UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

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

For the transition period from                      to                     

Commission File Number 0-15761

GLENAYRE TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE		98-0085742
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
825 8th Avenue, 23rd Floor, NY, NY (Address of Principal Executive Offices)		10019 (Zip Code)

(770) 283-1000
(Registrant’s Telephone Number, Including Area Code)

NOT APPLICABLE

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of Exchange Act. (Check one):

Large Accelerated Filer o       Accelerated Filer þ       Non-Accelerated Filer o

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

The number of shares outstanding of the Registrant’s common stock, par value $.02 per share, at July 31, 2006 was 68,819,031 shares.

 

 

Glenayre Technologies, Inc. and Subsidiaries

INDEX

		Page
Part I – Financial Information:
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm			3
Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005			4
Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 (Unaudited)			5
Condensed Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005 (Unaudited)			6
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2006 (Unaudited)			7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)			8
Notes to Condensed Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			40
Part II – Other Information:
Item 1. Legal Proceedings			40
Item 4. Submission of Matters to Vote of Security Holders			41
Item 6. Exhibits			41
EX-10.2 GLENAYRE 1996 INCENTIVE STOCK PLAN
EX-10.3 SHARE PURCHASE AGREEMENT
EX-15.1 LETTER REGARDING UNAUDITIED FINANCIAL INFORMATION
EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER, SECTION 302
EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER, SECTION 302
EX-32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER, SECTION 906
EX-32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER, SECTION 906

PART I – FINANCIAL INFORMATION

Board of Directors and Stockholders
Glenayre Technologies, Inc.

We have reviewed the condensed consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of June 30, 2006, and the related condensed consolidated statements of operations for the three month and six month periods ended June 30, 2006 and 2005, the consolidated statement of stockholders’ equity for the six month period ended June 30, 2006, and condensed consolidated statements of cash flows for the six month periods ended June 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated March 15, 2006 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Atlanta, Georgia
August 7, 2006

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2006				2005
		(Unaudited)
		(In thousands, except share and
		per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	66,837			$	78,803
Restricted cash			2,144				10,602
Accounts receivable, net of allowances for doubtful accounts of $375 and $489 at June 30, 2006 and December 31, 2005, respectively			29,229				28,056
Current portion of long-term receivable			1,659				6,076
Inventories, net			14,714				15,620
Prepaid expenses and other current assets			20,418				11,099
Total Current Assets			135,001				150,256
Restricted cash			21,839				29,727
Property, plant and equipment, net			65,168				62,340
Long-term receivable			7,185				6,560
Goodwill			3,027				—
Intangible assets			60,674				59,642
Other assets			4,826				6,883
TOTAL ASSETS		$	297,720			$	315,408
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	23,678			$	28,990
Accrued and other liabilities			36,148				38,001
Income taxes payable			10,027				9,489
Deferred income taxes			231				215
Deferred revenue			3,582				9,003
Loans from employees			1,117				1,132
Current portion of long-term debt			19,845				14,700
Accrued liabilities, discontinued operations			2,363				2,174
Total Current Liabilities			96,991				103,704
Other non-current liabilities			7,447				3,353
Loans from employees			3,604				4,113
Long-term debt			51,541				61,868
Pension and other defined benefit obligations			32,541				29,281
Deferred income taxes			9,699				8,462
Accrued liabilities, discontinued operations			—				61
Total Liabilities			201,823				210,842
Minority interest in subsidiary company			772				886
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value; authorized: 5,000,000 shares, no shares issued and outstanding			—				—
Common stock, $.02 par value; authorized: 200,000,000 shares, issued and outstanding: 2006 - 68,815,431 shares; 2005 – 68,063,799 shares			1,376				1,361
Contributed capital			366,290				364,376
Accumulated deficit			(272,624	)			(260,874	)
Cumulative translation adjustment, net of tax			83				(1,183	)
Total Stockholders’ Equity			95,125				103,680
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	297,720			$	315,408

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Three Months Ended June 30,
		2006				2005
		(In thousands, except per share amounts)
REVENUES:
Product sales		$	66,071			$	30,429
Service revenues			23,902				12,325
Total Revenues			89,973				42,754
COST OF REVENUES:
Cost of sales			53,313				19,667
Cost of services			14,740				7,857
Total Cost of Revenues			68,053				27,524
GROSS MARGIN			21,920				15,230
OPERATING EXPENSES:
Selling, general and administrative expense			17,460				12,113
Research and development expense			4,221				3,948
Amortization of intangible assets			2,025				566
Total Operating Expenses			23,706				16,627
OPERATING LOSS			(1,786	)			(1,397	)
OTHER INCOME (EXPENSES):
Interest income			1,032				571
Interest expense			(1,563	)			(505	)
Gain (loss) on currency swap, net			(1,650	)			262
Transaction gain (loss), net			584				(1,300	)
Other income			14				25
Total Other Expenses			(1,583	)			(947	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(3,369	)			(2,344	)
Provision for income taxes			1,187				134
Minority interests			(114	)			—
LOSS FROM CONTINUING OPERATIONS			(4,442	)			(2,478	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION (BENEFIT)			(386	)			388
NET LOSS		$	(4,828	)		$	(2,090	)
LOSS PER WEIGHTED AVERAGE COMMON SHARE:
Loss from continuing operations		$	(0.06	)		$	(0.04	)
Income (loss) from discontinued operations			(0.01	)			0.01
Loss per weighted average common share		$	(0.07	)		$	(0.03	)
LOSS PER COMMON SHARE — ASSUMING DILUTION:
Loss from continuing operations		$	(0.06	)		$	(0.04	)
Income (loss) from discontinued operations			(0.01	)			0.01
Loss per weighted average common share		$	(0.07	)		$	(0.03	)

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Six Months Ended June 30,
		2006				2005
		(In thousands, except per share amounts)
REVENUES:
Product sales		$	126,389			$	44,087
Service revenues			50,030				16,589
Total Revenues			176,419				60,676
COST OF REVENUES:
Cost of sales			102,165				23,822
Cost of services			33,180				10,324
Total Cost of Revenues			135,345				34,146
GROSS MARGIN			41,074				26,530
OPERATING EXPENSES:
Selling, general and administrative expense			36,212				19,100
Research and development expense			8,796				6,982
Amortization of intangible assets			3,780				566
Total Operating Expenses			48,788				26,648
OPERATING LOSS			(7,714	)			(118	)
OTHER INCOME (EXPENSES):
Interest income			2,080				1,101
Interest expense			(2,974	)			(512	)
Gain (loss) on currency swaps, net			(2,377	)			262
Transaction gain (loss), net			940				(1,300	)
Other income, net			6				32
Total Other Expenses			(2,325	)			(417	)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(10,039	)			(535	)
Provision for income taxes			1,191				163
Minority interests			(114	)			—
LOSS FROM CONTINUING OPERATIONS			(11, 116	)			(698	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION (BENEFIT)			(634	)			398
NET LOSS		$	(11,750	)		$	(300	)
LOSS PER WEIGHTED AVERAGE COMMON SHARE:
Loss from continuing operations		$	(0.16	)		$	(0.01	)
Income (loss) from discontinued operations			(0.01	)			0.01
Loss per weighted average common share		$	(0.17	)		$	(0.00	)
LOSS PER COMMON SHARE — ASSUMING DILUTION:
Loss from continuing operations		$	(0.16	)		$	(0.01	)
Income (loss) from discontinued operations			(0.01	)			0.01
Loss per weighted average common share		$	(0.17	)		$	(0.00	)

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

														Accumulated
																		Other
		Common Stock								Contributed								Comprehensive				Comprehensive
		Shares				Amount				Capital				Deficit				Loss				Loss
Balances, January 1, 2006			68,064			$	1,361			$	364,376			$	(260,874	)		$	(1,183	)
Net loss															(11,750	)						$	(11,750	)
Foreign currency translation																			1,266				1,266
Shares issued for ESP Plan and option exercises			751				15				1,129
Stock compensation expense											785
Total comprehensive loss, net of tax																						$	(10,484	)
Balances, June 30, 2006			68,815			$	1,376			$	366,290			$	(272,624	)		$	83

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Six Months Ended June 30,
		2006				2005
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(11,750	)		$	(300	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			10,890				2,586
Stock compensation expense			715				26
Profits interest			823				807
Unrealized loss (gain) on currency swap			2,377				(262	)
Foreign currency transaction (gain) loss			(1,026	)			1,006
Minority interest			(114	)			—
Other			302				(281	)
Changes in operating assets and liabilities, net of effects of business dispositions and acquisitions:
Restricted cash			1,207				(845	)
Accounts receivable			(617	)			(25,650	)
Inventories			1,129				(2,529	)
Prepaids and other current assets			(8,891	)			(308	)
Long-term receivable			4,359				7,501
Goodwill and intangible assets			(140	)			—
Other assets			(329	)			20
Accounts payable			(6,257	)			9,907
Deferred revenue			(5,421	)			7,272
Accrued liabilities and income taxes payable			(3,549	)			9,541
Pension and other defined benefit plans			1,599				—
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES			(14,693	)			8,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment			(7,381	)			(1,597	)
Maturities of short-term securities			—				12,180
Asset and share purchase of EDC, net of cash acquired			—				(67,262	)
Release (increase) in restricted cash			16,500				(16,500	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			9,119				(73,179	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowing, net of costs			—				45,444
Proceeds from employee loans			360				—
Repayment of long-term borrowing			(8,135	)			—
Proceeds from sale of LLC interest in subsidiary			—				772
Repayment of employee loans			(1,156	)			—
Issuance of common stock			1,144				551
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(7,787	)			46,767
EFFECT OF EXCHANGE RATE CHANGES ON CASH			1,395				(771	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(11,966	)			(18,692	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			78,803				82,691
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	66,837			$	63,999
Depreciation and amortization included in net cash used in operating activities:
Depreciation included in cost of sales		$	5,495			$	1,036
Depreciation included in selling, general and administrative expense			1,055				341
Depreciation included in research and development expense			560				643
Amortization of intangible assets			3,780				566

SUPPLEMENTAL INFORMATION OF NON-CASH ACTIVITIES:
During the six months ended June 30, 2006, we purchased a printer under a capital lease for approximately $965,000.

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

1. Business and Basis of Presentation

Glenayre Technologies, Inc. and its wholly owned and controlled majority owned subsidiaries (collectively referred to as “we,” “us,” “our,” “Glenayre” or the “Company”) is an international company operating in the entertainment and communications industries. The Company has two reportable business segments: Entertainment Distribution Company, LLC (“EDC”) and Glenayre Messaging (“Messaging”). The EDC segment provides pre-recorded products and distribution services to the entertainment industry. The Messaging segment is an established global provider of network-based messaging and communication systems and software that enable applications including voice messaging, multimedia messaging and other enhanced services.

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. We believe all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The results for the interim periods are not necessarily indicative of results for the full year. These interim financial statements should be read in conjunction with the consolidated financial statements of the Company and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The financial statements include the accounts of Glenayre and its wholly owned as well as controlled majority owned subsidiaries and have been prepared from records maintained by Glenayre and its subsidiaries in their respective countries of operation. The ownership interest of minority investors is recorded as minority interest. All significant intercompany accounts and transactions are eliminated in consolidation. The Company does not have any equity or cost method investments.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Certain items in the prior period consolidated financial statements have been reclassified to conform to the current presentation.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

2. Recently Adopted Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of SFAS 123. SFAS 123R supersedes Accounting Principals Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We adopted SFAS 123R on January 1, 2006. Prior to adoption of SFAS 123R, we accounted for share-based payments to employees using APB 25’s intrinsic value method and consequently recognized no compensation cost for employee stock options. Had the adoption of SFAS 123R occurred in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 15.

On January 1, 2006 we adopted SFAS No. 151 Inventory Cost, an amendment of Accounting Research Bulletin No. 43, Chapter 4 (SFAS 151). SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) to be recognized as current period charges. In addition, SFAS 151 requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The adoption of the new standard did not have a material impact on the Company’s financial position or results of operation.

We also adopted on January 1, 2006 SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154). SFAS 154 requires retroactive application of a voluntary change in accounting principle to prior period financial statements unless it is impracticable. SFAS 154 replaced APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. The adoption of the provisions of SFAS 154 did not have a material impact on the Company’s results of operations or financial condition.

3. Impact of Recently Issued Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. We have not determined the effect, if any, the adoption of FIN 48 will have on our financial position and results of operations.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

4. EDC Acquisition

On May 31, 2005, we acquired the U.S. and central European CD and DVD manufacturing and distribution operations from Universal Music Group (“Universal”). The transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. The purchase price of approximately $130.0 million (as set forth in the table below), using the May 31, 2005 Euro to U.S. dollar exchange rate of 1.2474, consisted of $81.6 million cash paid at closing, $39.8 million in deferred payments to Universal and $7.0 million for various contingent payments and transaction costs. The purchase price was subject to post-closing adjustments associated with the contingent purchase price discussed below. Of the cash purchase price paid at closing, $30.5 million was for the U.S. operations, €35.5 million ($44.3 million) was for the central European operations, and the balance constituted transaction expenses. The purchase price was allocated to the related tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date.

Under the purchase method of accounting, the assets and liabilities acquired from Universal were recorded on our balance sheet at their respective fair values as of the date of acquisition. We have finalized our purchase price allocation and do not expect further material adjustments to values assigned to the assets acquired and assumed liabilities. The following table summarizes the fair values at acquisition:

		December 31, 2005				Adjustment				June 30, 2006
Current assets		$	53,406				—			$	53,406
Spare parts			4,569				(1,532	)			3,037
Property, plant & equipment			55,549				351				55,900
Long-term receivable from Universal			20,667				—				20,667
Other assets			1,056				—				1,056
Customer relationships			65,383				2,670				68,053
Goodwill			—				3,023				3,023
Accounts payable and accrued expenses			(28,548	)			—				(28,548	)
Deferred tax liability			(9,176	)			(1,062	)			(10,238	)
Long-term liabilities			(35,933	)			(374	)			(36,307	)
Total		$	126,973			$	3,076			$	130,049

The additional purchase price adjustments recorded during the six months ended June 30, 2006 included $1.6 million relating to the fair value of the profits interests awarded to the Seller and the investment banker as part of the acquisition, $1.3 million of additional contingent purchase price payable to the Seller and $141,000 of additional transaction costs.

During the first quarter of 2006, in accordance with plans adopted at acquisition date, we terminated nine employees as part of the EDC acquisition resulting in estimated severance cost of approximately $325,000. During the second quarter of 2006 this estimate was increased by $50,000. The total severance cost of $375,000 is an adjustment of the purchase price and consequently increased intangible assets in the accompanying unaudited condensed consolidated balance sheet at June 30, 2006. We paid approximately $228,000 of the severance cost during the six months ended June 30, 2006. The remaining severance cost is recorded in accrued liabilities in the accompanying unaudited condensed consolidated balance sheet at June 30, 2006.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

Universal Contingent Purchase Price

Pursuant to the terms of EDC’s acquisition of Universal’s central European CD and DVD manufacturing and distribution operations, we must pay Universal a percentage of the profits earned on the revenue derived from two third party distribution services agreements assumed in the acquisition. Profit is defined as earnings before interest and taxes. We reached an agreement with Universal in June 2006 clarifying the terms of this agreement. As clarified, such arrangement extends through December 31, 2007.

The contingent consideration included in the purchase price totals €5.3 million ($6.6 million) consisting of €3.2 million ($4.0 million) for actual consideration from the date of purchase through June 30, 2006 and €2.1 million ($2.6 million) for estimated consideration due for the remaining 18 months ended December 31, 2007, using the May 31, 2005 Euro to U.S. dollar exchange rate of 1.2474. Additional adjustments to the purchase price will be recorded in future periods when the amounts become probable and determinable. Included in accrued liabilities in the unaudited condensed consolidated balance sheet at June 30, 2006 are approximately €94,000 ($117,000) for consideration earned but not paid as of June 30, 2006, and €2.1 million ($2.6 million) for the estimated amount payable for the 18 months ended December 31, 2007, using the June 30, 2006 Euro to U.S. dollar exchange rate of 1.2551.

EDC Profits Interests

As part of the EDC acquisition, we issued profits interests to certain key employees, Universal, and the Company’s financial advisor, that will entitle these parties to up to 30% of EDC’s distributed profits after the Company has received a return of its equity capital contribution and certain internal rate of return hurdles and other profitability conditions have been met. No payments were required from these parties to acquire the profits interests. These profits interests do not carry any voting rights.

The estimated fair value of the profits interests at the date of grant represents the present value of estimated future cash flows to those profits interests. The fair value of the profits interests granted to Universal and the financial advisor was included in the acquisition costs of EDC.

The profits interests issued to members of management are accounted for as compensation expense and are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. Compensation expense included in EDC’s results for the six months ended June 30, 2006 and 2005, respectively was $823,000 and $807,000. Compensation expense is recorded according to a vesting schedule of one-third immediately upon grant and two-thirds ratably in each of the two years after grant. The estimated fair value of the profits interests are subject to change in subsequent reporting periods as a result of actual results and revised estimates that differ from our current estimates, and this could result in adjustments to compensation expense related to the management profits interests. At June 30, 2006 and December 31, 2005, $1.9 million and $1.1 million, respectively, were included in other non-current liabilities in our condensed consolidated balance sheets as follows:

		June 30, 2006				December 31, 2005
Vested		$	1,822			$	710
Unvested			124				413
Total		$	1,946			$	1,123

At March 31, 2006 EDC had a potential unrecorded liability related to a disagreement in the interpretation of the definition of the units that are eligible for the volume discount that is earned by Universal. During the second quarter of 2006 EDC recorded a liability relating to this additional volume discount once we determined that the probability of incurring the liability was more likely than not.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

Intangible Assets

Intangible assets are comprised of supply agreements and contractual and non-contractual customer relationships arising from the acquisition of Universal’s U.S. and central European manufacturing and distribution operations. The supply agreements and customer relationships include 10-year manufacturing and distribution services supply agreements with Universal, two third party distribution supply agreements with automatic renewal terms and relationships with several central European customers for CD and DVD manufacturing services. The fair value assigned to the agreements was based on the present value of estimated future cash flows. The intangible value of the U.S. and international manufacturing and distribution agreements with Universal is being amortized over the 10-year terms of the agreements. The intangible value of the other international customer agreements and the international third party customer relationships are being amortized over five years.

As of June 30, 2006, acquired intangible assets and related amortization, using the June 30, 2006 Euro to U.S. dollar exchange rate of 1.2551, are as follows:

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

The weighted average useful life of intangible assets subject to amortization is 9.2 years. The amortization expense for the six months ended June 30, 2006 and 2005 was $3.8 million and $0.6 million, respectively. The estimated amortization expense for the remaining current year and the next five years is as follows:

For the six months ending December 31, 2006		$	4,068
For the years ending December 31,
2007			8,136
2008			8,136
2009			8,136
2010			6,795
2011			5,837

Goodwill

In connection with the Universal acquisition in our EDC segment, we recorded goodwill in the amount of $3.0 million. No goodwill was recorded at December 31, 2005, because the valuation was preliminary at that time. Goodwill allocated to U.S. operations is expected to be deductible for income tax purposes. There were no indicators of impairment at June 30, 2006. The measurement date for impairment will be October 1 of each fiscal year.

Pro Forma Information

The pro forma financial information for the second quarter and the first six months of fiscal 2005 includes the business combination accounting effect on historical Glenayre and EDC revenues, adjustments to depreciation on acquired property, amortization expense on intangible assets and acquisition costs reflected in Glenayre’s and EDC’s historical statements of operations for periods prior to the acquisition. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on the first day of the applicable period presented. In addition, the pro forma amounts are not necessarily indicative of operating results in future periods.

The following unaudited pro forma consolidated results of operations of the Company for three and six months ended June 30, 2005 assume that the acquisition of the U.S. and central European CD and DVD manufacturing and distribution operations of Universal were completed as of January 1, 2005:

		Three Months Ended				Six Months Ended
		June 30, 2005				June 30, 2005
Total revenues		$	89,928			$	172,557
Net loss from continuing operations		$	(5,079	)		$	(6,741	)
Net income from discontinued operations		$	388			$	398
Net loss		$	(4,691	)		$	(6,343	)
Basic net loss per share		$	(0.07	)		$	(0.09	)
Diluted net loss per share		$	(0.07	)		$	(0.09	)

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

5. Currency Rate Swap

The Company entered into a cross-currency rate swap agreement with a commercial bank on May 31, 2005. The Company’s objective is to manage foreign currency exposure arising from its loan to its German subsidiary, acquired in May 2005, and is therefore for purposes other than trading. The loan is denominated in Euros and repayment is due on demand, or in any event by May 31, 2010. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, the currency swap does not qualify for hedge accounting. Consequently, the Company reports the foreign currency exchange gains or losses attributable to changes in the US$/€ exchange rate on the currency swap in earnings.

The loss on the currency rate swap was approximately $1.6 million and $2.4 million for the three months and six months ended June 30, 2006, respectively. The gain on the currency rate swap was approximately $262,000 for the three months and six months ended June 30, 2005.

6. Inventories

Inventories, net of reserves, related to continuing operations consisted of:

		June 30, 2006				December 31, 2005
Raw materials		$	10,023			$	10,647
Work in process			1,892				1,390
Finished goods			2,799				3,583
Total		$	14,714			$	15,620

At June 30, 2006 and December 31, 2005, reserves related to continuing operations were approximately $3.0 million and $2.8 million, respectively.

7. Estimated Warranty Costs and Deferred Revenue

Messaging products generally include a one-year warranty. Consequently, a provision for estimated warranty costs is recorded at the time of sale. Factors affecting the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim.

The following is a summary of activity of the continuing operations warranty obligation for the six months ended June 30, 2006 and 2005:

		2006				2005
Balance at January 1st		$	423			$	573
Provision (release) for warranty obligations			92				46
Warranty release			(105	)			—
Settlements of warranty obligation			(8	)			(45	)
Balance at March 31st		$	402			$	574
Provision (release) for warranty obligations			(32	)			82
Settlements of warranty obligation			(16	)			(74	)
Balance at June 30th		$	354			$	582

Post installation extended warranty and support services, known as Glenayre Care, are available for Messaging products and services. One year of Glenayre Care is generally included in the price of the product. A portion of the product revenue (an amount equal to the fair value of the Glenayre Care) is deferred when the product is sold and ratably recognized into revenues over the support period. Once this service period expires, customers

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

generally enter into Glenayre Care agreements of varying terms, which typically require payment in advance of the performance of the extended warranty service. Revenue derived from post-installation support services is recognized ratably over the contracted support period.

Deferred revenue related to support services for new product sales and to the sale of post installation support services was approximately $2.7 million of the $3.6 million of deferred revenue included in the unaudited condensed consolidated balance sheet at June 30, 2006 and $2.9 million of the $9.0 million at December 31, 2005.

EDC provides its customers with a fixed credit as compensation for defective products. Revenue for CD and DVD products are recorded net of the fixed credit.

8. Discontinued Operations

In May 2001, the Company began exiting its Wireless Messaging (“Paging”) business. As a result, we recorded the Paging segment as a disposal of a segment starting in the second quarter of 2001 in accordance with APB Opinion No. 30, Reporting the Results of Operations. The operating results of the Paging segment have been classified as a discontinued operation for all periods presented in the unaudited condensed consolidated statements of operations. Additionally, all of the Paging segment assets are reported at their estimated net realizable value in the unaudited condensed consolidated balance sheet as of June 30, 2006. All business transactions related to the Paging segment, with the exception of existing contractual obligations, ceased in May 2002, the end of the transition period. Results for discontinued operations consist of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Gain (loss) on disposal of segment before income taxes		$	(405	)		$	428			$	(360	)		$	491
Income tax benefit (expense)			19				(40	)			(274	)			(93	)
Gain (loss) on disposal of discontinued			(386	)			388				(634	)			398
Income (loss) from discontinued operations		$	(386	)		$	388			$	(634	)		$	398

In the first quarter of 2006, after reviewing the estimated liabilities and future commitments related to the discontinued operations, we recorded a net decrease in the loss on disposal of approximately $45,000. The adjustments to the original estimates related primarily to asset liquidations and a reduction in estimated contract obligations. The income tax benefit (expense) is primarily related to foreign income tax contingencies. In the second quarter of 2006, we recorded a net increase in the loss on disposal of approximately $405,000 related to foreign currency exchange rate fluctuations offset slightly by liquidation of assets.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

In the first quarter of 2005, we recorded a net decrease in the loss on disposal of approximately $63,000. This decrease included income of $74,000 primarily due to settlement payments received from Pilot Pacific Properties, Inc. and its associated companies. This income was offset by adjustments to the original estimates, related primarily to international office closures, of $11,000. In the second quarter of 2005, as a result of our review of the estimated liabilities and future commitments related to the discontinued operations, a net decrease in the loss on disposal of $428,000 was recorded. We recorded income of $53,000 primarily due to a settlement and previously reserved accounts receivable receipts. Additional reductions of $375,000 were recorded primarily related to the release of a reserve for the Lynnview Ridge litigation (see Note 13).

9. Long-Term Debt

Long-term debt consisted of:

		June 30,				December 31,
		2006				2005
Senior Secured Credit Facility		$	41,500			$	41,500
Payable to Universal — undiscounted			32,418				39,440
Capital Leases			1,008				170
Employee Loans			4,721				5,245
Subtotal			79,647				86,355
Less: Unamortized Discount			(3,540	)			(4,542	)
Total Debt			76,107				81,813
Less: Current Portion			(20,962	)			(15,832	)
Total Long-Term Debt		$	55,145			$	65,981

Total scheduled principal payments for all long-term debt are as follows:

2006 (Remaining six months)		$	7,056
2007			23,221
2008			24,493
2009			11,945
2010			10,290
2011			1,039
Thereafter			1,603
Total		$	79,647

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

Senior Secured Credit Facility

In May 2005, to fund a portion of the purchase price for the EDC acquisition and provide for working capital needs, EDC obtained a Senior Secured Credit Facility (the “facility”) from Wachovia Bank, National Association for an aggregate principal amount of $56.5 million consisting of a term loan of $46.5 million, and a revolving credit loan of $10.0 million. On June 21, 2006, the facility was amended to extend the revolving credit loan for one year, modify the applicable leverage and fixed charge coverage ratios, and move all required principal payment dates from June 30^th to December 31^st of each year. The term loan expires December 31, 2010 and the revolving credit loan expires May 31, 2007. The amendment also released the $16.5 million cash collateral that Glenayre deposited with the lender on the closing date of the EDC acquisition. Substantially all of EDC’s assets are pledged as collateral to secure obligations under this facility. Scheduled principal payments are included in the table above. The weighted average interest rate of outstanding debt under the facility was 7.92% at June 30, 2006. At June 30, 2006, no drawings were made against the $10.0 million revolving credit loan.

Capital Leases

Leased equipment includes a DVD reproduction line and a CD printer. Lease terms allow ownership to transfer to EDC at no additional cost. Property, plant and equipment includes $1.3 million for capitalized equipment leases and accumulated depreciation of $74,000. Depreciation expense for the three and six months ended June 30, 2006 is $17,000 and $34,000 respectively.

10. Income Taxes

The differences in the consolidated income tax provision from continuing operations and the amount computed using the U.S. federal statutory income tax rate is set forth below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Income tax (benefit) federal U.S. statutory rate		$	(1,179	)		$	(821	)		$	(3,514	)		$	(188	)
State income tax (benefit) net of federal benefit			(279	)			(133	)			(567	)			(172	)
Increase (decrease) in valuation allowance			1,236				565				3,695				(59	)
Foreign taxes at rates other than U.S. statutory rates			1,187				110				1,191				139
Profits interest awards			226				282				288				282
Other non deductibles			7				109				90				139
Minority interest in earnings of subsidiary			(11	)			22				8				22
Income tax provisions		$	1,187			$	134			$	1,191			$	163

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

We account for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). At June 30, 2006, the U.S. net deferred tax assets were fully reserved by a valuation allowance. Pursuant to SFAS 109, a valuation allowance should be recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized as offsets to the future taxable income. We assessed whether the net deferred asset at June 30, 2006 was realizable and determined that the entire amount should be reserved due to significant U.S. net operating losses and our inability to project future taxable income. The foreign pretax income (loss) from operations for the three months ended June 30, 2006 and June 30, 2005 was approximately $3.0 million and ($122,000), respectively.

We have realized U.S. federal net operating losses (“NOLs”) of $276.9 million and foreign NOLs of $45.1 million. At December 31, 2005, of the $276.9 million realized U.S. NOLs, $243.5 million will begin to expire in 2019. The remaining $33.4 million of U.S. NOLs were related to the 1997 acquisitions of Open Development Corporation and Wireless Access, Inc., which start expiring in 2006. Our ability to offset future income with these acquired NOLs is subject to restriction in the United States Internal Revenue Code of 1986, as amended.

Income taxes payable includes $8.5 million and $7.5 million at June 30, 2006 and December 31, 2005, respectively, for probable and estimable exposure for tax filing positions in various jurisdictions. At June 30, 2006 and December 31, 2005, the above amounts included $6.3 million and $5.5 million of transfer pricing exposure in various foreign jurisdictions, in addition to reserves for international business taxes. We have approached the foreign country involved for tax clearance in an effort to reach a conclusion on the international business tax.

An unrecorded tax loss contingency arose in 2005 related to overhead costs incurred in the U.S. that were allocated to certain foreign subsidiaries. It is possible, if such subsidiaries were subjected to an audit, that the tax authorities in these foreign jurisdictions will object to the charges. If we are unsuccessful in defending our position, tax expense could increase by as much as $1.0 million over the amounts currently accrued. We believe that the chance of disallowance is more than remote, but less than likely.

11. Employee Benefit Plans

Net pension and post-retirement benefit costs consisted of the following components:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Service cost		$	237			$	14			$	474			$	29
Interest cost on APBO			290				31				579				63
Amortization of prior service costs			(64	)			(63	)			(127	)			(127	)
Amortization of actuarial loss			8				23				16				45
		$	471			$	5			$	942			$	10

The June 30, 2006 and 2005 amounts include pension benefit costs assumed in May 2005 in connection with the EDC acquisition. The amortization of prior service cost decreases the post-retirement benefit costs due to an amendment of a Messaging plan that reduced the number of participants by changing eligibility provisions.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

12. Stockholders’ Equity

Loss from continuing operations per Common Share

The following table sets forth the computation of loss from continuing operations per share:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Numerator:
Loss from continuing operations		$	(4,442	)		$	(2,478	)		$	(11,116	)		$	(698	)
Denominator:
Denominator for basic Loss from continuing operations per share – weighted average shares			68,746				66,997				68,464				67,051
Effect of dilutive securities			—				—				—				—
Denominator for diluted Loss from continuing operations per share			68,746				66,997				68,464				67,051
Loss from continuing operations per weighted average common share (1)		$	(0.06	)		$	(0.04	)		$	(0.16	)		$	(0.01	)
Loss from continuing operations per common share — assuming dilution (1)		$	(0.06	)		$	(0.04	)		$	(0.16	)		$	(0.01	)
Dilutive securities not included above due to anti-dilutive effect			2,111				2,051				2,630				1,748
Anti-dilutive securities not included above:
Stock options			2,199				6,635				2,248				7,378

Restricted Stock Units

Restricted stock units (“RSU’s”) issued to directors are non-cash transactions. For the six months ended June 30, 2006, approximately 39,000 shares were issued to directors for vested RSU’s valued at approximately $64,000, based on the grant date fair value.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

13. Commitments and Contingencies

Litigation

In connection with the licensing of Messaging’s software products, our standard purchase and license agreements typically require us to defend and indemnify our customers against claims that our licensed programs infringe or misappropriate the intellectual property rights of third parties. Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection with patent, copyright, trade secret or mask works infringement claims made by third parties with respect to the customer’s authorized use of our licensed programs. The indemnity provisions generally provide, subject to various exclusions and conditions, for our control of defense and settlement and cover costs and damages actually finally awarded against the customer. We retain the right in our discretion or after issuance of a final adverse judgment to obtain a license for the licensed program in question from the third party, to modify the licensed program so it is no longer infringing, or to terminate the customer’s license for the licensed program with a pro-rata refund of license fees paid based on a 5-year straight-line amortization schedule. The following lawsuit relates to these indemnification obligations.

Phillip Jackson – Beginning in late 2001, Phillip Jackson (“Jackson”) filed lawsuits against several of our customers claiming that products sold by us and used by these customers infringed a patent held by Jackson. We agreed to indemnify our customers for the claims in these lawsuits and assumed primary responsibility for defending the claims with respect to our products. Following completion of the trial and post-trial reduction of damages by the court, the court entered judgment in the total amount of approximately $2.7 million, plus interest and costs. During the first quarter of 2004, we recorded a charge consisting of $2.7 million of royalty fee expense (recorded in cost of revenues) and $200,000 of interest expense, and recorded a reduction of the estimated liability for accrued legal cost associated with this case of $770,000. We paid the $2.7 million award plus interest and costs during the second quarter of 2004.

On May 14, 2004, Jackson filed a motion with the trial court to set trial on remaining issues of contributory infringement and inducement to infringe Jackson’s patent. On June 29, 2004, the trial court ruled that there were no issues remaining between the parties and denied Jackson’s motion to set trial on remaining issues. Jackson filed an appeal with respect to this ruling and the appeal was argued before the United States Court of Appeals for the Federal Circuit on March 11, 2005. On April 11, 2006, the appellate court ruled on the appeal in Glenayre’s favor, affirming the trial court’s ruling of June 29, 2004 and dismissing Jackson’s claim for a second trial on other issues. On April 25, 2006, Jackson filed a request for rehearing en banc with the appellate court that was subsequently denied. Since that time, no further appeal has been filed by Jackson, and the time for further appeals by Jackson has expired. Accordingly, the Federal Circuit appellate court decision has become final and nonappealable, and the Jackson case is now concluded.

Lynnview Ridge, Alberta – In November 2002 and April 2003, a total of twenty lawsuits seeking approximately CDN $22.3 million in damages were filed in the Court of Queen’s Bench, Judicial Centre of Calgary, in Alberta, Canada, against us and several other defendants, including Imperial Oil, a major Canadian petroleum company. These lawsuits asserted that the defendants are liable for negligence, nuisance, and negligent misrepresentation arising out of the development and sale of homes located in Calgary, Canada residential development, Lynnview Ridge, that was jointly developed in the early 1980’s by a corporate predecessor of the Company and a wholly owned subsidiary of Imperial Oil.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

In March 2004, one of the lawsuits was discontinued by one of the plaintiffs. In April 2004, we made an application for grant of summary judgment in one action that was chosen to be a representative case for this matter, but the plaintiffs in this representative case discontinued their lawsuit in October 2004. In April 2005, we were notified that Imperial Oil had filed a notice with the Court that it has settled nine of the lawsuits involving approximately CDN $11.8 million in total damages and that the releases to be made by the plaintiffs in connection with those settlements would include the Company. Since that time consent judgments and dismissals covering the Company have been entered in eight of the remaining nine lawsuits, which had been requesting approximately CDN $6.5 million in total damages. In February 2006, the plaintiffs in the last of the lawsuits, seeking approximately CDN $145,000 in total damages, agreed to discontinue their lawsuit. On March 10, 2006, the case was formally dismissed. Based on the foregoing, all of the original twenty lawsuits have been settled or dismissed and are now closed. We have paid no damages with respect to any of the foregoing settlements or judgments.

In addition to the legal proceedings discussed above, we are, from time to time, involved in various disputes and legal actions related to our business operations. While no assurance can be given regarding the outcome of these matters, based on information currently available, we believe that the resolution of these matters will not have a material adverse effect on the financial position or results of future operations of the Company. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial condition, results of operations and cash flows could be materially adversely affected.

Letters of Credit and Cash Collateral

Restricted cash includes $771,000 of customer performance bonds and $30,000 for letters of credit for leased space and a tax bond. None of these bonds or letters of credit were drawn upon as of June 30, 2006.

Other

At June 30, 2006, we had approximately $14.9 million of outstanding unconditional purchase commitments, mainly to suppliers of inventories and equipment.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

14. Segment Reporting

We have two reportable segments: EDC and Messaging. EDC consists of the CD and DVD manufacturing and distribution operations. Messaging consists of the software development operation, producing network-based messaging and communication systems and software that enable applications including voice messaging, multimedia messaging and other enhanced services. The segments operate in different industries and are managed separately.

The interim results are not necessarily indicative of estimated results for a full fiscal year. For EDC, the first half of each calendar year is typically the lowest point in the revenue cycle in the entertainment industry. For Messaging, results are variable depending on the capital equipment needs of communication service providers. Additionally, EDC results include one month of operations for the three and six months ended June 30, 2005.

		Three Months Ended June 30,
		Consolidated								EDC								Messaging
		2006				2005				2006				2005				2006				2005
Revenues		$	89,973			$	42,754			$	73,586			$	20,007			$	16,387			$	22,747
Income (loss) from continuing operations before income taxes			(3,369	)			(2,344	)			(2,334	)			(4,015	)			(1,035	)			1,671
Depreciation & amortization			5,595				2,114				5,133				1,606				462				508

		Six Months Ended June 30,
		Consolidated								EDC								Messaging
		2006				2005				2006				2005				2006				2005
Revenues		$	176,419			$	60,676			$	143,662			$	20,007			$	32,757			$	40,669
Income (loss) from continuing operations before income taxes			(10,039	)			(535	)			(6,706	)			(4,015	)			(3,333	)			3,480
Depreciation & amortization			10,890				2,586				9,877				1,606				1,014				980

15. Stock Compensation Expense

On January 1, 2006, we adopted SFAS 123R, which is a revision of SFAS 123. SFAS 123R supersedes APB 25 and amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This pronouncement applies to our incentive stock plan, including stock options and restricted stock units, and our employee stock purchase plan.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

We elected the “modified prospective” method for our transition. Under this method, we recognized compensation cost beginning on January 1, 2006 (a) based on the requirements of SFAS 123R for all share-based payments granted after that date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the that date that were unvested. No share-based employee compensation cost was recognized in the statement of operations for the year ended December 31, 2005 for options granted because all such options had an exercise price equal to the market value of the underlying common stock on the date of grant. Additionally, no compensation costs were recognized for those periods for the employee stock purchase plan transactions. Compensation expense was recorded for the restricted stock units issued to our directors in the two preceding years because the stock is issued at no cost to the directors.

As a result of adopting SFAS 123R, our net loss from continuing operations before income taxes and net loss for the six months ended June 30, 2006 is approximately $709,000 greater than if we had continued to account for share-based compensation under APB 25. Basic and diluted loss per share from continuing operations for the same period are $0.01 greater than if we had continued to account for share-based compensation under APB 25.

The grant of equity instruments in exchange for services is a non-cash item and, therefore, is reflected as a reconciling item from net income to cash flow from operations, when using the indirect method for presenting the statement of cash flows. Prior to the adoption of SFAS 123R, we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. SFAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. During the six months ended June 30, 2006, we did not record any excess tax benefits or a corresponding increase to contributed capital because the Company has a net operating loss carry forward, and the tax benefit will not be recognized until the deduction is used to reduce current taxes payable.

We grant stock options and issue new shares under stock incentive plans and an employee stock purchase plan.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provision of SFAS 123R to options granted under the Company’s stock option plan in 2005. For purposes of pro forma disclosures, the estimated fair value of the options is estimated using a Black-Scholes-Merton option pricing formula and amortized to expense on a straight-line basis over the options’ vesting period. For the three-month and six-month periods ended June 30, 2005, pro forma option expense was as follows:

		Three Months Ended				Six Months Ended
		June 30, 2005				June 30, 2005
Loss from continuing operations — as reported		$	(2,478	)		$	(698	)
Pro forma stock option expense			(477	)			(785	)
Loss from continuing operations — pro forma		$	(2,925	)		$	(1,483	)
Loss from continuing operations — per common share — as reported		$	(0.04	)		$	(0.01	)
Pro forma stock option expense			(0.01	)			(0.01	)
Loss from continuing operations — per common share — pro forma		$	(0.05	)		$	(0.02	)
Loss from continuing operations, assuming dilution — per common share — as reported		$	(0.04	)		$	(0.01	)
Pro forma stock option expense			(0.01	)			(0.01	)
Loss from continuing operations, assuming dilution — per common share — pro forma		$	(0.05	)		$	(0.02	)

Both SFAS 123 and SFAS 123R require measurement of fair value using an option-pricing model. We use the Black-Scholes-Merton model. All awards granted prior to July 1, 2005 maintain their grant-date value as calculated under SFAS 123. The future compensation cost for the portion of these awards that are unvested (the service period continues after date of adoption) will be based on their grant-date value adjusted for estimated forfeitures. Prior to adopting SFAS 123R, we adjusted the pro forma expense for forfeitures only as they occurred. The pro forma expense was allocated to the service period based on the accelerated attribution method, and all the awards have graded service vesting. Under the new standard, we may use a straight-line or accelerated attribution method and elected to use the straight-line method for awards issued after January 1, 2006.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

The following table details the compensation expense for options, restricted stock units and the employee stock purchase plan:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Employee Stock Purchase Plan		$	32			$	—			$	60			$	—
Stock options			317				—				649				—
Subtotal of expense subsequent to the adoption of FAS123R			349				—				709				—
Restricted Stock Units			(17	)			14				6				26
Total stock compensation expense		$	332			$	14			$	715			$	26

No stock compensation expense was capitalized as part of the cost of any asset during the six months ended June 30, 2006 and 2005.

(a) Incentive Stock Plans

We maintain two incentive stock plans (the “1996 Plan” and the “1991 Plan”) that are used to promote the long-term financial interests and growth of the Company. The 1996 and 1991 Plans, as amended, authorize up to 12,650,000 and 11,475,000 shares, respectively, of the Company’s common stock for issuance in connection with the grant of stock options, stock appreciation rights, restricted stock and performance shares. Participation under the 1996 and 1991 Plans is limited to non-officer directors, key employees and other key persons. Options are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest based on three years of continuous service and have 10-year contractual terms. Generally, one-third of the options granted vest on each of the first, second and third anniversaries of the grant.

The 1996 Plan also provides for the grant of restricted stock units (“RSU’s”) to non-officer directors on an annual basis. RSU’s are intended to align the interest of directors and stockholders in enhancing the value of the Company’s common stock and to encourage such directors to remain with and to devote their best efforts to the Company. Beginning in January 2006, each non-officer director receives a number of RSU’s equal to $18,000 divided by the fair market value of the common stock on the last trading day immediately preceding each Annual Meeting. Prior to January 2006, non-officer directors received annual grants of RSU’s with a value of $9,000. One-third of the RSU’s vest immediately and the remainder vest on each of the first and second anniversaries of the grant.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

Activity and price information regarding the Company’s incentive stock plans are summarized as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Shares				Exercise				Contractual				Intrinsic
Options		(In 000’s)				Price				Term				Value
Outstanding, December 31, 2005			6,067			$	3.28
Granted			157				5.10
Exercised			(670	)			1.49
Forfeited			(57	)			2.89
Expired			(60	)			26.44
Outstanding, June 30, 2006			5,437			$	3.35			6.6 years				$	2,648
Vested or expected to vest at June 30, 2006			5,311			$	3.35				—			$	2,634
Exercisable at June 30, 2006			3,847			$	3.37			5.8 years				$	2,426

The weighted average grant-date fair value of options granted during the six months ended June 30, 2006 was $2.55 per share. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $2.1 million.

A summary of the status of the Company’s RSU’s (nonvested shares) as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below:

						Weighted-
						Average
		Shares				Grant-Date
Nonvested Shares		(000’s)				Fair Value
Nonvested at December 31, 2005			66			$	1.99
Granted			50				3.05
Vested			(39	)			1.64
Forfeited			—				—
Nonvested at June 30, 2006			77				2.87

As of June 30, 2006, there was $1.4 million of total unrecognized compensation cost related to share-based compensation arrangements granted under the 1996 and 1991 Plans. That cost is expected to be recognized over a weighted-average period of 1.09 years. The total fair value of shares vested during the six months ended June 30, 2006 was approximately $120,000.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

Prior to adopting SFAS 123R on January 1, 2006, we followed APB 25 and related interpretations in accounting for employee stock options. Under APB 25, because the exercise price of our stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. The weighted average fair value of stock options, calculated using the Black-Scholes-Merton option-pricing model, granted during the year ended December 31, 2005 was $1.42 per option. The fair value for these options was estimated at the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:

		2005
Expected Life in Years			1 to 4
Risk Free Interest Rate			4.4 to 4.5	%
Volatility			0.64
Dividend Yield			—

The fair value for each option granted in the six months ended June 30, 2006 is estimated on the date of grant using the Black-Scholes-Merton option-pricing model using the following assumptions:

		2006
Expected Life in Years			3.53
Risk Free Interest Rate			4.35	%
Volatility			0.65
Dividend Yield			—

The expected life in years was based on the weighted average of historical grants assuming that outstanding options are exercised at the midpoint of the future remaining term, adjusted for current demographics. The risk free interest rate was the U.S. Treasury five-year spot rate for January 2006. Volatility was determined by using (i) the long-term volatility (mean reversion), (ii) the midpoint of historical rolling 3.53 year volatilities, (iii) the volatility of the most recent 3.53 year time period, (iv) the volatility of the most recent one-year period, (v) the implied volatility as seen in the open market place on January 3, 2006 (beginning of quarter), (vi) the range (min/max) of the implied volatility in the last 52 weeks, and (vii) the Company’s selection for volatility in the prior reporting year. We have not paid cash dividends since 1982 and do not anticipate paying cash dividends in the foreseeable future.

(b) Employee Stock Purchase Plan

We use our Employee Stock Purchase Plan (the “ESP Plan”) to give employees an opportunity to purchase our common stock through payroll deductions, thereby encouraging employees to share in our economic growth and success. All regular full-time employees are eligible to enter the ESP Plan as of the first day of each six-month period beginning every February 1 and August 1. The calculation of the price for common stock is 85% of the lower of the closing price on the first day of the period (i.e. February 1 or August 1), or the last day of the period (i.e. July 31 or January 31). For the August 1, 2005 to January 31, 2006 period, the discounted stock purchase price was $3.315. For the February 1, 2006 to July 31, 2006 period, the discounted stock purchase price was $2.20.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

16. Subsequent Event (Unaudited)

On July 21, 2006, EDC acquired the shares of Deluxe Global Media Services Blackburn Limited (“Blackburn”), a subsidiary of The Rank Group Plc, for a purchase price of approximately $6.0 million in cash, excluding expenses, and subject to an adjustment related to an agreed upon amount of working capital for Blackburn as of the closing. Blackburn, located in Blackburn England, is the largest CD replicator in the U.K. Its customer base includes Universal Music Group, its largest customer, as well as Demon Music Group, Sanctuary Records Group and Warner Music Group. As part of EDC’s international supply agreement with Universal, Blackburns’s Universal volumes were scheduled to revert to EDC in 2007.

This transaction increases our customer base, expands our geographic reach and allows us to further capitalize on our 10-year agreement with our largest client, Universal, by accelerating the reversion of their U.K. volumes. In addition, it allows us to avoid capital expenditures in our Hanover, Germany, location that would have been required to accommodate this volume in 2007. We expect Blackburn will generate annual cash flows from operations in excess of $4 million with margins that are slightly less than EDC’s as a result of its product mix.

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

We, from time to time, make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the expectations of management at the time such statements are made. Forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intend(s),” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including those set forth in Part II, Item 1A – Risk Factors of our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2006 and Part I, Item 1A – Risk Factors of our annual report on Form 10-K for the fiscal year ended December 31, 2005 which factors are specifically incorporated herein by this reference. All forward-looking statements included in this quarterly report on Form 10-Q are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements and do not intend to do so.

Overview

The three months and six months ended June 30, 2005 included one month of operations for EDC following the Universal acquisition in May 2005, whereas such operations are included for the full three months and six months ended June 30, 2006. A comparison to EDC’s results for such periods may not be indicative of future results.

EDC:

On May 31, 2005, EDC acquired the CD and DVD manufacturing and distribution operations in the United States and central Europe from Universal Music Group (“Universal”). The acquisition was a strategic opportunity for the Company to become an industry leader in providing pre-recorded products and distribution services to the entertainment industry. As part of the transaction, we entered into 10-year supply agreements with Universal under which we became the exclusive manufacturer and distributor for approximately 80% of Universal’s CD and DVD manufacturing requirements and 100% of Universal’s distribution requirements for the United States and central Europe. Under these contracts, we have the opportunity to assume responsibility for fulfilling the remaining portion of Universal’s requirements in the United States and central Europe that was outsourced as Universal’s existing commitments to third party suppliers expire. Approximately 25% of these outsourced volumes have reverted to us as of June 30, 2006, and the remaining 75% is expected to revert to us evenly over the next three years.

EDC’s revenues for the six months ended June 30, 2006 were $143.7 million compared to $136.1 million for the six months ended June 30, 2005 on a pro forma basis assuming the consummation of the EDC acquisition at the beginning of such period, representing an increase of approximately 5.6%. The increase was due primarily to increased sales volume from new third party customers and Universal volume that reverted to us, and to an increase in international CD pricing applied retroactively since the acquisition, offset by lower international DVD market pricing and higher volume rebates.

In June 2006 our DVD lines in the U.S. went into full production, providing us with enough capacity to handle all of Universal’s current reversionary DVD business. We continue to add additional customers and manage our costs across our operations. We remain very optimistic about our growth potential, and we believe we are on track to meet our year over year growth expectation, excluding acquisitions, of 5% to 10%. We expect that the majority of our anticipated positive cash flows from operations for the year will be realized in the second half of the year due to seasonality of revenue.

On July 21, 2006 we acquired a CD replicator in Blackburn, U.K. We expect Blackburn will generate annual cash flows from operations in excess of $4.0 million annually with the majority of this also coming in the second half of the year.

Messaging:

Messaging provides communications service providers with a complete messaging solution, consisting of hardware, software, and services that enable a range of related applications that provide significant value in both wireless, wireline and cable networks. Applications available in the product group include voice mail, fax mail, video solutions, short message service, multimedia message service, missed-call notification, and others. Messaging’s services relate primarily to the installation and maintenance of our products.

Messaging’s revenues for the six months ended June 30, 2006 were $32.8 million compared to $40.7 million for the six months ended June 30, 2005, representing a 19.5% decrease. Approximately $4.5 million, or 57% of the decrease related to domestic sales. Sales to one of our domestic customers, Sprint-Nextel, declined by 82% to approximately $1.8 million during the six months ended June 30, 2006 compared to the six months ended June 30, 2005. During the second quarter of 2006 we were notified by Sprint-Nextel that we would no longer be included in their voicemail vendor selection process. This revenue decline was partially offset by $4.6 million of sales to a U.S. customer during the first quarter of 2006 that had purchased very little in 2005, and by a $3.0 million sale to a cable customer during the second quarter of 2006. International revenues for the six months ended June 30, 2006 declined compared to the six months ended June 30, 2005. Revenue for the first half of 2005 included a significant sale to MTN, a new international customer.

During the first quarter of 2006 Messaging recorded an operating loss of ($2.9) million on revenues of $16.4 million. During the second quarter of 2006 we reduced Messaging’s operating expenses by approximately $1.2 million and reduced our operating loss to ($1.7) million on flat revenues of $16.4 million. We expect to continue to see softness in the domestic market and timing delays in the closing of international business. As a result, we are adjusting our revenue outlook for the second half 2006 to be flat with the first half of 2006 and have recently implemented a realignment plan to achieve profitability at this revenue level. As part of the realignment plan we reorganized our operations, bringing them in-line with the softer domestic market while maintaining adequate resources to serve the growing international opportunities. This reorganization, which will result in severance related costs of approximately $1.3 million in the third quarter of 2006, is expected to generate approximately $3.0 million of operating cost savings during the second half of 2006. Further, we have retained Jefferies Broadview to assist us with our previously announced strategic initiatives for our Messaging business. We anticipate that these steps, coupled with our continued strength in the international arena and new video applications, will support a return to profitable growth.

Results of Continuing Operations

     The following table and discussion present the material changes in the consolidated results of operations of the Company for the periods indicated:

		Three Months Ended June 30,												Six Months Ended June 30,
		2006				2005				Change				2006				2005				Change
REVENUES
EDC		$	73,586			$	20,007			$	53,579			$	143,662			$	20,007			$	123,655
Messaging			16,387				22,747				(6,360	)			32,757				40,669				(7,912	)
Consolidated		$	89,973			$	42,754			$	47,219			$	176,419			$	60,676			$	115,743
GROSS MARGIN
EDC		$	13,134			$	2,729			$	10,405			$	23,574			$	2,729			$	20,845
Messaging			8,786				12,501				(3,715	)			17,500				23,801				(6,301	)
Consolidated		$	21,920			$	15,230			$	6,690			$	41,074			$	26,530			$	14,544
OPERATING INCOME (LOSS)
EDC		$	(110	)		$	(2,520	)		$	2,410			$	(3,112	)		$	(2,520	)		$	(592	)
Messaging			(1,676	)			1,123				(2,799	)			(4,602	)			2,402				(7,004	)
Consolidated		$	(1,786	)		$	(1,397	)		$	(389	)		$	(7,714	)		$	(118	)		$	(7,596	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
EDC		$	(2,334	)		$	(4,015	)		$	1,681			$	(6,706	)		$	(4,015	)		$	(2,691	)
Messaging			(1,035	)			1,671				(2,706	)			(3,333	)			3,480				(6,813	)
Consolidated		$	(3,369	)		$	(2,344	)		$	(1,025	)		$	(10,039	)		$	(535	)		$	(9,504	)
INCOME (LOSS) FROM CONTINUING OPERATIONS
EDC		$	(3,337	)		$	(4,015	)		$	678			$	(7,447	)		$	(4,015	)		$	(3,432	)
Messaging			(1,105	)			1,537				(2,642	)			(3,669	)			3,317				(6,986	)
Consolidated		$	(4,442	)		$	(2,478	)		$	(1,964	)		$	(11,116	)		$	(698	)		$	(10,418	)