PLEDGE AGREEMENT

This PLEDGE AGREEMENT, dated as of August 26, 2002, between Digital Recorders, Inc., a North Carolina corporation (“Pledgor”) and John D. Higgins (“Secured Party”).

RECITALS

A. Pledgor and Secured Party entered into a Convertible Loan Agreement of even date herewith (the “Loan Agreement”). Capitalized terms used but not defined herein shall have the meanings set forth in the Loan Agreement.

B. Pursuant to the terms of the Loan Agreement, Secured Party will lend to Pledgor the aggregate principal amount of $250,000 to be evidenced by the Pledgor’s 8.00% Convertible Debentures of even date herewith (the “Debentures”).

C. Pledgor is the owner of the shares (collectively, the “Shares”) of capital stock hereto issued by each Subsidiary described on Schedule A, and Pledgor has agreed to pledge and assign to Secured Party a security interest in the Shares, together with any additional shares of capital stock of any U.S. subsidiary subsequently acquired by Pledgor or an affiliate, subject with respect to such U.S. subsidiaries only, to the prior pledge to Guaranty Business Credit Corporation (“GBCC”), Renaissance US Growth & Income Trust PLC (“RUSFIT”) and BFSUS Special Opportunities Trust PLC (“BFSUS”) to secure payment of the Obligations of Pledgor under the Loan Agreement and Debentures.

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants, the parties agree as follows:

1. Pledge of Shares. Pledgor hereby pledges and assigns to the Secured Party the Shares, subject with respect to any U.S. subsidiaries only, to the prior pledge to GBCC, BFSUS and RUSFIT, for the purpose of securing the full and prompt payment, when due, by Pledgor of the Obligations.

2. Delivery of Shares. In the event that GBCC, BFSUS and RUSFIT release its security interest in the Shares of the U.S. subsidiaries, the Pledgor shall deliver such Shares to Secured Party with duly executed stock powers, in blank. Secured Party shall hold all such certificates and stock powers subject to the terms of this Pledge Agreement.

3. Voting of Shares and Receipt of Dividends. Subject to the rights of GBCC, BFSUS and RUSFIT with respect to the shares of the U.S. subsidiaries, Pledgor shall have the right to vote the Shares, except as provided herein and in the Loan Agreement and Debentures, upon the occurrence of an Event of Default or a Default.

4. Representations and Warranties. Pledgor hereby warrants, represents and covenants as follows:

a. Pledgor owns the Shares, free from any adverse claims and Liens, except the prior security interest of GBCC, BFSUS and RUSFIT with respect to the Shares of the U.S. Subsidiaries;

b. Pledgor will notify Secured Party of, and will defend the Shares against, all claims and demands of all persons at any time claiming the Shares or any interest therein;

c. Pledgor will pay all taxes and assessments upon the Shares prior to the date of delinquency for payment of such taxes and assessments; and

d. Pledgor has the full power, authority and capacity to grant the security interest hereunder.

5. Return of Security. When the Obligations have been paid in full, Secured Party shall promptly deliver the certificates representing the Shares then held by it and all related stock powers to Pledgor.

6. Occurrence of Event of Default. Subject to the rights of GBCC, BFSUS and RUSFIT with respect to the Shares of the U.S. Subsidiaries, if an Event of Default or a Default occurs, Secured Party shall have the right to exercise any rights and remedies provided in the Loan Agreement, as Secured Party, in his sole discretion, may deem necessary or appropriate. Secured Party shall further have the right to exercise any remedies afforded a secured party under the Uniform Commercial Code of Texas or any other applicable law with respect to the Shares.

7. Duration of Pledge. This Pledge shall be terminated upon the earlier of: (i) foreclosure by Secured Party of the security interest granted hereunder upon the occurrence of a Default or an Event of Default, or (ii) return of the Shares to Pledgor upon payment of the Obligations.

8. Miscellaneous.

a. Governing Law. This Pledge shall be governed by and construed and enforced in accordance with the substantive laws of the State of Texas, without regard to the conflicts of laws provisions thereof, and the applicable laws of the United States. Venue and jurisdiction shall be in the state or federal courts in Dallas County, Texas.

b. Binding Effect. All of the terms, covenants, representations, warranties and conditions herein shall be binding upon, and inure to the benefit of, and be enforceable by the parties and their respective successors and assignees.

c. Waiver. This Pledge may not be amended, modified, superseded or canceled, nor may any of the terms, covenants, representations, warranties or conditions hereof be waived, except by a written instrument executed by the party against whom such amendment, modification, supersedure, cancellation or waiver is charged. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of any breach of any term, covenant, representation or warranty contained herein, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of any breach of any other term, covenant, representation or warranty.

d. Attorneys’ Fees. If any party brings an action in connection with the performance, breach or interpretation of this Pledge, or in any action related to the transaction contemplated hereby, the prevailing party in such action shall be entitled to recover from the losing party in such action all reasonable costs and expenses of such litigation, including attorneys’ fees, court costs, costs of investigation, accounting and other costs reasonably incurred or related to such litigation.

e. Severability. If any provision hereof is determined to be illegal or unenforceable, such determination shall not affect the validity or enforceability of the remaining provisions hereof, all of which shall remain in full force and effect.

f. Further Documents. Each party covenants and agrees that, from time to time, after the date hereof, at the reasonable request of any other party, and without further consideration, such party will execute and deliver such other documents and take such other action reasonably required to carry out, in all respects, the transactions contemplated and intended by this Pledge.

g. Notices. Any notices or other communications required or permitted to be given by this Agreement or any other documents and instruments referred to herein must be (i) given in writing and personally delivered, mailed by prepaid certified or registered mail or sent by overnight service, such as FedEx, or (ii) made by telex or facsimile transmission delivered or transmitted to the party to whom such notice or communication is directed, with confirmation thereupon given in writing and personally delivered or mailed by prepaid certified or registered mail.

If to Secured Party
or Agent:

John D. Higgins, Sr.
105 High Farms Road
Glen Head, NY 11545
Telephone: (516) 671-5745
Facsimile: (516) 656-3349

If to Pledgor:

Digital Recorders, Inc.
Sterling Plaza, Box 26
5949 Sherry Lane, Suite 1050
Dallas, Texas 75225
Attn.: David L. Turney
Chairman, CEO and President
Telephone: (214) 378-9429
Facsimile: (214) 378-8437

with a copy to:

David Furr, Esq.
Gray, Layton, Kersh, Solomon, Sigmon, Furr & Smith, PA
516 South New Hope Road
P.O. Box 2636
Gastonia, North Carolina 28053-2637
Telephone: (704) 865-4400
Facsimile: (704) 866-8010

Any notice delivered personally in the manner provided herein will be deemed given to the party to whom it is directed upon the party’s (or its agent’s) actual receipt. Any notice addressed and mailed in the manner provided herein will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is placed in the mail, or, if earlier, the time of actual receipt.

h. Parties in Interest. Nothing in this Pledge, whether express or implied, is intended to confer any rights or remedies under or by reason of this Pledge on any persons other than the parties and their respective successors and assigns, nor is anything in this Pledge intended to relieve or discharge the obligation or liability of any third persons to any party to this Pledge, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Pledge.

i. Defined Terms. All capitalized terms, unless otherwise specified, have the same meanings assigned to them in the Loan Agreement and Debentures.

IN WITNESS WHEREOF, this Pledge Agreement is executed as of the date first above written.

PLEDGOR:

DIGITAL RECORDERS, INC.

By:

Name: David L. Turney
Title: Chairman, CEO and President

SECURED PARTY:

JOHN D. HIGGINS

SCHEDULE A

	Subsidiaries		No. of Shares
	Twin Vision of North America, Inc.		100
	Digital Audio Corporation		100