits		$	1,984			$	1,428
Taxes — payroll, sales, income, and other			1,143				817
Warranties			580				495
Current portion of capital leases			14				19
Interest payable			334				281
Deferred revenue			569				694
Other			960				625
Total accrued expenses		$	5,584			$	4,359

(7) LINES OF CREDIT AND LOANS PAYABLE

     (a) Domestic line of credit and loans payable

     Our wholly-owned subsidiaries Digital Recorders, Inc. and TwinVision of North America, Inc. (collectively, the “Borrowers”) have in place a three-year, asset-based lending agreement (the “PNC Agreement”) with PNC Bank, National Association (“PNC”), which matures on June 30, 2011. DRI has agreed to guarantee the obligations of the Borrowers under the PNC Agreement. The PNC Agreement provides up to $8.0 million in borrowings under a revolving credit facility and is secured by substantially all tangible and intangible U.S. assets of the Company. Borrowing availability under the PNC Agreement is based upon an advance rate equal to 85% of eligible domestic accounts receivable of the Borrowers, plus 75% of eligible foreign accounts receivable of the Borrowers, limited to the lesser of $2.5 million in the aggregate or the aggregate amount of coverage under Acceptable Credit Insurance Policies (as defined in the PNC Agreement, as amended) that the Borrowers have with respect to eligible foreign receivables, as determined by PNC in its reasonable discretion, plus 85% of the appraised net orderly liquidation value of inventory of the Borrowers, limited to $750,000. The PNC Agreement provides for one of two possible interest rates on borrowings: (1) an interest rate based on the rate (the “Eurodollar Rate”) at which U.S. dollar deposits are offered by leading banks in the London interbank deposit market (a “Eurodollar Rate Loan”) or (2) interest at a rate (the “Domestic Rate”) based on either (a) the base commercial lending rate of PNC, or (b) the open rate for federal funds transactions among members of the Federal Reserve System, as determined by PNC (a “Domestic Rate Loan”). The actual annual interest rate for borrowings under the PNC Agreement is (a) the Eurodollar Rate plus 3.25% for a Eurodollar Rate Loan and (b) the Domestic Rate plus 1.75% for Domestic Rate Loans. Interest is calculated on the principal amount of borrowings outstanding, subject to a minimum principal amount of $3.5 million. The PNC Agreement contains certain covenants and provisions with which we and the Borrowers must comply on a quarterly basis. If all outstanding obligations under the PNC Agreement are paid before the end of the three-year term, the Borrowers will be obligated to pay an early termination fee of up to $160,000, depending on the time the early termination occurs. At September 30, 2009, the outstanding principal balance on the revolving credit facility was approximately $2.1 million and remaining borrowing availability under the revolving credit facility was approximately $3.2 million.

     Pursuant to terms of a loan agreement (the “BHC Agreement”) with BHC Interim Funding III, L.P. (“BHC”), the Borrowers have outstanding a $5.0 million term loan (the “Term Loan”) that matures June 30, 2011. DRI agreed to guarantee the Borrowers’ obligations under the BHC Agreement. The Term Loan bears interest at an annual rate of 12.75% and is secured by substantially all tangible and intangible assets of the Company. Additionally, the Term Loan is secured by a pledge of all outstanding common stock of the Borrowers and Robinson Turney International, Inc., a wholly-owned subsidiary of DRI, a pledge of 65% of the outstanding common stock of all foreign subsidiaries other than Mobitec Pty Ltd., and a pledge of 100% of the common stock issued by Mobitec Brazil Ltda to DRI. The BHC Agreement contains certain covenants and provisions with which we and the Borrowers must comply on a quarterly basis. The Borrowers are subject to a termination fee which escalates over time from $200,000 to $735,000. The amount of the termination fee due is dependent upon the date of repayment, if any, with the maximum amount of $735,000 due if the Term Loan is not paid until the maturity date. We are recording the maximum termination fee on the Term Loan ratably over the three-year term of the BHC Agreement as interest expense. During the nine months ended September 30, 2009, we recorded approximately $183,000 of interest expense related to the Term Loan termination fee, all of which is included in long-term debt on the consolidated balance sheet.

     Among the covenants contained in the PNC Agreement and BHC Agreement are requirements we maintain certain minimum EBITDA levels as of the end of each fiscal quarter for the twelve-month period then ending and that we and our domestic subsidiaries maintain certain leverage ratios as of the end of each fiscal quarter for the twelve-month period then ending. On March 26, 2009, the PNC Agreement and BHC Agreement were each amended to revise such minimum EBITDA and leverage ratios required to be

maintained as of the end of each of the fiscal quarters ending March 31, 2009, June 30, 2009 and September 30, 2009 as set forth below.

Fiscal Quarter Ending:		EBITDA:				Leverage Ratio:
March 31, 2009		$	3,000,000			5.70 to 1.0
June 30, 2009		$	2,500,000			6.25 to 1.0
September 30, 2009		$	4,000,000			4.55 to 1.0

     For the quarter ended September 30, 2009, we and the Borrowers were not in compliance with the leverage ratio required to be maintained under terms of the PNC Agreement and the BHC Agreement. PNC agreed to amend the PNC Agreement to revise the leverage ratio required to be maintained for the quarter ended September 30, 2009 to 5.25 to 1.00. BHC agreed to waive the violation of the leverage ratio covenant for the quarter ended September 30, 2009.

     Management believes it is unlikely that we and the Borrowers will be in compliance with the leverage ratio required to be maintained under terms of the PNC Agreement and the BHC Agreement for the quarter ending December 31, 2009. Pursuant to terms of the PNC Agreement and the BHC Agreement, a covenant violation is a breach of the loan agreement and the lenders have the right to demand immediate payment of all outstanding balances due under these agreements. Management has disclosed this potential covenant violation to PNC and BHC and both lenders have indicated to management that they expect to waive such a covenant violation for the quarter ending December 31, 2009 or amend the applicable loan agreement to reflect a leverage ratio covenant with which we and the Borrowers will be able to comply for the quarter ending December 31, 2009. Although management expects PNC and BHC to waive such a covenant violation or amend the loan agreement as described herein, we can provide no assurance that any such waiver or amendment to the loan agreement will be executed by either PNC or BHC.

     See Note 16 for disclosure of additional amendments to the BHC Agreement and the PNC Agreement.

b) International lines of credit and loans payable

     Mobitec AB, the Company’s wholly-owned Swedish subsidiary, has in place agreements with Svenska Handelsbanken AB (“Handelsbanken”) under which working capital credit facilities have been established. On June 16, 2009, Mobitec AB and Handelsbanken entered into amendments to these agreements to, among other things, until April 30, 2010, increase the borrowing capacity on the credit facilities by 3.5 million krona (approximately US$499,000, based on exchange rates as of September 30, 2009) to 27.5 million krona (approximately US$3.9 million, based on exchange rates as of September 30, 2009) and increase the annual interest rate on the credit facilities from Tomorrow Next Stockholm Interbank Offered Rate (“T/N STIBOR”) plus 1.85% to T/N STIBOR plus 3.65%. At September 30, 2009, borrowings due and outstanding under these credit facilities totaled 10.1 million krona (approximately US$1.4 million, based on exchange rates at September 30, 2009) and are reflected as lines of credit in the accompanying consolidated balance sheet. Additional borrowing availability under these agreements at September 30, 2009, amounted to approximately US$2.5 million. These credit agreements renew annually on a calendar-year basis.

     At September 30, 2009, Mobitec AB had an outstanding principal balance of 1.5 million krona (approximately US$214,000, based on exchange rates at September 30, 2009) due on a term loan under a credit agreement with Handelsbanken (the “Mobitec Term Loan”). On June 16, 2009, Mobitec AB and Handelsbanken entered into an amendment to the Mobitec Term Loan agreement to, among other things, extend the repayment date for the outstanding principal balance of 1.5 million krona from June 30, 2009 to March 31, 2010 and decrease the annual interest rate on the Mobitec Term Loan from 5.80% to 5.55%. The outstanding principal balance due on the Mobitec Term Loan is reflected as a loan payable in the accompanying consolidated balance sheet.

     At September 30, 2009, Mobitec AB had an outstanding principal balance of 3.4 million krona (approximately US$482,000, based on exchange rates at September 30, 2009) due on an additional term loan under a credit agreement with Handelsbanken (the “Mobitec Loan”). On June 16, 2009, Mobitec AB and Handelsbanken entered into an amendment to the Mobitec Loan agreement to, among other things, extend the principal payment of 375,000 krona (approximately US$54,000, based on exchange rates as of September 30, 2009) due on the Mobitec Loan from June 30, 2009 to March 31, 2010; increase the quarterly principal payments due on this term loan from 375,000 krona to 500,000 krona (approximately US$71,000, based on exchange rates as of September 30, 2009) beginning June 30, 2010; and decrease the annual interest rate on the Mobitec Loan from 5.80% to 5.55%. The outstanding principal balance due on the Mobitec Loan is reflected as long-term debt in the accompanying consolidated balance sheet.

     Mobitec GmbH, the Company’s wholly-owned subsidiary in Germany, has in place an agreement with Handelsbanken under which a working capital credit facility has been established. On June 25, 2009, Mobitec GmbH and Handelsbanken entered into an amendment to this agreement to, among other things, until April 30, 2010, increase the borrowing capacity on the credit facility by 500,000 Euro (approximately US$730,000, based on exchange rates as of September 30, 2009) to approximately 1.4 million Euro (approximately US$2.0 million, based on exchange rates as of September 30, 2009) and increase the annual interest rate on the credit facility from Euro OverNight Index Average (“EONIA”) plus 1.85% to EONIA plus 3.70%. At September 30, 2009, borrowings due and outstanding under this credit facility totaled 563,000 Euro (approximately US$821,000, based on exchange rates at September 30, 2009) and are reflected as lines of credit in the accompanying consolidated balance sheet. Additional borrowing availability under this credit facility at September 30, 2009, amounted to approximately $1.2 million. The agreement under which this credit facility is extended has an open-ended term.

     At September 30, 2009, Mobitec Brazil Ltda has outstanding borrowings from two banks in Brazil of approximately 461,000 Brazilian Real (“BRL”) (approximately US$258,000, based on exchange rates at September 30, 2009). The borrowings are secured by accounts receivable on certain export sales by Mobitec Brazil Ltda, bear interest at annual rates ranging from 6.50% to 9.28%, and have a term of 180 days. These borrowings are included in loans payable on the accompanying consolidated balance sheet.

     At September 30, 2009, Mobitec Brazil Ltda had two loans payable to a bank in Brazil with an aggregate outstanding principal balance of approximately 303,000 BRL (approximately US$170,000, based on exchange rates as of September 30, 2009). One loan, with an outstanding principal balance of 169,000 BRL at September 30, 2009 (approximately US$95,000, based on exchange rates as of September 30, 2009), bears interest at an annual rate of 4.64% and matures April 13, 2010. The other loan, with an outstanding principal balance of 134,000 BRL at September 30, 2009 (US$75,000, based on exchange rates as of September 30, 2009), bears interest at an annual rate of 15.80%, is payable in twelve equal monthly principal installment payments, and matures May 14, 2010. The outstanding principal balance due on these loans is included in loans payable in the accompanying consolidated balance sheet.

     At September 30, 2009, Mobitec Brazil Ltda had four additional loans outstanding with an aggregate outstanding principal balance of approximately 63,000 BRL (approximately US$36,000, based on exchange rates as of September 30, 2009) that bear interest at annual rates ranging from 15.12% to 19.41% and have maturity dates ranging from January 17, 2010 to November 16, 2010. The outstanding principal balance due on these loans is included in long-term debt in the accompanying consolidated balance sheet.

     At September 30, 2009, Mobitec EP had an outstanding balance of $1.0 million due on a promissory note entered into in connection with the execution of a Purchase Agreement for the acquisition of the remaining fifty percent (50%) of the issued and outstanding interests of Mobitec Brazil (see Note 2). The note is contingent on all of the terms and conditions being met under the Purchase Agreement. The outstanding balance of this note is included in loans payable on the accompanying consolidated balance sheet.

     At September 30, 2009, Mobitec AB had an outstanding balance of $1.95 million due on a promissory note entered into in connection with the execution of a Purchase Agreement for the acquisition of the remaining fifty percent (50%) of the issued and outstanding interests of Mobitec Brazil (see Note 2). The note is payable in twelve (12) successive fixed quarterly principal payments of $162,500 within thirty (30) days after the close of each calendar quarter (each such payment, an “Installment Payment”). The first Installment Payment will be due within thirty (30) days after the close of the calendar quarter ending December 31, 2009, and the last Installment Payment will be due within thirty (30) days after the close of the calendar quarter ending September 30, 2012. The unpaid principal balance of the note will bear simple interest at a rate of five percent (5%) per annum, which will be payable quarterly on each date on which an Installment Payment is due. Mobitec AB will have the right, at its discretion, with certain interest rate provisions applied, to not make up to two such installments, provided such two installments are not consecutive (with such amounts to bear interest therefrom at a rate of nine percent (9%) per annum) and to defer such installment payments to the end date of the note. The outstanding principal balance due on this note is included in long-term debt on the accompanying consolidated balance sheet.

     Domestic and international lines of credit consist of the following:

		September 30,				December 31,
		2009				2008
		(In thousands)
Line of credit with PNC Bank, National Association dated June 30, 2008; payable in full June 30, 2011; secured by all tangible and intangible U.S. assets of the Company; bears average interest rate of 5.00% and 6.28% in 2009 and 2008, respectively.		$	2,067			$	1,601
Line of credit with Handelsbanken; renews annually on a calendar-year basis; secured by certain assets of the Swedish subsidiary, Mobitec AB; bears average interest rate of 3.41% and 6.58% in 2009 and 2008, respectively.			—				732
Line of credit with Handelsbanken; renews annually on a calendar-year basis; secured by accounts receivable of the Swedish subsidiary, Mobitec AB; bears average interest rate of 5.03% and 6.95% in 2009 and 2008, respectively.			1,448				573
Line of credit with Handelsbanken dated June 23, 2004; open-ended term; secured by accounts receivable and inventory of the German subsidiary, Mobitec GmbH; bears average interest rate of 3.29% and 5.62% in 2009 and 2008, respectively.			821				837
Total lines of credit		$	4,336			$	3,743

(8) LONG-TERM DEBT

     Long-term debt consists of the following:

		September 30,				December 31,
		2009				2008
		(In thousands)
Term loan with BHC Interim Funding III, L.P., dated June 30, 2008; payable in full June 30, 2011; secured by substantially all tangible and intangible assets of the Company; bears interest rate of 12.75%.		$	5,000			$	5,000
Term loan with Svenska Handelsbanken AB, dated June 30, 2008; payable in quarterly installments of $54,000; secured by accounts receivable and inventory of the Swedish subsidiary, Mobitec AB; bears average interest rate of 5.84% and 7.32% in 2009 and 2008, respectively.			482				483
Term loan with Robert Demore, dated August 31, 2009; payable in quarterly installments of $162,500; unsecured; bears interest rate of 5.0%.			1,950				—
Other long-term debt			36				—
Total long-term debt			7,468				5,483
Term loan termination fee accrual			306				123
Less current portion			751				193
Less debt discount			194				278
			6,829				5,135
Long-term portion of capital leases			31				14
Total long-term debt and capital leases, less current portion		$	6,860			$	5,149

(9) PREFERRED STOCK

     The Company’s preferred stock consists of 5,000,000 authorized shares, par value $.10 per share, 20,000 shares of which are designated as Series AAA Redeemable, Nonvoting, Convertible Preferred Stock (“Series AAA Preferred”), 30,000 shares of which are designated as Series D Junior Participating Preferred Stock (“Series D Preferred”), 500 shares of which are designated as Series E Redeemable, Nonvoting, Convertible Preferred Stock (“Series E Preferred”), 400 shares of which are designated as Series F Convertible Preferred Stock (“Series F Preferred”), 600 shares of which are designated as Series G Redeemable, Convertible Preferred Stock (“Series G Preferred”), 600 shares of which are designated as Series H Redeemable, Convertible Preferred Stock (“Series H Preferred”), 200 shares of which are designated as Series I Redeemable, Convertible Preferred Stock (“Series I Preferred”), 250 shares of which are designated as Series J Redeemable, Convertible Preferred Stock (“Series J Preferred”), and 4,947,450 shares of which remain undesignated.

     As of September 30, 2009, we had outstanding 166 shares of Series AAA Preferred, 80 shares of Series E Preferred, 471 shares of Series G Preferred, 68 shares of Series H Preferred, and 90 shares of Series J Preferred. There are no shares of Series D Preferred, Series F Preferred, or Series I Preferred outstanding.

(10) COMMON STOCK WARRANTS

     In connection with the BHC Agreement, we issued BHC a warrant to purchase up to 350,000 shares of our Common Stock (the “BHC Warrant”) at an exercise price of $2.99 per share. The BHC Warrant has a term of exercise expiring on June 30, 2013. The number of shares issuable and the exercise price of the BHC Warrant are subject to adjustment in the case of a reorganization, reclassification, liquidation and/or dilutive issuance of our Common Stock (or common stock equivalents). In the event of a dilutive issuance of Common Stock or common stock equivalents, the exercise price of the BHC Warrant will be adjusted by a weighted-average amount based on the sales price of the dilutive issuance. The BHC Warrant also provides BHC with the right to demand that the shares of Common Stock issuable upon exercise of the BHC Warrant (the “Warrant Shares”) be registered under the Securities Act of 1933, as amended (the “Securities Act”). BHC’s registration rights also include registration of the Warrant Shares on any other registration statement we intend to file, with certain exceptions.

     On March 26, 2009, in connection with an amendment of the BHC Agreement (as described in Note 7), the BHC Warrant was amended (the “First Warrant Amendment”) to modify the exercise price at which BHC is entitled, under the terms of the BHC Warrant, to purchase an aggregate of 350,000 shares of DRI’s Common Stock, par value $0.10 per share. Pursuant to the terms of the First Warrant Amendment, BHC held the right to purchase (i) 200,000 shares of Common Stock at an exercise price equal to $1.00 per

share, and (ii) 150,000 shares of Common Stock at an exercise price equal to $2.99 per share. The increase in fair value of the BHC Warrant resulting from the adjustment of the exercise price was recorded as deferred finance costs and is being amortized ratably over the remaining term of the Term Loan.

     Effective July 1, 2009, DRI and BHC agreed to an amendment of the BHC Warrant (the “Second Warrant Amendment”) which deleted the dilutive issuance provision (the “Provision”) contained in the BHC Warrant. Pursuant to the Provision, if DRI effected a dilutive issuance, as defined in the BHC Warrant, at any time while the BHC Warrant was outstanding, then the exercise price would be adjusted in accordance to the procedures described in the Provision. The Second Warrant Amendment also modified the exercise price at which BHC is entitled, under the terms of the BHC Warrant, as amended, to purchase an aggregate of 350,000 shares of Common Stock. Pursuant to the terms of the Second Warrant Amendment, BHC now holds the right to purchase (i) 200,000 shares of Common Stock at an exercise price equal to $1.00 per share, and (ii) 150,000 shares of Common Stock at an exercise price equal to $2.50 per share.

(11) PER SHARE AMOUNTS

     The basic net income (loss) per common share has been computed based upon the weighted average shares of Common Stock outstanding. Diluted net income (loss) per common share has been computed based upon the weighted average shares of Common Stock outstanding and shares that would have been outstanding assuming the issuance of Common Stock for all potentially dilutive equities outstanding.

		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
		(Unaudited)
		(In thousands, except share amounts)
Net income applicable to common shareholders		$	880			$	662			$	869			$	1,694
Effect of dilutive securities on net income:
Convertible debt			—				—				—				10
Convertible preferred stock			80				66				—				173
Net income applicable to common shareholders, assuming conversions		$	960			$	728			$	869			$	1,877
Weighted average shares outstanding — Basic			11,522,979				11,453,588				11,498,333				11,290,217
Effect of dilutive securities on shares outstanding:
Options			37,933				53,451				6,199				49,812
Warrants			122,488				77,223				62,350				58,344
Convertible debt			—				—				—				150,133
Convertible preferred stock			1,712,430				1,468,054				—				1,337,122
Weighted average shares outstanding — Diluted			13,395,830				13,052,316				11,566,882				12,885,628

     The calculation of weighted average shares outstanding excludes 2,028,348 and 2,038,469 stock options and warrants for the three months ended September 30, 2009 and 2008, respectively, and 2,559,868 and 2,298,610 stock options and warrants for the nine months ending September 30, 2009 and September 30, 2008, respectively because these securities would not have been dilutive for these periods due to the fact that the exercise prices were greater than the average market price of our Common Stock for these periods or the total assumed proceeds under the treasury stock method resulted in negative incremental shares. The calculation of weighted average shares outstanding excludes preferred stock convertible into 150,909 shares of Common Stock for the three months ended September 30, 2008, and preferred stock convertible into 1,712,430 and 284,282 shares of common stock for the nine months ended September 30, 2009 and 2008, respectively, because they are anti-dilutive.

(12) SHAREHOLDERS’ EQUITY, COMPREHENSIVE INCOME (LOSS) AND NONCONTROLLING INTERESTS

     Set forth below is a reconciliation of shareholders’ equity attributable to the Company and total noncontrolling interests at the beginning and end of the nine months ended September 30, 2009 and September 30, 2008 (in thousands).

		DRI Shareholders’ Equity
																		Accumulated
										Additional				Accum-				Other				Total DRI								Compre-			Total
		Preferred				Common				Paid-in				ulated				Comprehensive				Shareholders’				Noncontrolling				hensive			Shareholders’
		Stock				Stock				Capital				Deficit				Income (Loss)				Equity				Interests				Income (Loss)			Equity
Balance as of January 1, 2009		$	3,765			$	1,147			$	32,706			$	(20,398	)		$	512			$	17,732			$	852						$	18,584
Cumulative effect of reclassification of warrants (ASC 815-40)											(333	)			292								(41	)										(41	)
Balance as of January 1, 2009, as adjusted		$	3,765			$	1,147			$	32,373			$	(20,106	)		$	512			$	17,691			$	852						$	18,543
Issuance of common stock							7				67												74											74
Issuance of Series G Preferred Stock dividend			135																				135											135
Issuance of Series H Preferred Stock dividend			20																				20											20
Reclassification of warrants											207												207											207
Modification of warrants											10												10											10
Preferred stock dividends											(234	)											(234	)										(234	)
Stock-based compensation expense											269												269											269
Purchase of noncontrolling interest											(2,707	)											(2,707	)			(243	)						(2,950	)
Comprehensive income:
Net income															1,103								1,103				(207	)		$	896			896
Translation adjustment																			2,214				2,214								2,214			2,214
Total comprehensive income																														$	3,110
Balance as of September 30, 2009		$	3,920			$	1,154			$	29,985			$	(19,003	)		$	2,726			$	18,782			$	402						$	19,184

		DRI Shareholders’ Equity
																		Accumulated
										Additional				Accum-				Other				Total DRI								Compre-				Total
		Preferred				Common				Paid-in				ulated				Comprehensive				Shareholders’				Noncontrolling				hensive				Shareholders’
		Stock				Stock				Capital				Deficit				Income (Loss)				Equity				Interests				Income (Loss)				Equity
Balance as of January 1, 2008		$	3,618			$	1,119			$	32,079			$	(21,894	)		$	4,570			$	19,492			$	422							$	19,914
Issuance of common stock							3				63												66												66
Issuance of Series G Preferred Stock dividend			125																				125												125
Issuance of Series H Preferred Stock dividend			20																				20												20
Conversion of Series E Preferred stock			(18	)			1				17												—												—
Conversion of Series AAA Preferred stock			(30	)							29												(1	)											(1	)
Conversion of Convertible Subordinated
Debenture							23				227												250												250
Amortization of convertible subordinated debenture beneficial conversion feature											54												54												54
Issuance of warrants											333												333												333
Preferred stock dividends											(226	)											(226	)											(226	)
Dividends paid to noncontrolling interests																											(184	)							(184	)
Stock-based compensation expense											111												111												111
Comprehensive income:
Net income															1,920								1,920				700			$	2,620				2,620
Translation adjustment																			(1,520	)			(1,520	)							(1,520	)			(1,520	)
Total comprehensive income																														$	1,100
Balance as of September 30, 2008		$	3,715			$	1,146			$	32,687			$	(19,974	)		$	3,050			$	20,624			$	938							$	21,562

(13) SEGMENT AND GEOGRAPHIC INFORMATION

     DRI conducts its operations in one business segment. Accordingly, the accompanying consolidated statements of operations report the results of operations of that operating segment and no separate disclosure is provided herein. Geographic information is provided below. Long-lived assets include net property and equipment and other assets.

		Three Months Ended September,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Unaudited)								(Unaudited)
		(In thousands)								(In thousands)
Net sales
North America		$	8,248			$	8,005			$	24,301			$	22,460
Europe			6,787				4,580				20,054				15,639
Asia-Pacific			4,120				2,304				6,567				6,991
Middle East			191				74				291				676
South America			2,260				3,831				5,172				9,156
		$	21,606			$	18,794			$	56,385			$	54,922

		September 30,
		2009				December 31,
		(Unaudited)				2008
		(In thousands)
Long-lived assets
North America		$	3,456			$	2,982
Europe			1,873				1,527
Asia-Pacific			133				46
South America			227				209
		$	5,689			$	4,764

(14) INCOME TAXES

     As a result of its net operating loss carryforwards, the Company has significant deferred tax assets. ASC Topic 740, “Income Taxes”, requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. The Company’s total deferred tax assets as of September 30, 2009, are $8.7 million and its deferred tax valuation allowance is $8.3 million. In addition, as a result of its equity transactions during 2004, the Company has determined its ability to use its net operating loss carryforwards and related tax benefits in any single year is limited under the Internal Revenue Code.

     As a result of intercompany sales that give rise to uncertain tax positions related to transfer pricing, during the nine months ended September 30, 2009, the Company recorded a decrease to its liability for unrecognized tax benefits of approximately $18,000. These reductions, if recognized, would affect the effective tax rate. Changes in foreign currency exchange rates increased the liability for unrecognized tax benefits by approximately $51,000 during the nine months ended September 30, 2009.

     The Company’s effective tax expense rate of 16.3% for the nine months ended September 30, 2009 differs from the expected statutory tax expense rate of 34% primarily due to a decrease to the valuation allowance on deferred tax assets and lower rates on earnings of foreign operations.

(15) FOREIGN TAX SETTLEMENT

     At December 31, 2006, the Company’s Brazilian subsidiary, Mobitec Brazil Ltda, recorded a liability for Imposto sobre Produtos Industrializados (Industrialized Products Tax or “IPI Tax”), a form of federal value-added tax in Brazil, and related penalties and interest assessed by Brazil’s Federal Revenue Service (“FRS”) in the amount of $1.5 million, or $750,000 net of the non-controlling ownership in Mobitec Brazil Ltda.

     The assessment was the result of an audit performed by the FRS in 2006 for the periods January 1, 1999 to June 30, 2006 and varying interpretations of Brazil’s complex tax laws by the FRS and the Company. Prior to the audit conducted by the FRS, the Company, under guidance provided by its Brazilian legal counsel, interpreted certain provisions of Brazil’s tax laws to conclude IPI Tax was suspended on sales of Mobitec Ltda’s products to be used in the manufacture of buses. Upon conclusion of the FRS audit in December 2006, the Company and its Brazilian legal counsel were informed the FRS did not concur with the Company’s assessment that suspension of IPI Tax on Mobitec Brazil Ltda’s sales of products to end users to be used in the manufacture of buses was appropriate. The Company reached a settlement with the FRS to pay the assessed amount in monthly installments over a five-year period.

     Under the provisions of a new law enacted in Brazil in 2009, the FRS has provided relief to certain Brazilian entities by allowing a partial reduction in the amount of IPI tax obligations and related penalties and interest that have been previously assessed against those entities. Pursuant to the provisions of the new law, the outstanding IPI tax obligations, including penalties and interest, of Mobitec Brazil Ltda previously assessed, which are reflected as foreign tax settlement in the accompanying consolidated balance sheet, were reduced by approximately $267,000. Accordingly, at September 30, 2009, we recorded an adjustment to reduce the foreign tax settlement by approximately $267,000. This adjustment is reflected in our consolidated income statement in selling, general and administrative expenses.

(16) SUBSEQUENT EVENTS

     On October 1, 2009, the Borrowers, DRI and BHC entered into the Fourth Amendment to the BHC Agreement (the “BHC Amendment”) to, among other things, effect the following:

	•		Permit the Borrowers and DRI to make a recallable equity investment in Mobitec AB on or about October 1, 2009 (the “BHC Effective Date”), in an amount not to exceed the Contribution Amount (as defined below);
	•		Permit the Borrowers and DRI to make a recallable equity investment in Mobitec Empreendimientos e Participações Ltda., Mobitec AB’s wholly-owned Brazilian subsidiary, on or about the BHC Effective Date in an amount not to exceed $400,000;
	•		Allow the Borrowers to make dividends or distributions to DRI to enable DRI to pay up to the sum of (a) $150,000 plus (b) the result of 9.5% of the amount of the Series K Preferred Stock issued by DRI on or prior to October 31, 2009, in the aggregate in any fiscal year, of dividends or distributions with respect to DRI’s preferred stock;
	•		Allow the Borrowers and DRI to enter into any transaction, capital contribution, investment and transfer which, in the aggregate for all such events, do not exceed $2 million plus the Contribution Amount; and
	•		Permit DRI to adopt the Certificate of Designation of, and amend its Organizational Documents (as defined in the BHC Agreement) to authorize, the Series K Preferred Stock.

     On October 5, 2009 (the “PNC Effective Date”), the Borrowers (as defined in Note 7), DRI, and PNC entered into Amendment No. 5 to the PNC Agreement (the “PNC Amendment”) to, among other things, effect the following:

	•		Obtain PNC’s consent for DRI to issue a new series of preferred stock and to be designated the Series K Senior Convertible Preferred Stock (the “Series K Preferred Stock”), so long as the net proceeds of such issuance are utilized to repay outstanding Advances (as defined in the PNC Agreement) and to use Advances to make a recallable equity investment in Mobitec AB on or after the PNC Effective Date in an amount not to exceed, if DRI receives gross proceeds from the issuance of the Series K Preferred Stock of (i) no more than $3.5 million, $1 million, (ii) $5 million, $1.5 million, and (iii) in excess of $3.5 million but less than $5 million, $1 million plus the lesser of (a) $500,000 and (b) an amount determined by multiplying (x) the quotient (expressed as a percentage) of (1) the amount by which gross proceeds from the issuance of Series K Preferred Stock exceeds $3.5 million, divided by (2) $1.5 million, by (y) $500,000 (the foregoing clauses (i) through (iii) collectively referred to as the “Contribution Amount”); provided , however , that (x) the amount of the proceeds applied to repay Advances must be equal to or greater than the Contribution Amount and (y) the amount of the proceeds as applied to prepay the Term Loan (as defined in Note 7) may not exceed the Prepayment Amount, as defined below; and
	•		Obtain PNC’s consent to the prepayment of the Term Loan with a portion of the proceeds of the Series K Preferred Stock in an amount not to exceed the Prepayment Amount;
			The Prepayment Amount shall be an amount that is dependent upon the gross proceeds that DRI receives from the issuance of the Series K Preferred Stock, as follows: if DRI receives gross proceeds from the issuance of the Series K Preferred Stock of (i) no more than $3.5 million, $250,000, (ii) $5 million, $1 million, and (iii) in excess of $3.5 million, but less than $5 million, $250,000 plus the lesser of (a) $750,000 and (b) an amount determined by multiplying (x) the quotient (expressed as a percentage) of (1) the amount by which gross proceeds from the issuance of the Series K Preferred Stock exceed $3.5 million, divided by (2) $1.5 million, by (y) $750,000 (the foregoing clauses (i) through (iii) are collectively referred to as the “Prepayment Amount”);
			In addition to the above consents, the PNC Amendment also:
	•		Allows the Borrowers to make dividends or distributions to DRI to enable DRI to pay up to the sum of (a) $150,000 plus (b) the result of 9.5% of the amount of the Series K Preferred Stock issued by DRI on or prior to October 31, 2009;
	•		Permits the Borrowers and DRI to enter into any transaction, capital contribution, investment and transfers which, in the aggregate for all such events, do not exceed $2 million plus the Contribution Amount; and
	•		Permits DRI to adopt the Certificate of Designation of, and amend its Articles of Incorporation to authorize, the Series K Preferred Stock.

     On October 13, 2009, 50 shares of Series J Preferred with a liquidation value of $250,000 were converted into 110,600 shares of the Company’s Common Stock. On October 29, 2009, 40 shares of Series J Preferred with a liquidation value of $200,000 were converted into 88,480 shares of the Company’s Common Stock. As a result of these conversions, there are no shares of Series J Preferred outstanding.

     On October 26, 2009 (the “Closing Date”), the Company sold an aggregate of 160 shares of the Company’s newly designated Series K Preferred Stock, par value $0.10 per share, to multiple outside investors pursuant to a subscription agreement with each investor. The gross proceeds to the Company were $800,000, which are being used for general corporate working capital purposes and to be applied toward partial payment of the Term Loan with BHC. In addition to the subscription agreement, the Company entered into a registration rights agreement with each Series K Preferred Stock investor pursuant to which the Company agreed that upon written demand from each Series K Preferred Stock investor, the Company will register the shares of Series K Preferred Stock issued to the Series K Preferred Stock investor pursuant to the subscription agreement (the “Registrable Securities”) for resale by the Series K Preferred Stock investor under the Securities Act of 1933, as amended (the “Securities Act”). The Company also agreed that it will register the Registrable Securities if the Company registers any of its securities under the Securities Act in connection with a public offering of the Company’s Common Stock during the one (1) year period following the Closing Date.

     Series K Preferred Stock is convertible at any time at the option of the holder, into shares of Common Stock at a conversion price of $2.50 per share of Common Stock, subject to certain adjustments. Holders of Series K Preferred Stock are entitled to voting rights on any matters on which holders of Common Stock are entitled to vote, based upon the quotient obtained by dividing the liquidation preference by the conversion price. Outstanding shares of Series K Preferred Stock shall automatically convert to shares of the Company’s Common Stock if the closing bid price for the Common Stock on The NASDAQ Stock Market (or other exchange or market on which the Common Stock may be traded) for any consecutive twenty (20) day period exceeds $5.00. Holders of Series K Preferred Stock are entitled to receive cumulative quarterly dividends payable in cash or additional shares of Series K Preferred Stock, at the option of the holder, when and if declared by the Board of Directors, at a rate of 9.5% per annum on the liquidation value of $5,000 per share. With respect to the payment of dividends and liquidation, the Series K Preferred Stock ranks prior and superior to

the Company’s Series AAA Preferred, Series E Preferred, Series G Preferred, Series H Preferred, Series J Preferred, and Common Stock. The Company has the right to redeem all or any portion of the outstanding shares of Series K Preferred Stock at its discretion.

     On November 2, 2009, using proceeds from the sale of Series K Preferred Stock, the Borrowers paid $250,000 of the outstanding principal balance of the Term Loan with BHC. In addition to the principal payment, pursuant to terms of the BHC Agreement, the Borrowers paid a termination fee of $20,000 to BHC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT ARE IN ITEM 1 OF THIS QUARTERLY REPORT AND IN THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 AND THE COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 2009 AND JUNE 30, 2009.

Business — General

     Through its business units and wholly-owned subsidiaries, DRI designs, manufactures, sells, and services information technology products either directly or through manufacturers’ representatives or distributors. DRI produces passenger information communication products under the Talking Bus^®, TwinVision^®, VacTell^® and Mobitec^® brand names, which are sold to transportation vehicle equipment customers worldwide.

     DRI’s customers generally fall into one of two broad categories: end-user customers or original equipment manufacturers (“OEM”). DRI’s end-user customers include municipalities, regional transportation districts, state and local departments of transportation, transit agencies, public, private, or commercial operators of buses and vans, and rental car agencies. DRI’s OEM customers are the manufacturers of transportation rail, bus and van-like vehicles. The relative percentage of sales to end-user customers compared to OEM customers varies widely from quarter-to-quarter and year-to-year, and within products and product lines comprising DRI’s mix of total sales in any given period.

Critical Accounting Policies and Estimates

     Our critical accounting policies and estimates used in the preparation of the Consolidated Financial Statements presented in our 2008 Annual Report on Form 10-K (“2008 Annual Report”) are listed and described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Annual Report and include the following:

	§		Allowance for doubtful accounts;
	§		Inventory valuation;
	§		Warranty reserve;
	§		Intangible assets and goodwill;
	§		Income taxes, including deferred tax assets;
	§		Revenue recognition; and
	§		Stock-based compensation.

     The financial statements include amounts that are based on management’s best estimates and judgments. The most significant estimates relate to allowance for uncollectible accounts receivable, inventory obsolescence, depreciation, intangible asset valuations and useful lives, goodwill impairment, warranty costs, income taxes, stock-based compensation, and revenue on projects with multiple deliverables. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

     The Company believes there were no significant changes during the nine-month period ended September 30, 2009 to the items disclosed as critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Annual Report.

Recent Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles”, (formerly referred to as SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). ASC Topic 105 establishes the ASC as the source of authoritative principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC Topic 105 did not have a material impact on our consolidated financial statements for the three and nine months ended September 30, 2009.

     On February 12, 2008, the FASB issued ASC Topic 820-10-15, “Fair Value Measurements and Disclosures”, (formerly referred to as FASB Staff Position (“FSP”) No. FAS 157-2, “Effective date of FASB Statement No. 157”), which delayed the effective date of ASC Topic 820-10, (formerly referred to as SFAS No. 157), for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until 2009. The Company adopted the provisions of ASC Topic 820-10 for nonfinancial assets and nonfinancial liabilities effective January 1, 2009. The adoption of ASC Topic 820-10 with respect to nonfinancial assets and nonfinancial liabilities did not have a significant impact on our results of operations or financial condition.

     In December 2007, the FASB issued ASC Topic 805-10, “Business Combinations”, (formerly referred to as SFAS No. 141(R)). ASC Topic 805-10 retains the underlying concepts of prior guidance in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting; but ASC Topic 805-10 changed the method of applying the acquisition method in a number of significant aspects. ASC Topic 805-10 requires companies to recognize, with certain exception, 100% of the fair value of the assets acquired, liabilities assumed and non-controlling interest in acquisitions of less than 100% controlling interest when the acquisition constitutes a change in control; measure acquirer shares issued as consideration for a business combination at fair value on the date of the acquisition; recognize contingent consideration arrangements at their acquisition date fair value, with subsequent change in fair value generally reflected in earnings; recognition of reacquisition loss and gain contingencies at their acquisition date fair value; and expense, as incurred, acquisition related transaction costs. We adopted the provisions of ASC Topic 805-10 effective January 1, 2009 and accounted for the acquisition of the remaining 50% interest in Mobitec Brazil Ltda under the provisions of ASC Topic 805-10 (see Note 2 to the accompanying consolidated financial statements for further discussion of this acquisition).

     In December 2007, the FASB issued ASC Topic 810-10-65, “Consolidation”, (formerly referred to as SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51”). ASC Topic 810-10-65 establishes new standards that govern the accounting for and reporting of (1) noncontrolling interest in partially-owned consolidated subsidiaries and (2) loss of control of subsidiaries. ASC Topic 810-10-65 requires that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interest of the noncontrolling owners separately within the consolidated statement of position within equity, but separate from the parent’s equity and separately on the face of the consolidated income statement. Further, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be initially measured at fair value. We adopted the provisions of ASC Topic 810-10-65 effective January 1, 2009 and accounted for the acquisition of the remaining 50% interest in Mobitec Brazil Ltda under the provisions of ASC Topic 810-10-65 (see Note 2 to the accompanying consolidated financial statements for further discussion of this acquisition). The adoption of ASC Topic 810-10-65 impacted the accompanying consolidated financial statements for all periods presented as follows:

•

The noncontrolling interests in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited have been reclassified to shareholders’ equity.

•

Consolidated net income (loss) has been adjusted to include the net income (loss) attributed to the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

•

Consolidated comprehensive income (loss) has been adjusted to include the comprehensive income (loss) attributed to the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

•

We have disclosed for each reporting period the amounts of consolidated income (loss) attributed to the Company and the noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited. In addition, for each reporting period we have presented a reconciliation at the beginning and end of the period of the carrying amount of equity attributable to the Company and noncontrolling interest in Mobitec Brazil Ltda and Castmaster Mobitec India Private Limited.

     In March 2008, the FASB issued ASC Topic 815-10, “Derivatives and Hedging”, (formerly referred to as SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133”), which is effective on a prospective basis for fiscal years and interim periods beginning after November 15, 2008. ASC Topic 815-10 is intended to

improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand such effects on financial position, financial performance and cash flow. We adopted the provisions of ASC Topic 815-10 effective January 1, 2009. The adoption of ASC Topic 815-10 did not have a material impact on our results of operations or financial condition.

     In April 2008, the FASB issued ASC Topic 350-30-65, “Intangibles-Goodwill and Other”, (formerly referred to as FSP FAS 142-3,“Determination of the Useful Life of Intangible Assets”) ASC Topic 350-30-65 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC Topic 350-30-65 is effective for fiscal years beginning after December 15, 2008. We adopted the provisions of ASC Topic 350-30-65 effective January 1, 2009. The adoption of ASC Topic 350-30-65 did not have a material impact on our results of operations or financial condition.

     In June 2008, the FASB issued ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity”, (formerly referred to as Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”). ASC Topic 815-40 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10-15 (formerly referred to as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). ASC Topic 815-40 is effective for financial statements issued for fiscal years beginning after December 15, 2008. In conjunction with a loan agreement pursuant to which a $5.0 million term loan was obtained in June 2008, the Company issued the lender warrants to purchase up to 350,000 shares of our Common Stock. These warrants were determined to be a derivative instrument based on the clarification within ASC Topic 815-40. As of January 1, 2009, the fair value of these warrants was reclassified from equity to a current liability and a cumulative effect adjustment to retained earnings was recorded for the change in the fair value of the warrants. During the period in which the warrants are classified as a liability, the fair value of the warrants will be periodically remeasured with any changes in value recognized in other income (loss) in the consolidated financial statements. See the “Fair Value of Assets and Liabilities” section of Note 1 to the accompanying consolidated financial statements for further discussion of accounting treatment of these warrants.

     In May 2009, the FASB issued ASC Topic 855-10, “Subsequent Events”, (formerly referred to as SFAS No. 165, “Subsequent Events”). ASC Topic 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855-10 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of ASC Topic 855-10 did not have an impact on our consolidated financial statements for the three and nine months ended September 30, 2009, as it is our continuing policy to evaluate subsequent events through the date our financial statements are issued. For the quarterly period ended September 30, 2009, we have evaluated subsequent events through November 16, 2009, which is the date our financial statements were issued and filed with the SEC.

     In April 2009, the FASB issued ASC Topic 825-10-65, “Financial Instruments”, (formerly referred to as FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”) ASC Topic 825-10-65 enhances consistency in financial reporting by increasing the frequency of fair value disclosures. ASC Topic 825-10-65 relates to fair value disclosures for any financial instruments that are not currently reflected on a company’s balance sheet at fair value. ASC Topic 825-10-65 requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under ASC Topic 825-10-65 was effective for the Company beginning with the interim reporting period ended June 30, 2009.

     In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-06, “Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”. ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes and eliminates the disclosures required by paragraph ASC Topic 740-10-50-15(a) through (b) for nonpublic entities. The Company believes the adoption of ASU 2009-09 will not have a material impact on its consolidated financial statements.

     In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, “Revenue Recognition”, to require companies to allocate the overall consideration in multiple-element arrangements to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company is in the process of determining the effect, if any, the adoption of ASU 2009-13 will have on its consolidated financial statements.

     In October 2009, the FASB issued ASU 2009-14, which amends ASC Topic 985-605, “Software-Revenue Recognition”, to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company is in the process of determining the effect, if any, the adoption of ASU 2009-14 will have on its consolidated financial statements.

Results of Operations

     Management reviews a number of key indicators to evaluate the Company’s financial performance, including net sales, gross profit and selling, general and administrative expenses. The following table sets forth the percentage of our revenues represented by certain items included in our Consolidated Statements of Operations:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			66.7				65.4				68.7				65.3
Gross profit			33.3				34.6				31.3				34.7
Operating expenses:
Selling, general and administrative			23.1				25.5				25.9				25.3
Research and development			0.7				1.1				0.8				1.3
Total operating expenses			23.8				26.6				26.7				26.6
Operating income			9.5				8.0				4.6				8.1
Other income and expense			(3.3	)			(1.6	)			(2.7	)			(1.2	)
Income before income tax expense			6.2				6.4				1.9				6.9
Income tax expense			(1.0	)			(1.5	)			(0.3	)			(2.1	)
Net income			5.2				4.9				1.6				4.8
Net (income) loss attributable to noncontrolling interests			(0.8	)			(0.9	)			0.4				(0.9	)
Net income attributable to DRI			4.4	%			4.0	%			2.0	%			3.9	%