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 September 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                    

GLENAYRE TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		98-0085742 (I.R.S. Employer 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 October 23, 2006 was 69,103,808 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 September 30, 2006 (Unaudited) and December 31, 2005			4
Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005 (Unaudited)			5
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005 (Unaudited)			6
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2006 (Unaudited)			7
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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			33
Item 3. Quantitative and Qualitative Disclosures about Market Risk			42
Item 4. Controls and Procedures			43
Part II – Other Information:
Item 1. Legal Proceedings			44
Item 6. Exhibits			44
EX-15.1 LETTER REGARDING UNAUDITED FINANCIAL INFORMATION
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Glenayre Technologies, Inc.

We have reviewed the condensed consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of September 30, 2006, and the related condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2006 and 2005, the condensed consolidated statement of stockholders’ equity for the nine month period ended September 30, 2006, and the condensed consolidated statements of cash flows for the nine month periods ended September 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
November 6, 2006

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		September 30,				December 31,
		2006				2005
		(Unaudited)
		(In thousands, except share and per
		share amounts)
ASSETS
Current Assets:
Cash and cash equivalents		$	64,150			$	78,803
Restricted cash			2,295				10,602
Accounts receivable, net of allowances for doubtful accounts of $601 and $489 at September 30, 2006 and December 31, 2005, respectively			51,884				28,056
Current portion of long-term receivable			2,163				6,076
Inventories, net			18,041				15,620
Prepaid expenses and other current assets			18,764				11,099
Total Current Assets			157,297				150,256
Restricted cash			22,248				29,727
Property, plant and equipment, net			66,586				62,340
Long-term receivable			6,754				6,560
Goodwill			2,382				—
Intangible assets			58,874				59,642
Deferred income taxes			2,858				—
Other assets			5,172				6,883
TOTAL ASSETS		$	322,171			$	315,408
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	35,916			$	28,990
Accrued and other liabilities			40,026				38,001
Income taxes payable			8,411				9,489
Deferred income taxes			233				215
Deferred revenue			4,038				9,003
Loans from employees			1,127				1,132
Current portion of long-term debt			20,131				14,700
Accrued liabilities, discontinued operations			108				2,174
Total Current Liabilities			109,990				103,704
Other non-current liabilities			3,694				2,230
Loans from employees			3,752				4,113
Long-term debt			51,938				61,868
Pension and other defined benefit obligations			34,042				29,281
Deferred income taxes			9,805				8,462
Accrued liabilities, discontinued operations			—				61
Total Liabilities			213,221				209,719
Minority interest in subsidiary company			871				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 – 69,080,297 shares; 2005 – 68,063,799 shares			1,382				1,361
Contributed capital			366,940				364,376
Profits interests			4,105				1,123
Accumulated deficit			(264,651	)			(260,874	)
Cumulative translation adjustment, net of tax			303				(1,183	)
Total Stockholders’ Equity			108,079				104,803
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	322,171			$	315,408

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Three Months Ended September 30,
		2006				2005
		(In thousands, except per share amounts)
REVENUES:
Product sales		$	73,412			$	67,720
Service revenues			23,921				29,193
Total Revenues			97,333				96,913
COST OF REVENUES:
Cost of sales			58,426				51,849
Cost of services			17,254				19,470
Total Cost of Revenues			75,680				71,319
GROSS MARGIN			21,653				25,594
OPERATING EXPENSES:
Selling, general and administrative expense			17,723				16,646
Research and development expense			3,375				3,462
Amortization of intangible assets			2,038				1,710
Total Operating Expenses			23,136				21,818
OPERATING INCOME (LOSS)			(1,483	)			3,776
OTHER INCOME (EXPENSES):
Interest income			1,071				729
Interest expense			(1,567	)			(1,549	)
Gain on currency swap, net			318				125
Transaction gain (loss), net			213				(109	)
Other income (expenses)			(94	)			23
Total Other Expenses			(59	)			(781	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM			(1,542	)			2,995
Provision for income taxes			1,434				404
Minority interests			—				—
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM			(2,976	)			2,591
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX			4,029				(48	)
INCOME BEFORE EXTRAORDINARY ITEM			1,053				2,543
Extraordinary gain – net of taxes of $0			6,920				—
NET INCOME		$	7,973			$	2,543
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE (1):
Income (loss) from continuing operations		$	(0.04	)		$	0.04
Income (loss) from discontinued operations			0.06				(0.00	)
Extraordinary gain			0.10				—
Net income per weighted average common share		$	0.12			$	0.04
INCOME (LOSS) PER COMMON SHARE — ASSUMING DILUTION (1):
Income (loss) from continuing operations		$	(0.04	)		$	0.04
Income (loss) from discontinued operations			0.06				(0.00	)
Extraordinary gain			0.10				—
Net income per weighted average common share		$	0.12			$	0.04

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Nine Months Ended September 30,
		2006				2005
		(In thousands, except per share amounts)
REVENUES:
Product sales		$	199,801			$	111,807
Service revenues			73,951				45,782
Total Revenues			273,752				157,589
COST OF REVENUES:
Cost of sales			157,566				75,671
Cost of services			53,459				29,794
Total Cost of Revenues			211,025				105,465
GROSS MARGIN			62,727				52,124
OPERATING EXPENSES:
Selling, general and administrative expense			53,935				35,746
Research and development expense			12,171				10,444
Amortization of intangible assets			5,818				2,276
Total Operating Expenses			71,924				48,466
OPERATING INCOME (LOSS)			(9,197	)			3,658
OTHER INCOME (EXPENSES):
Interest income			3,151				1,830
Interest expense			(4,541	)			(2,061	)
Gain (loss) on currency swap, net			(2,059	)			387
Transaction gain (loss), net			1,153				(1,409	)
Other income (expense), net			(88	)			55
Total Other Expenses			(2,384	)			(1,198	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM			(11,581	)			2,460
Provision for income taxes			2,625				567
Minority interests			(114	)			—
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM			(14,092	)			1,893
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX			3,395				350
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM			(10,697	)			2,243
Extraordinary gain – net of taxes of $0			6,920				—
NET INCOME (LOSS)		$	(3,777	)		$	2,243
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE (1):
Income (loss) from continuing operations		$	(0.21	)		$	0.03
Income from discontinued operations			0.05				0.01
Extraordinary gain			0.10				—
Income (loss) per weighted average common share		$	(0.06	)		$	0.03
INCOME (LOSS) PER COMMON SHARE — ASSUMING DILUTION (1):
Income (loss) from continuing operations		$	(0.21	)		$	0.03
Income from discontinued operations			0.05				0.01
Extraordinary gain			0.10				—
Income (loss) per weighted average common share		$	(0.06	)		$	0.03

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

																		Accumulated
																						Other
																						Comprehensive				Comprehensive
		Common Stock								Contributed				Profits								Income				Income
		Shares				Amount				Capital				Interests				Deficit				(Loss)				(Loss)
Balance, January 1, 2006			68,064			$	1,361			$	364,376			$	1,123			$	(260,874	)		$	(1,183	)
Net loss																			(3,777	)						$	(3,777	)
Foreign currency translation																							1,486				1,486
Shares issued for ESP Plan and option exercises			1,016				21				1,463
Stock compensation expense											1,101
Profits interests															2,982
Total comprehensive loss, net of tax																										$	(2,291	)
Balances, September 30, 2006			69,080			$	1,382			$	366,940			$	4,105			$	(264,651	)		$	303

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

		Nine Months Ended September 30,
		2006				2005
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(3,777	)		$	2,243
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Extraordinary gain			(6,920	)			—
Depreciation and amortization			16,367				7,903
Stock compensation expense			1,032				42
Compensation expense on profits interests in EDC, LLC			1,340				950
Unrealized loss (gain) on currency swap			2,059				(387	)
Foreign currency transaction (gain) loss			(1,153	)			962
Gain on adjustment to discontinued operations accrual and related tax payable			(3,949	)			(302	)
Minority interest			(114	)			—
Other			500				119
Changes in operating assets and liabilities, net of effects of business dispositions and acquisitions:
Restricted cash			913				(900	)
Accounts receivable			(4,421	)			(20,892	)
Inventories			151				(4,730	)
Prepaids and other current assets			(6,043	)			(3,646	)
Long-term receivable			4,383				7,543
Other assets			(763	)			(253	)
Accounts payable			(36	)			12,179
Deferred revenue			(4,965	)			5,213
Accrued liabilities and income taxes payable			(3,764	)			24,264
Pension and other defined benefit plans			1,462				(2,449	)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES			(7,698	)			27,859
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment			(11,940	)			(4,118	)
Maturities of short-term securities			—				12,180
Asset and share purchase of EDC operations, net of cash acquired			(5,561	)			(69,948	)
Release (increase) in restricted cash			16,500				(16,500	)
NET CASH USED IN INVESTING ACTIVITIES			(1,001	)			(78,386	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowing, net of costs			—				45,444
Proceeds from employee loans			469				—
Repayment of long-term borrowing			(8,135	)			—
Proceeds from sale of LLC interest in subsidiary			99				772
Repayment of employee loans			(1,156	)			—
Issuance of common stock			1,483				696
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(7,240	)			46,912
EFFECT OF EXCHANGE RATE CHANGES ON CASH			1,286				(750	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(14,653	)			(4,365	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			78,803				82,691
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	64,150			$	78,326
Depreciation and amortization included in net cash (used in) provided by operating activities:
Depreciation included in cost of sales		$	8,090			$	3,879
Depreciation included in selling, general and administrative expense			1,703				775
Depreciation included in research and development expense			756				973
Amortization of intangible assets			5,818				2,276

SUPPLEMENTAL INFORMATION OF NON-CASH ACTIVITIES:

During the nine months ended September 30, 2006, we purchased a printer under a capital lease for approximately $1.1 million.

See Notes to Condensed Consolidated Financial Statements.

GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)

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.

Use of Estimates

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.

Reclassifications

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

The cost of revenues for the nine months ended September 30, 2006 reflect a reclassification of $3.0 million from cost of product to cost of services for EDC relating to the period ended June 30, 2006.

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 16.

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 the adoption of FIN 48 will have on our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157) which defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States and expands disclosure about fair value measurements. The statement is effective for us beginning on January 1, 2008. We are still assessing the potential impact of the adoption of SFAS 157.

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

In September 2006, the FASB also issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. We will initially recognize the funded status of our defined benefit postretirement plan and provide the required disclosures as of the end of our fiscal year ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for our fiscal year ending December 31, 2009. We have not determined the effect, if any, the adoption of SFAS 158 will have on our financial position and results of operations.

4. Acquisitions

The results of EDC’s and Blackburn’s operations, discussed below, are included in the condensed consolidated financial statements since their acquisition dates.

(a) 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 (SFAS 141). The purchase price of approximately $129.2 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 $7.8 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.

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

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 the acquisition. We have finalized our purchase price allocation and do not expect any further material adjustments to values assigned to the assets acquired and assumed liabilities. The following table summarizes the fair values at acquisition:

		December 31,								September 30,
		2005				Adjustment				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				2,484				67,867
Goodwill			—				2,382				2,382
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			$	2,249			$	129,222

The additional purchase price adjustments recorded during the nine months ended September 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, $1.1 million of additional deferred tax liabilities, $0.5 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 the EDC acquisition date, we terminated nine employees 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 September 30, 2006. We paid approximately $298,000 of the severance cost during the nine months ended September 30, 2006. The remaining severance cost is recorded in accrued liabilities in the accompanying unaudited condensed consolidated balance sheet at September 30, 2006.

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.

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

The contingent consideration included in the purchase price totals €4.6 million ($5.79 million) consisting of €3.4 million ($4.3 million) for actual consideration from the date of purchase through September 30, 2006 and €1.2 million ($1.5 million) for estimated consideration due for the remaining 15 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 September 30, 2006 are approximately €343,000 ($435,000) for consideration earned but not paid as of September 30, 2006, and €1.2 million ($1.5 million) for the estimated amount payable for the 15 months ended December 31, 2007, using the September 30, 2006 Euro to U.S. dollar exchange rate of 1.2688.

During the third quarter of 2006, the estimated consideration was adjusted downward by €663,000 ($841,000) based upon revised projections, using the September 30, 2006 Euro to U.S. dollar exchange rate of 1.2688. In accordance with SFAS 141’s guidance on a contingency based on earnings, the adjustment is accounted for as part of the purchase price allocation resulting in the elimination of the goodwill balance associated with central European operations of €514,000 ($652,000) and reduction in the customer relationships intangible of €149,000 ($189,000). The estimated consideration will be adjusted quarterly as projections change until the obligation becomes final at December 31, 2007.

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 nine months ended September 30, 2006 and 2005, was $1.3 million and $950,000, respectively. 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.

At September 30, 2006 and December 31, 2005, $4.1 million and $1.1 million, respectively, were included in contributed capital in our condensed consolidated balance sheets as follows:

		September 30, 2006				December 31, 2005
Vested		$	3,701			$	710
Unvested			404				413
Total		$	4,105			$	1,123

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.

During the third quarter of 2006, as previously discussed above under Universal Contingent Purchase Price, the gross carrying value of the customer relationship intangibles and goodwill allocated to the central European operations were adjusted €149,000 ($189,000) and €514,000 ($652,000), respectively, based upon revised projections of this contingent obligation, which eliminated the goodwill in Germany. Until the final obligation under this contingency is known, there will be quarterly adjustments that could impact intangible assets and goodwill.

As of September 30, 2006, acquired intangible assets and related amortization, using the September 30, 2006 Euro to U.S. dollar exchange rate of 1.2688, are as follows:

						September 30, 2006								December 31, 2005
						Gross								Gross
		Useful				Carrying				Accumulated				Carrying				Accumulated
		Lives				Amount				Amortization				Amount				Amortization
Intangible assets subject to amortization:
Customer relationship intangibles		5-10 years				$	68,603			$	9,729			$	63,335			$	3,693
Intangible assets not subject to amortization:
Goodwill						$	2,382			$	—			$	—			$	—

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 nine months ended September 30, 2006 and 2005 was $5.8 million and $2.3 million, respectively. The estimated amortization expense for the remaining current year and the next five years is as follows:

For the three months ending December 31, 2006		$	2,030
For the years ending December 31, 2007			8,121
2008			8,121
2009			8,121
2010			6,778
2011			5,819

Goodwill

In connection with the EDC acquisition, we recorded goodwill in the amount of $2.4 million. As discussed previously, the goodwill allocated to the central European operations was eliminated during the third quarter of 2006 as part of the purchase price allocation adjustment to the Universal contingent purchase price. 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 September 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 third quarter and the first nine months of fiscal 2005 includes the business combination accounting effect on historical Glenayre and EDC (but excluding the Blackburn acquisition discussed below) 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 nine months ended September 30, 2005 assume that the EDC acquisition was completed as of January 1, 2005:

		Three Months				Nine Months
		Ended				Ended
		September 30, 2005				September 30, 2005
Total revenues		$	96,913			$	273,636
Net income (loss) from continuing operations		$	2,591			$	(126	)
Net income (loss) from discontinued operations		$	(48	)		$	350
Net income		$	2,543			$	224
Basic net income per share		$	0.04			$	0.00

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

(b) Blackburn Acquisition

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 €3.0 million ($5.6 million) in cash, including closing costs, using the July 21, 2006 British pound to U.S. dollar exchange rate of 1.8465. 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.

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

		Estimated
		Fair
		Value**				Allocation				Adjusted Value
Accounts receivable		$	18,457			$				$	18,457
Inventory			2,282								2,282
Prepaids and other current assets			1,035								1,035
Property, plant and equipment **			3,937				(3,937	)			—
Deferred tax asset			2,926								2,926
Spare parts **			961				(961	)			—
Accounts payable and other accrued liabilities			(11,362	)							(11,362	)
Long-term liabilities			(857	)							(857	)
Extraordinary gain			—				(6,920	)			(6,920	)
			17,379				(11,818	)			5,561
Purchase price			(5,561	)			—				(5,561	)
		$	11,818			$	(11,818	)		$	—

In accordance with SFAS 141, the excess was allocated as a pro rata reduction of the amounts assigned with the remaining excess recorded as an extraordinary gain in our condensed consolidated statements of operations for the three months and nine months ended September 30, 2006.

We plan to reorganize the Blackburn operations to integrate them with the existing EDC operations in Europe. In connection therewith, we expect to incur €748,000 ($1.4 million) in costs over the next several quarters associated with the integration activities. Plans affecting the integration have been completed and approved by management, resulting in adjustments to the purchase price allocation for the acquired assets and assumed liabilities.

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

We entered into a cross-currency rate swap agreement with a commercial bank on May 31, 2005. Our objective is to manage foreign currency exposure arising from a U.S. subsidiary loan to its German subsidiary 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, we report the foreign currency exchange gains or losses attributable to changes in the US$/€ exchange rate on the currency swap in earnings.

The gain (loss) on the currency rate swap was approximately $318,000 and ($2.1) million for the three months and nine months ended September 30, 2006, respectively. The gain on the currency rate swap was approximately $125,000 and $387,000 for the three months and nine months ended September 30, 2005, respectively. At September 30, 2006, the currency rate swap was in a net loss position of $1.3 million and was included as a non-current liability in our condensed consolidated balance sheet.

6. Accounts Receivable

Accounts receivable related to continuing operations consisted of:

		September 30, 2006				December 31, 2005
Trade receivables		$	52,485			$	28,545
Less: allowance for doubtful accounts			(601	)			(489	)
Total		$	51,884			$	28,056

7. Inventories

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

		September 30, 2006				December 31, 2005
Raw materials		$	12,893			$	10,647
Work in process			2,319				1,390
Finished goods			2,829				3,583
Total		$	18,041			$	15,620

At September 30, 2006 and December 31, 2005, reserves related to continuing operations were approximately $3.3 million and $2.8 million, respectively.

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

8. 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 nine months ended September 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
Provision (release) for warranty obligations			(41	)			223
Settlements of warranty obligation			(45	)			(168	)
Balance at September 30th		$	268			$	637

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 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 $2.4 million of the $4.0 million of deferred revenue included in the unaudited condensed consolidated balance sheet at September 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.

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

9. 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 September 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								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Income (loss) on discontinued operations before income taxes		$	(55	)		$	—			$	(415	)		$	491
Income tax benefit (expense)			4,084				(48	)			3,810				(141	)
Income (loss) from discontinued operations		$	4,029			$	(48	)		$	3,395			$	350

In the third quarter of 2006, we recorded a net increase in the loss on disposal of approximately $55,000 related to increased tax contingencies offset by the reduction in customer deposit obligation and estimated contract obligations. The income tax benefit in the third quarter of 2006 reflects the release of a reserve for international business taxes of $4.1 million due to the receipt of clearance by the applicable foreign country’s taxing authority. In the nine months ended September 30, 2006 we recorded a net increase in the loss on disposal of approximately $415,000 related to foreign currency exchange rate fluctuations offset slightly by liquidation of assets and a reduction in estimated contact obligations. The income tax benefit was primarily related to the release of foreign income tax contingencies as previously discussed.

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, we recorded (1) a net decrease in the loss on disposal of $428,000 (2) income of $53,000 primarily due to a settlement and previously reserved accounts receivable receipts and (3) additional reductions of $375,000 primarily related to the release of a reserve for the Lynnview Ridge litigation (see Note 14). In the third quarter of 2005, no change was recorded in the loss on disposal except for the recurring addition for accretion in contingent tax provisions.

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

10. Long-Term Debt

     Long-term debt consisted of:

		September 30,				December 31,
		2006				2005
Senior Secured Credit Facility		$	41,500			$	41,500
Payable to Universal — undiscounted			32,584				39,440
Capital Leases			1,072				170
Employee Loans			4,879				5,245
Subtotal			80,035				86,355
Less: Unamortized Discount			(3,087	)			(4,542	)
Total Debt			76,948				81,813
Less: Current Portion			(21,258	)			(15,832	)
Total Long-Term Debt		$	55,690			$	65,981

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

2006 (Remaining three months)		$	6,984
2007			23,334
2008			24,608
2009			11,999
2010			10,325
2011			1,050
Thereafter			1,735
Total		$	80,035

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 we 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 8.62% at September 30, 2006. At September 30, 2006, no drawings were made against the $10.0 million revolving credit loan.

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

11. 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								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Income tax (benefit) federal U.S. statutory rate		$	(539	)		$	1,049			$	(4,053	)		$	861
State income tax (benefit) net of federal benefit			(264	)			(68	)			(832	)			(240	)
Increase (decrease) in valuation allowance			553				(1,026	)			4,249				(1,084	)
Foreign taxes at rates other than U.S. statutory rates			1,434				477				2,625				615
Profits interest awards			181				49				469				331
Deductible amortization			—				(99	)			—				—
Other non deductibles			55				25				145				65
Minority interest in earnings of subsidiary			14				(3	)			22				19
Income tax provisions		$	1,434			$	404			$	2,625			$	567

We account for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). At September 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 September 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 September 30, 2006 and September 30, 2005 was approximately $7.0 million and $1.5 million, respectively.

At December 31, 2005, we have realized U.S. federal net operating losses (“NOLs”) of $276.9 million and foreign NOLs of $45.1 million. 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 $4.5 million and $7.5 million at September 30, 2006 and December 31, 2005, respectively, for probable and estimable exposure for tax filing positions in various jurisdictions. At September 30, 2006 and December 31, 2005, the above amounts included $4.0 million and $5.5 million respectively, of transfer pricing exposure in various foreign jurisdictions. We received tax clearance from a foreign country’s taxing authority for the potential liability of $4.1 million for international business tax of which $1.9 million was included in the $7.5 million December 31, 2005 balance. The remaining $2.3 million was included in accrued liabilities, discontinued operations on the condensed consolidated balance sheet at December 31, 2005.

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.

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

12. Employee Benefit Plans

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Service cost		$	240			$	15			$	711			$	44
Interest cost on APBO			292				32				869				95
Amortization of prior service costs			(64	)			(64	)			(191	)			(191	)
Amortization of actuarial loss			8				22				24				67
		$	476			$	5			$	1,413			$	15

The September 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)

13. Stockholders’ Equity

Income (loss) from continuing operations per Common Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Numerator:
Net income (loss) from continuing operations		$	(2,976	)		$	2,591			$	(14,092	)		$	1,893
Denominator:
Denominator for basic income (loss) from continuing operations per share – weighted average shares			68,951				67,210				68,628				67,031
Effect of dilutive securities			—				3,044				—				2,199
Denominator for diluted income (loss) from continuing operations per share			68,951				70,254				68,628				69,230
Income (loss) from continuing operations per weighted average common share (1)		$	(0.04	)		$	0.04			$	(0.21	)		$	0.03
Income (loss) from continuing operations per common share – assuming dilution (1)		$	(0.04	)		$	0.04			$	(0.21	)		$	0.03
Dilutive securities not included above due to anti-dilutive effect			778				—				1,632				—
Anti-dilutive securities not included above:
Stock options (2)			6,387				3,094				2,933				4,943

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

Restricted Stock Units

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

14. Commitments and Contingencies

Litigation

EDC is not currently party to any material legal proceedings. 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.

Vladimir Gusinsky – On September 11, 2006, we were officially served with a lawsuit filed in the Supreme Court of the State of New York by Vladimir Gusinsky (“Gusinsky”), a company shareholder, initiating a derivative action against the Company (as nominal defendant) and against certain of our current and former officers and directors as defendants. The complaint, purportedly on behalf of the Company, alleges that the defendants breached their fiduciary duties by improperly backdating the grant of stock options between May 1994 and July 2001, and also contains allegations of related violations of federal securities laws in connection with the dissemination of our financial and proxy statements and violations of generally accepted accounting principles as a result of such allegedly improper grants. The complaint further alleges that the officer defendants were unjustly enriched as a result of their receipt and retention of the subject stock option grants. The plaintiff seeks to obtain, on behalf of the Company, unspecified equitable relief and disgorgement of any improperly granted stock options and related proceeds of any such exercised stock options from the individual officer defendants, as well as an award of attorneys’ fees and costs. A stipulation has been entered in the case granting the plaintiff 60 days to amend the complaint, and extending the time for the defendants to file an answer. The Company and its Board of Directors have established a Special Litigation Committee of the Board to conduct a full review, with the assistance of outside legal counsel and other experts, of its option grant practice.

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

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 our 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, Jackson filed a petition for writ of certiorari to the Supreme Court of the United States seeking further appellate review of the decision. We filed a responsive brief in opposition to the Jackson petition on October 10, 2006. A decision regarding whether the Supreme Court will accept the appeal is pending with the Court.

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, including us, 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.

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 us. Since that time consent judgments and dismissals covering us 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. A dismissal covering us was filed on March 10, 2006, and the case was formally dismissed on that date. 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.

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

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 our financial position or results of our future operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Letters of Credit and Cash Collateral

Restricted cash includes approximately $771,000 of customer performance bonds and $164,000 for letters of credit for leased space. None of these bonds or letters of credit were drawn upon as of September 30, 2006.

Lease Commitments

Due to the acquisition of Blackburn (see Note 4) we incurred additional contractual obligations on leases of office and manufacturing space and machinery and equipment. Total lease commitments resulting from the acquisition total $7.0 million at September 30, 2006. The facility lease contains a break clause that allows us to cancel the lease without penalty in June 2010.

At September 30, 2006, we had contractual obligations on leases of office and manufacturing space and machinery and equipment as follows:

2006 (Remaining three months)		$	994
2007			3,709
2008			3,630
2009			3,641
2010			3,249
Thereafter			8,411
Total		$	23,634

Other

At September 30, 2006, the Company had approximately $18.6 million of outstanding unconditional purchase commitments, mainly to suppliers of inventories and equipment, primarily related to EDC.

15. 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.

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

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 four months of operations for the nine months ended September 30, 2005.

		Three Months Ended September 30,
		Consolidated								EDC								Messaging
		2006				2005				2006				2005				2006				2005
Revenues		$	97,333			$	96,913			$	85,040			$	75,910			$	12,293			$	21,003
Income (loss) from continuing operations before income taxes and extraordinary gain			(1,542	)			2,995				1,128				1,984				(2,670	)			1,011
Depreciation & amortization			5,477				5,316				5,051				4,781				426				535

		Nine Months Ended September 30,
		Consolidated								EDC								Messaging
		2006				2005				2006				2005				2006				2005
Revenues		$	273,752			$	157,589			$	228,702			$	95,917			$	45,050			$	61,672
Income (loss) from continuing operations before income taxes and extraordinary gain			(11,581	)			2,460				(5,578	)			(2,031	)			(6,003	)			4,491
Depreciation & amortization			16,367				7,903				14,927				6,389				1,440				1,514

16. 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.

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 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.

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

As a result of adopting SFAS 123R, our net loss from continuing operations before income taxes and net loss for the nine months ended September 30, 2006 is approximately $1,032,000 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 nine months ended September 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.

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 nine-month periods ended September 30, 2005, pro forma option expense was as follows:

		Three Months				Nine Months
		Ended September				Ended September
		30, 2005				30, 2005
Income from continuing operations - as reported		$	2,591			$	1,893
Pro forma stock option expense			(401	)			(1,186	)
Income from continuing operations - pro forma		$	2,190			$	707
Income from continuing operations per common share - as reported		$	0.04			$	0.03
Pro forma stock option expense			(0.01	)			(0.02	)
Income from continuing operations per common share - pro forma		$	0.03			$	0.01
Income from continuing operations, assuming dilution per common share - as reported		$	0.04			$	0.03
Pro forma stock option expense			(0.01	)			(0.02	)
Income from continuing operations, assuming dilution per common share - pro forma		$	0.03			$	0.01

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

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.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Employee Stock Purchase Plan		$	28			$	—			$	88			$	—
Stock options			258				—				907				—
Subtotal of expense subsequent to the adoption of FAS123R			286				—				995				—
Restricted Stock Units			31				15				37				42
Total stock compensation expense		$	317			$	15			$	1,032			$	42

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

(a) Incentive Stock Plans

We maintain an incentive stock plan (the “1996 Plan”) that is used to promote the long-term financial interests and growth of the Company. The 1996 Plan, as amended, authorizes up to 14,850,000 shares 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 Plan 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 plan 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			330				3.70
Exercised			(875	)			1.38
Forfeited			(284	)			2.71
Expired			(89	)			18.87
Outstanding, September 30, 2006			5,149			$	3.43			6.4 years				$	1,396
Vested or expected to vest at September 30,2006			5,050			$	3.43				—			$	1,394
Exercisable at September 30, 2006			3,743			$	3.61			5.6 years				$	1,357